Tuesday, May 5, 2009

Good News: Government Responds to the TARP Payback Schemes

Last money, several banks, including Goldman Sachs and JP Morgan Chase, vowed publicly to pay their TARP loans and to make an early departure from the controversial program. Those banks, however, hold very substantial loan guarantees from the federal government through a program administered by FDIC. Under the FDIC program, the federal government guarantees loans issued to participating banks by private lenders. If the banks default, then the government repays the debt. TARP loans, by contrast, come directly from the government.

Because the federal government guarantees the private loans, they carry less risk than other private loans. Accordingly, banks that participate in the program receive lower interest rates than they would have received on the open market.

If banks pay back TARP loans while they still hold billions of dollars in loans backed by the federal government, then the government-secured loans would essentially help finance the banks' early departure from TARP. The situation is quite controversial because TARP, unlike the FDIC program, carries restrictions related to executive compensation. According to the Associated Press, however, the government will try to close the loophole:
A government official said Tuesday evening that banks eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp. The FDIC program allows financial institutions to borrow money at lower costs. . . .

"It throws a hurdle as far as the banks repaying TARP," said Scott Talbott, a senior lobbyist for the Financial Services Roundtable, a bank industry group.

Related Readings on Dissenting Justice:

Startling Discovery: Banks Want Federal Financial Assistance Without Strings Attached

Surprise, Surprise: Potential Participants in Toxic Assets Plan Ask Government to Stay Away From Executive Compensation


dualdiagnosis said...

Is there a way that you see that Obama would ever free these banks and let them pay back these loans?

dualdiagnosis said...

This article is what caused me to finally ask you why you would think it's a good thing to keep these banks on a string-

"Apparently, the $34 billion figure is good news because BAC has all those preferreds at Treasury that can be converted to common stock, leaving Treasury with $34 billion of common and $11 billion of preferreds. But Joe Weisenthal asks a good question:

If this is how the conversion goes, and the bank does pay off the remaining $11 billion over the next year or so, are they considered to have repayed TARP? How does a bank that's taken the conversion ever actually repay the TARP?

This is troubling, because it's now clear that the worry many of us had at the time of the bank bailouts has come true: the government is using its intervention in the banking system to pressure banks to give special deals to the government's special friends." ....

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