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. . . .Kudos.
"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