Trapped in TARP? Banks eager to exit the US bailout program find it's not so easy.
A hasty exodus could weaken the wobbly banking system, US officials say. They're poised to raise the bar for those wanting out of the Treasury-runprogram.
It’s a club they were strong-armed to join, in a way. And now it is turning out to be harder to resign than they had envisioned.
That’s the situation with some US banks and TARP, the Treasury’s $700 billion Troubled Asset Relief Program.
Financial firms that want to return their TARP cash will have to show they can do without help from another government bailout effort, debt guarantees provided by the Federal Deposit Insurance Corp. (FDIC), US officials said Wednesday.
The point of this linkage is to show banks “they can’t just pick and choose what federal programs they’ll participate in,” says Martin Neil Baily, a senior fellow in economic studies at the Brookings Institution.
Congress authorized TARP last October, amid the uncertainty of the worst of the world liquidity meltdown. Its first use came when Henry Paulson, then Treasury secretary, called in the heads of some of the biggest US banks and strongly advised them that it would be in the best interests of the country if they accepted an infusion of TARP cash. The move was seen as a means of instilling confidence in the US financial system.
Many of these bankers saw the funds as cheap capital. Hundreds of smaller institutions eventually signed up to participate in TARP as well.
But the bailout has been unpopular in Congress. Lawmakers attached new conditions to the program, including limits on executive compensation, following reports that TARP money was paying for executive bonuses and retreats.
Since then, some financial firms have soured on TARP. These program participants chafe at the restrictions and worry that membership in the association of TARP recipients will brand them as weakened institutions.
Goldman Sachs has indicated its interest in paying back TARP money, as have JPMorgan Chase and the Bank of New York Mellon.
The US Treasury’s response? Not so fast, folks. Line up, and we’ll think about it.
The reason for the hesitance is that the initial reason for TARP infusions still holds. Also, officials have said that while they would welcome the money back, they do not want to set off a stampede in which even weak firms pull out of the program, fearful that remaining in TARP will brand them as unable to stand on their own.
“My basic obligation is to make sure the system as a whole has the ability to provide the credit the economy requires,” said Treasury Secretary Timothy Geithner, when asked about repayment at a congressional hearing last month.
Thus the linkage: Before they can withdraw from TARP, institutions will have to show they can do without a popular FDIC program that allows them to borrow money at a relatively low cost.
Senior officials described this approach to wire services prior to its official announcement, which could come as early as Wednesday.
As of Monday, banks had $332 billion in debt outstanding under the FDIC program, which does not impose the same restrictions as TARP.
The FDIC effort is financed by fees assessed to participating institutions. So far, it has collected about $7 billion in premiums and does not expect to show losses, said FDIC Chairman Sheila Bair at a Senate Banking Committee hearing on Wednesday.
The program has worked, but the need for it may be ending, Ms. Bair said.
“We’d like the institutions that are in it now to stay in until Oct. 31.... Then, we’d like to just end the program,” she told Senate Banking Committee members.
• Material from the Associated Press was used in this report.