TARP Update: Not Looking Pretty

What’s going on with TARP? Quite a bit lately. The original bank bailout program designed to buy up toxic assets isn’t doing much of its Congressionally prescribed duties. All though $100 billion has now been earmarked to help launch the Public-Private Investment Program aimed at clearing toxic legacy assets from bank books, the remaining $600 billion has been dished out at the will of the Treasury.

  • Today a WSJ report announced that $22 billion of the bank rescue fund will be given to life insurance companies struggling in the downturn. Hartford Financial Services, Prudential, PFG, Lincoln National, Ameriprise, and Allstate have all been approved initially to be bailout recipients. This of course means yet another sector will be widely subjected to government restrictions such as pay limits for all employees (if passed by the Senate). And though the insurance companies are technically bank holding firms, thus eligible, I would venture to say this wasn’t the original intent of TARP. Just a theory, thats all.
  • Earlier this week, Treasury announced that it would blatantly violate TARP statutes and use repaid money from some of the big banks (up to $35 billion according to the WaPost) to bailout some of the smaller banks in the country. However, TARP, as written, requires that all repaid funds go back into the general funds of America, out of the legal reach of Geithner, to pay down debt.
  • The number of banks receiving bailout money from TARP is closing in on 600, though 12 banks have returned their money as of May 5 (see this list from the New York Times).
  • Large banks, now terrified of the Treasury’s dictatorial thumb are scrambling to get out. On Wednesday BB&T filed to repay its TARP cash. Also known to want out are Capitol One Bank, JP Morgan Chase, Goldman Sachs, Wells Fargo, Northern Trust, and New York Mellon.
  • Treasury in the past weeks has laid down hard conditions for getting out of TARP, including requiring the banks be able to stand without FDIC insurance. Though this has sparked the frustration of the industry it’s not holistically unreasonable; less dependence on government insurance is preferable. And big firms like JP Morgan and Goldman have been successful at issuing debt without needing the FDIC to secure them. What is somewhat diabolical about the restrictions is the suspicion that Treasury is trying to keep banks in TARP so it has more leverage to control them. I think Geithner has generally been acting in good faith during this crisis, but I also think he errantly is under the personal belief that he knows what’s best for the banking industry.
  • Remember that homeowners, car companies (and their lending arms), auto parts manufacturers, and other non-real bank AIG have also received over $100 billion of the TARP bailout funds.

Ironically, one of the things that Paulson was condemned for was his original bailout plan: a three page document that would have given Treasury hundreds of billions with virtually no oversight. He could have done whatever he wanted with the money. Instead, an elaborate, wasteful law was passed granting Treasury hundreds of billions that they have gone and done whatever they want with because the law has not been enforced and had little oversight. (Hand slaps forehead.)

Update (5/16): Ameriprise has announced it will not be taking the money. Though it applied for the money last year, the political climate has changed–i.e. they are afraid of increased government regulations on TARP firms. Prudential might also be out.