TARP Payback Rules Announced

Tim Cavanaugh | June 1, 2009

The Federal Reserve Board says the first repayment of Troubled Asset Relief Program funds can begin the week of June 8, and lays out its rules for repayment. Among other things:

Any BHC [bank holding company] seeking to redeem U.S. Treasury capital must demonstrate an ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP), and must successfully demonstrate access to public equity markets.

In addition, the Federal Reserve's review of a BHC's application to redeem U.S. Treasury capital will include consideration of the following:

• Whether a BHC can redeem its Treasury capital and remain in a position to continue to fulfill its role as an intermediary that facilitates lending to creditworthy households and businesses;
• Whether, after redeeming its Treasury capital, a BHC will be able to maintain capital levels that are consistent with supervisory expectations;
• Whether a BHC will be able to continue to serve as a source of financial and managerial strength and support to its subsidiary bank(s) after the redemption; and
• Whether a BHC and its bank subsidiaries will be able to meet its ongoing funding requirements and its obligations to counterparties while reducing reliance on government capital and the TLGP.

It would be deliciously diabolical if one of the 19 stress-tested banks went bankrupt after paying off its TARP loan, but that may be wishful thinking. And it's unlikely that many will conclude the Fed or the Treasury screwed up even if that does happen.

It will be interesting to see if one of naughty 19 doesn't get to pay off right away, takes a beating in public relations as a result, and then claims that the Treasury is responsible for devaluing its reputation. The original TARP-acceptance strong-arming was posited on the idea that the gigantibanks all had to hang together, so there wouldn't be any stigma attached to the charity. But paying off the charity might not be as easy to do without a few fall guys. Then again, the banks are long past the point of shame, so maybe even that won't matter.

Comments

|6.1.09 @ 9:03PM|#

Are those banks which didn't want the TARP money but were forced to take it anyway, and not allowed to give it back, now be able to give it back without interest?

Sorry if I sound confused, but this financial soap opera is hard to keep straight.

hmm|6.1.09 @ 9:38PM|#

I love the vagueness. Nothing in finance is vague unless the government is in the driver seat. Anyone else wants scenarios and specifics relative to those scenarios. Government wants to be able to change the rules 14 ways till Sunday.

I'm going to bet the interest comment falls under this exact situation. If such a deal is cut no one will talk to eliminate culpability on all sides. I try like hell not to listen to the conspiracy voice in my head, but the fucker is making an awful lot of sense with respect to the bank bailouts. Mushrooms farming at its finest. Keep it dark and just continue to shovel shit until something grows.

hmm|6.1.09 @ 9:40PM|#

I wouldn't apologize for not understanding this mess. The people who originated, implemented, and that are overseeing this monkey fucking a greased football of a fiasco don't understand it. They can barely make the rules up as they go along.

|6.1.09 @ 9:48PM|#

"Well, I had been running a successful bank - high class, no really, high class - we didn't have any of that. That was right out. And I decided then to open a high-class mortgage company for the gentry at Biggleswade with international cuisine, cooking, top-line acts, and not a cheap clip joint for picking up tarts, that was right out, I deny that completely, and one night Rahm Emmanuel walked in with a couple of big lads, one of whom was carrying a tactical nuclear missile. They said I'd bought one of their bailout packages and would I pay for it."

"How much did they want?"

"Three quarters of a billion dollars. Then they went out."

"Why didn't you call the police?"

"Well, I had noticed that the lad with the thermo-nuclear device was the Treasury Secretary. Anyway, a week later they came back, said that the cheque had bounced and that I had to see Biden."

|6.1.09 @ 9:57PM|#

JP Morgan scheduled a $5 billion secondary offering just today to help pay off TARP and they were considered the healthiest of the 19.

Its likely that there would have been a contagion of bankruptcies without TARP - the puny little $60 billion in the FDIC would have been exhausted in days so TARP was a bargain.

Its like the candidate from Texas said - If you're gonna get raped anyway just lay back and enjoy it.

|6.1.09 @ 9:58PM|#

It will be interesting to see if one of naughty 19 doesn't get to pay off right away

Typographical suggestion: The Naughty 19.

Sounds sexier.

Kyle Jordan|6.1.09 @ 10:31PM|#

"I try like hell not to listen to the conspiracy voice in my head, but the fucker is making an awful lot of sense with respect to the bank bailouts."

Gets harder and harder everyday dude.

hmm|6.1.09 @ 11:19PM|#

Its likely that there would have been a contagion of bankruptcies without TARP

And that would be a bad thing? Instead we prop up failed people and systems? Ben is a GD scholar and prescribes to the largest problem being the government not saving the banks, hence "the sky is falling" rush to save them. It would have been cheaper if the government just took over short term lending and let the banks disappear or restructure. Even that scenario is a disaster waiting to happen, although a cheaper disaster.

In 1906 an earthquake hit San Fransisco. Amadeo Giannini took his wheel barrow down to what was left of his bank, dug out his money, set up a table, and started making loans on signatures alone amidst the ruble of his city. Don't fear change, plan for it, persevere through it, fight to emerge from it, change with it, do whatever you have to do, but don't fear it.

jk|6.1.09 @ 11:22PM|#

I the gubmint gave me a few billion $s as a 'loan' I'd be tripping all over myself to pay back a few million $s in interest to deflect its attention elsewhere.

|6.2.09 @ 1:30AM|#

They can barely make the rules up as they go along.

Oh, they're pretending to have rules?

-jcr

Amakudari|6.2.09 @ 4:25AM|#

Its likely that there would have been a contagion of bankruptcies without TARP - the puny little $60 billion in the FDIC would have been exhausted in days so TARP was a bargain.

Short-term, sure. Longer-term, it's a realistic worry that we're propping up failing institutions that are undermining profitability for their peers or may fail anyway. A relevant example would be Long-Term Credit Bank of Japan, which failed 10 years and 2 government capital injections (I think, but a few trillion yen in any case) after Japan's bubble economy collapsed.

If the banks you prop up turn around and take on excess risk (i.e. destroy the risk premium), pay up for deposits and can't be solvent without government capital, the cure could be worse than the disease. Notice that the government's focusing on immediate solvency concerns and avoiding talk about the endgame. I could be wrong -- our banks have always had better ROE than Japan's -- but we'll see when all the bad business and conflicts of interest we've been prodding along over the last year bear fruit.

In 1906 an earthquake hit San Fransisco. Amadeo Giannini took his wheel barrow down to what was left of his bank, dug out his money, set up a table, and started making loans on signatures alone amidst the ruble of his city.

His bank could use a lot of those wheelbarrows right now. BofA will probably need at least $65 billion in new common equity to pay off TARP. And SF is left-leaning, but I wouldn't call them Soviets.

FYI, of your Naughty Nineteen, these guys sure as hell won't pay TARP back quickly (my guess at who's worst off first):
GMAC/Ally
Citi
Bank of America
SunTrust
KeyCorp
Fifth Third
Regions

|6.2.09 @ 12:41PM|#

I really don't understand this new set of conditions for paying back the TARP loans. At the time the loans were made, wasn't there some sort of agreement between the government and the bank? (There must have been, because otherwise there would be no enforceable obligation to pay back the loans at all.) If the loan agreement was like any of the loan agreements that I've ever been party to, it included repayment terms. So where does the government get the authority to impose new terms that weren't part of the original deal?

|6.2.09 @ 12:43PM|#

(I think Episiarch alluded to the answer to my question: If the banks pay the loans back early, Biden nails their heads to the floor.)

Darth Bernanke|6.2.09 @ 1:54PM|#

So where does the government get the authority to impose new terms that weren't part of the original deal?

Sorry, sir, the time for questioning whether government had the authority to do, well, anything, was about 6 months ago.

Amakudari|6.2.09 @ 10:56PM|#

I really don't understand this new set of conditions for paying back the TARP loans. At the time the loans were made, wasn't there some sort of agreement between the government and the bank? (There must have been, because otherwise there would be no enforceable obligation to pay back the loans at all.) If the loan agreement was like any of the loan agreements that I've ever been party to, it included repayment terms. So where does the government get the authority to impose new terms that weren't part of the original deal?

I think TARP preferred is callable at par (i.e. you can pay back the amount you received) after three years. I don't think the "healthier" banks would like to wait that long.

Until then at least, the recipient doesn't have a prepayment option. So don't think of it like a loan, which you can usually pay back whenever you feel like it. Think of it like selling your watch to a friend for cash, on the condition that you can buy it back in a few months. Maybe he'll let you get buy it back before then, but he decides.

As far as I'm concerned, the government is in deep shit if they let JPMorgan or Goldman repay TARP and then have them wind up back in line for government aid, so they're making the restrictions a bit tighter.

janejim|6.3.09 @ 5:57AM|#

Banks have huge debts, but they're getting a helping hand from the federal government. If you have overwhelming debt--perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending--you're probably on your own. Check the website http://obamadebthelp2009.blogspot.com
to see if they can help. I am glad I did read it before I talk to my CC company and it helped - Jane Jim, California