Should Banks Be Allowed to Repay TARP Funds, Then Take A New Test O'Stress?

Tim Cavanaugh | June 9, 2009

Elizabeth Warren, chairwoman of the congressionally appointed panel overseeing the Troubled Asset Relief Program (TARP), wants the stress tests to be "rerun" right away. She tells CNBC:

"We actually make recommendations to do it all over again right now," Warren told Squawk Box.

"We've already blown past the worst-case scenario on unemployment," she added.

Video here, with pride of Rutgers Becky Quick asking the important question.

Warren claims the oversight panel sees "some very encouraging things" in its monthly checkup [pdf], but refers to concerns that the first stress test's two-year window does not account for a spike in commercial mortgages predicted for 2011-2013. She also refers to self-reporting of numbers in the original model.

"Let's keep in mind that the worst case scenario for this year is for 8.9 percent unemployment," Warren says. "We're already at 9.5 percent. That's averaged of course across the whole year in the model. But it suggests that, you know, we ought to be thinking about rerunning this model, with some tougher numbers in it."  

In a nod to distributed analysis, Warren hopes for "enough details that outsiders can rerun em" and "take them out for a test drive. That's how you know you have a robust model."

Also today, 10 banks have reportedly been cleared to repay their TARP funds. Bloomberg quotes a person:

JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.  

Updated roster of the blessed, courtesy of commenter EJM.

Should banks that chose to accept TARP funds be free to go if the test that cleared them was a dud? Or are Goldman, AmEx, and State Street so strong they should be allowed to call no-wants on their 2008 agreement? Are ten of The Naughty 19 that strong? And was the 20th bank also the 20th hijacker?

Barry Ritholtz plugs a fun theory:

In Bailout Nation, we discuss the possibility that The TARP was all a giant ruse, a Hank Paulson engineered scam to cover up the simple fact that CitiGroup (C) was teetering on the brink of implosion. A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks.

This is an extrapolation of the hold-hands-and-jump thesis, that it had to be done to all the major banks so the terrifying weakness of a few of them would not be clear. If so, doesn't preventing Citi from paying its loan back so damage Citi's reputation that the Treasury would be liable to Citi? Or does Citi even have a reputation left to lose?

Comments

Warty|6.9.09 @ 5:19PM|#

What is a stress test, anyway? Is it a cooler name for audit?

EJM|6.9.09 @ 5:33PM|#

Here's an apparently fuller list...

Eight of the nine banks that were found to not need new capital following the government's bank stress tests last month made the list.

JPMorgan Chase [...], Goldman Sachs [...], American Express [...], Bank of New York Mellon [...], State Street [...] as well as regional banking giants Capital One [...], BB&T [...] and U.S. Bancorp [...] all said they will pay back TARP funds. (Insurer MetLife also was not required to raise capital but it did not receive any TARP money.)

Investment bank Morgan Stanley [...], which was the only financial firm that regulators did ask to raise money after the stress tests, confirmed it also won approval from the Treasury Department to pay back $10 billion.

Chicago-based Northern Trust [...], which took in $1.576 billion in TARP funds but was not part of the bank stress tests, also Tuesday said it won government approval to exit the program.

[...]

Five banks -- State Street, U.S. Bancorp, JPMorgan Chase, Northern Trust and BB&T -- explicitly said Tuesday they planned to buy back the government's warrants.

|6.9.09 @ 5:39PM|#

I'm still wondering where the statutory authority is for Treasury to refuse to take repayments from any of these banks. Those dollars they want to use to pay this debt are "legal tender" - that means that you are required to accept them, Treasury.

|6.9.09 @ 5:58PM|#

Warren hopes for "enough details that outsiders can rerun em" and "take them out for a test drive. That's how you know you have a robust model."

Does she realize how fantastically impractical this is? It makes my head hurt thinking about it.

|6.9.09 @ 6:26PM|#

Anything within eyesight of TARP makes my head hurt.

DJF|6.9.09 @ 8:04PM|#

The banks are not paying back TARP. The TARP money is being paid back using taxpayer money. Some of it via TARP, some by all the other billions routed to the banks.

Goldman Sachs got billions of tax dollars via money laundered through AIG, all they are doing is turning around and sending some of that money back to the Treasury. And this is just one way, there are billions more via low interest loans, guarantees and the buying of the banks toxic "assets" at premium prices by the FED and Treasury