Knowing When Not To Hold Em
April 23, 2009
A wise man once said, Youve got to know when to hold em, know when to fold em, know when to walk away, know when to run. Unfortunately, Kenny Rogers was not consulted in our governments bank bailout effort, so far as we know.
Earlier this week, Treasury Secretary Timothy Geithner told the Congressional Oversight Panel overseeing the Troubled Asset Relief Program (TARP) that it makes sense to allow some banks to repay TARP money early.
The banks want to get out from under TARP restrictions as quickly as possible, which may seem like a positive sign though some would argue this would delay the return of a healthy credit market.
And banks are asking to be allowed to pay off loans early and without penalties for an early exit. Try doing that with your mortgage and see what these banks tell you. Banks are asking the government to cut them a big break at the same time such breaks are hard to come by for businesses seeking loans or unemployed homeowners hoping to stave off foreclosure.
Part of their case is that the TARP money comes with lots of strings attached, including strings that were attached after the banks agreed to take the money, such as restrictions on bonuses and other pay imposed after public outrage over the AIG bonuses.
On one hand, it makes sense for the government to deny requests to pay the money back early. The U.S. government gave TARP money out in exchange for equity stakes. Shouldnt taxpayers get more for their money? If our tax dollars are going to be used to prop up banks, why shouldnt the public treasury reap the reward like a smart investor?
On the other hand, the government would do better to focus on regulating the TARP program and cracking down on fraud. Holding an equity stake in a bank means the possibility of greater payback, but it also means more risk and oversight. The government didnt catch egregious bonuses that were allowed in the first version of TARP, are we sure it will be an astute equity investor?
Times like these are times to minimize risk. If a bank can safely exit the program, take the money and be glad you got it back. The government can use this opportunity to impose conditions on an early exit from TARP. For example, a bank that exits TARP early can be prohibited from raising its credit card or mortgage interest rates past a certain level over a certain amount of time.
It is bank stability that is the primary goal of TARP, not government investment. The government is better off taking the money now, rather than try to squeeze equity from banks that may stumble later. Its time to take our money and walk away when we can.