We Don't Want Your Money

There is an article on cnnmoney.com that talks about how hard it is to give the money back that banks received from TARP funding. Some banks are saying that the funds that were given to them are actually preventing them from growing. The banks want the government out of their hair and allow them to run their bank as usual. None of them want to be the next AIG.

If the government was going to force banks to take money even though they didn’t need it to try to cover up the ones that did, why are they not making it easier for the people to pay back what they didn’t need in the first place? It is obvious which of the big banks needed the funds; the government really isn’t covering up anything.

(Bankers: Take your TARP money back http://money.cnn.com/2009/03/27/news/economy/tarp_takeback/index.htm)


chase said...

After reading the article I can see why some banks want the government out of their back yard. If I owned a bank I wouldn’t accept the money unless there was no other way. But from the sounds of this article it sounds like some banks have no choice and once they accept the money they have little say in decisions. Nobody likes to be micro managed, especially when some banks don’t even need the TARP money. I liked when Brain Garrett stated, “it should be TRAP not TARP because giving back is harder than receiving.” The more restrictions the government makes on the TARP, the harder it is to pay back and follow those rules.
Dr. Tufte do the banks have a choice whether or not to accept the money or is the government stepping in and forcing them to take the money?

Jason said...

The government either really thought this out or didn't think it out enough. They gave bailout money to everybody in order to cover up who the weak institutions were but now the strong institutions want to give it back which would nullify the purpose. That forces those that needed the money to give it back so as to not appear weak. That gives me the impression that the government didn't really think this one out. On the other hand, the government has a lot of control now as shown by the firing of GE's CEO. That power shouldn't be held by the government but that is just one of the many stipulations that come with the TARP money. That makes me wonder if the government planned to seize control when they began this process of issuing TARP funds.

anthony said...

This certainly could have been handled much better than it was. If some banks start sending the money back, then the banks who don't will appear to be in great financial trouble. I suppose it's hard to blame anyone for this conundrum, as the recession got so deep so quick, everyone was in such a hurry to find a solution.

carson said...

With the goverment keeping its pressure on banks in anyway it can, it sends a message to both good and bad banks that big brother is watching.

Dr. Tufte said...

Jason: you meant GM not GE.

Chase: the decision in the initial round of TARP distributions was that the government determined a subset of large, national banks that might need money, and then all those had to take it whether they wanted to or not.

This is a lot sounder than it may seem. Receiving the TARP money could be interpreted as a bad sign, and what investors will do when they get that kind of news is bleed the firm clean of its liquid assets. So, what you'd end up with is the equityholders in the banks losing their wealth and the government losing their cash as well. The only way around this is either absolute secrecy, or making everyone do the same thing.

It's also standard for banks that have to borrow money from the "lender of last resort" to understand that they are inviting regulatory inspection and potentially micromanagement.

The difficulty in this situation is that generally the borrowing and resulting inspection is voluntary. The analogy would be going into a substance-abuse program: 1) you admit you have a problem, 2) an outsider helps you out, and 3) there's the realization that the outsider is going to poke around your life a bit to make sure you stay on the straight and narrow. That's how it's supposed to work. The difference in this case is that the government started with # 2 and moved to # 3, whether or not a particular bank had gone through step # 1. So, for a healthier bank, this is like you getting a methadone prescription and random drug testing even if you don't do heroin. It's clearly invasive.

In retrospect though, it's not easy to think of a better way to do this. The obvious choice would be an open-market operation, which exists specifically to circumvent this sort of issue. But ... if you remember the discussions from last fall ... the biggest thing people were worried about was the government overpaying for "toxic" assets. We should now recognize that this was a really stupid concern.

I think the big message here is that our overemphasis on the incompetence and inefficiency of government tied their hands when they actually were potentially competent and efficient.