Why Are Banks Rushing to Repay TARP?

When many of the nation’s leading banks were on the verge of financial collapse in September 2008, the U.S. government shelled out $365 billion to bail them out, via the Troubled Asset Relief Program, or TARP.

This week, significantly earlier than expected, the government accepted repayment from a string of these banks, among them Wells Fargo ($25 billion), Citigroup ($20 billion), JP Morgan Chase ($25 billion), Goldman Sachs ($10 billion), Morgan Stanley ($10 billion), and Bank of America ($45 billion), which made good on its debt almost two years ahead of the payback date it had set for itself.

What’s going on? Mark Williams (GSM’93), executive-in-residence at the School of Management’s finance and economics department and a former risk management advisor for Deutsche Bank and Standard and Poor’s, says we should be concerned.

BU Today: Was TARP a good idea?
Williams: The banks were in significant trouble, so Henry Paulson, then secretary of the treasury, and Ben Bernanke, Federal Reserve chairman, decided they needed a rescue package. TARP was for risky banks. Risk-takers became TARP takers. We gave them billions of dollars to prop them up because the strength of our economy can only be as strong as our banks. So yes, TARP is a very important safety net.

Why do most economists agree that rushing to repay TARP money is a bad thing?
Risk-taking banks are rushing to return TARP money because they want more freedom in terms of how they can pay their senior executives. And they want to get back to business, which means taking risks again and exposing the economy to those risks.

Unemployment is 10 percent, yet we’ve seen executive bonuses go back up to what they were pre-recession. We can assume there were no lessons learned, and this pain will be a cycle. Banks are in the business of making money, and to make money they feel they need to be left to their own devices. The most intrusive thing that’s happened to them is the strings attached to TARP. For example, Citigroup had negotiated a $100 million bonus for a trader for one of its subsidiaries. It had to pay TARP money back quickly or be forced to sell the trading subsidiary.

How concerned are banks with the image they project to investors?
This cascade of repayment began with Goldman Sachs, followed by Bank of America, Citibank, and most recently Wells Fargo. Since we tend to view the health of one bank relative to its peers, if one pays back, it can be seen as stronger than the ones that haven’t paid back.

Is that perception accurate?
It’s a conundrum. The government has said yes to Citibank’s repayment. Citi had gone out and used TARP money to raise capital, and it received cash, so the TARP money is less than the amount of capital they raised. But Bank of America was repaying some of its TARP with its capital, so technically it wasn’t as strong after paying TARP back as it was before. So this counters the argument that repaying TARP is making banks stronger. It’s making many of them weaker, although Bank of America has claimed repayment has allowed them to hire a new CEO.

There’s concern about banks accepting billions in government bailout loans without resuming lending, which would give the economy a boost. Are banks obligated to increase lending?
The government did rescue them — that’s not debatable. The banks have an obligation not to negatively affect the economy.

The engine of economic growth tends to be small entrepreneurial companies, but we’re finding that banks are paying back TARP, but they haven’t been lending. They accepted TARP in time of need; if they don’t see the moral obligation to lend more, then from a political point of view we should not allow them to pay their TARP back. But as long as the banks stay within the letter of the law, there’s not much the government can do.

How does the rush to repayment affect the major banks’ public image?
It’s a big PR issue. We don’t have job growth, and banks are essential to job growth. They’re not lending, so no one’s spending. This is why, for example, the public is so infuriated with Goldman Sachs. They turned $10 billion in TARP money into profit. Morally it doesn’t feel or smell right.

Will the decision to allow these banks to pay back early come back to haunt us?
It’s not clear that we’re out of the woods. Banks could be hit more and may require additional funding. What would be the negative of holding on to the TARP money? If we have a double-dip recession and some existing big real estate loans go into default, the banks need reserve capital. So it’s financially irresponsible to pay back the TARP. Your bank should be in safe harbor, and it’s capital that gives banks safe harbor.

What can be done to make banks more responsible to taxpayers?
We’ve seen the problems banks can cause, but there has been no material change. Congressman Barney Frank (D-Mass.) has offered an overhaul bill that hasn’t been approved, but until we fix the system, we can have another Lehman Brothers, another big bank failure, and put the economy back into a tailspin.

These banks put their hands out and took money when they needed it most, then they used the money to pay lobbyists to get around the rules. I wouldn’t allow TARP to be repaid until we have meaningful financial overhaul.

When unemployment drops to 8 percent, let them pay TARP back. That’s a measure of progress the average American can appreciate.

Susan Seligson can be reached at sueselig@bu.edu.