The TARP Trap Revisited

Saving nickels, saving dimes
Working 'til the sun don't shine
Looking forward to happier times
On Blue Bayou

- Roy Orbison

The banking industry is splitting before our very eyes and the determining factors do not end with whether a bank has been "TARPed." While some bankers are attempting to save their jobs or even their employers, others are building for the future, partnering with their clients in the mutually beneficial relationship that primarily exists in a capitalist society. Indeed, we are all saving our nickels and dimes, but some continue to work for happier times in the future. These are the financial institutions that deserve our support.

Many banks have stated publicly their desire to pay back TARP funds in order to reduce the real and perceived government controls that have been tacked onto this program post-implementation. These include the banks who were coerced into participating in the program to begin with.

The problem with TARP is the scarlet letter that has become associated with any bank who participates. In order to confuse the short sellers and other demons on Wall Street, the Treasury "encouraged" healthy institutions to participate as well. This way, it would be much more difficult to tell who really needed TARP and who came along as cover.

Once implemented, the press labeled all TARP recipients as "bailed out" and set on a course to clamp down on such unacceptable practices as paying senior management. Even if these restrictions were necessary for some, they had to be applied to all TARPed banks once again to hide the bad eggs from the good.

Now, the good eggs are ready to fight back.

There are two types of good eggs, though, which makes the situation much more complicated.
First, there are those banks with the capacity and willingness to simply write a check and pay back the TARP funds. Unfortunately, by reducing their capital they are effectively limiting their lending capacity just at the time when the economy needs such activity to gear up.

Then, there are those banks that have avoided most of the potholes in today's economy and continue to see growth prospects going forward. These banks are less willing to give up capital as they see the current downturn as an opportunity to gain market share and solidify their place with all constituents. They need the additional capital to fund economic growth through their activities.

Both of these good eggs should be allowed the freedom to manage their business properly. But we've hidden the bad eggs among them rather than allowing bankruptcy court and the FDIC to perform their natural functions.

Allowing only a few banks to pay back TARP funds will leave the others in a precarious situation. These TARPed banks will continue to carry the label of the "walking dead" even though they may be growing their lending practices prudently and profitably - just what the government wants.

Indeed, the confusion is such that some large banks are touting great strength in the form of earnings even when their capital leaves them gasping for air at each earnings release.

A better and, frankly, more obvious solution, is to push the walking dead into the arms of the FDIC. Today, this looks like the coming course for General Motors, even after billions of dollars and tons of wasted carbon emissions in the form of verbal debate inside the Beltway.

The shortest distance between two points is a straight line. In the banking sector, that line leads to the FDIC for some of our largest and seemingly venerable institutions.

Key Developments

In this economy, it's difficult to state that retail sales "disappointed," but they did fall 0.9 percent in March instead of remaining flat as economists surveyed by Bloomberg expected. While some are micro-analyzing these data (we did have a late Easter this year), it seems obvious that retail sales figures will remain in the basement until the housing and jobs markets can get back on track.

The manufacturing sector continues to deteriorate as industrial production fell 1.5 percent in March after falling the same amount in February. Regional surveys of manufacturing activity remain negative as the national capacity utilization rate fell to 69.3 percent which is an historic low given data back to 1967.

Housing starts, which actually rose in February, fell by 10.8 percent to a 510,000 annual pace. This is about one-fourth the level experienced in early 2006 and about one-half the level of just one year ago. Though the construction industry - along with others tied to new home sales - is being battered, today's extreme inventory adjustment is necessary for the housing market to find a bottom.