The TARP Trap RevisitedOctober 22, 2012 Posted by: Joe Morgan, CFA
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 andthe determining factors do not end with whether a bank has been"TARPed." While some bankers are attempting to save their jobs oreven their employers, others are building for the future,partnering with their clients in the mutually beneficialrelationship that primarily exists in a capitalist society. Indeed,we are all saving our nickels and dimes, but some continue to workfor happier times in the future. These are the financialinstitutions that deserve our support.
Many banks have stated publicly their desire to pay back TARP fundsin order to reduce the real and perceived government controls thathave been tacked onto this program post-implementation. Theseinclude the banks who were coerced into participating in theprogram to begin with.
The problem with TARP is the scarlet letter that has becomeassociated with any bank who participates. In order to confuse theshort 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 andwho came along as cover.
Once implemented, the press labeled all TARP recipients as "bailedout" and set on a course to clamp down on such unacceptablepractices as paying senior management. Even if these restrictionswere necessary for some, they had to be applied to all TARPed banksonce 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 situationmuch more complicated.
First, there are those banks with the capacity and willingness tosimply write a check and pay back the TARP funds. Unfortunately, byreducing their capital they are effectively limiting their lendingcapacity just at the time when the economy needs such activity togear up.
Then, there are those banks that have avoided most of the potholesin today's economy and continue to see...Read More