Banks Paying Back the TARP Billions: Bad for the Economy?

Will paying back TARP early hurt economy?

Banks that decide to swiftly pay back billions in government aid may score points with angry American taxpayers, but will they hurt the wider effort to shore up the banking system and the economy?

That's the question some are asking after news that Goldman Sachs and Bank of America, two of the nine original recipients of funding from the Troubled Asset Relief Program, may repay the government within several weeks.

Bloomberg News reported Tuesday that Goldman was in talks with U.S. regulators to return the government's $10 billion by mid-April.

VOTE: Should Banks Repay TARP Money?

The Los Angeles Times reported yesterday that Bank of America CEO Ken Lewis wants to start repaying the government -- which provided Bank of America with $45 billion in aid -- next month and could complete its repayments as early as the end of the year.

The firms are reportedly waiting until the government completes its bank stress tests -- evaluations designed to determine whether banks would need additional capital to survive a deeper economic downturn -- before starting repayment.

Some, including bank executives, warn that moves by banks to pay back TARP early could hurt the banks that wait longer to repay the funds. That, in turn, they say, could prove damaging to the economy.

"If only a few do it, it's going to put an obvious spotlight on the banks that were too weak to do it. That's the real problem," said an executive at a financial institution that has received a large amount of TARP funding. The executive, who asked not to be identified so he could speak freely, said that that spotlight could "spook the market," leading to drops in stocks that would hurt more than just the "weak" banks.

Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., agreed.

"If another bank [stock] goes to zero, doesn't that contaminate the whole system? Yes, it does," he said.

Still, others argue that holding on to TARP money will cause only limited damage to banks.

The Case for Payback

Gerald O'Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said that it's in the interest of both taxpayers and shareholders for TARP banks to pay back government money as soon as they can.

As for the banks that can't?

O'Driscoll said the government has taken measures beyond TARP to bolster banks -- including increased Federal Deposit Insurance Commission limits on deposit insurance and, in some cases, offering banks guarantees on their losses -- that will help them survive any fallout over retaining TARP funding.

"I think the concern about these firms failing has been greatly reduced by the steps the government's taken," he said. "That makes it easier for the firms that wish to repay to do so."

Mickie Siebert, the founder and chairwoman of the brokerage firm Muriel Siebert & Co., Inc., said that what is far more important to the health of the banks is whether they can sell off the troubled assets on their books.

"They may come out very strong," she said. "If they sell the loans and get them off their balance sheet at a fair price, then they can take that money and do one of two things: give some of it back or start lending money again."

Hurting Lending, Boosting Stock Price?

Some worry that returning TARP money would curtail bank lending, which has already dropped significantly as banks pull back on risky lending practices.

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