Paying Back Billions: Is It Bad for Economy?

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

Expert Debate Whether Banks Should Rush to Pay Back Taxpayer Funds

By ALICE GOMSTYN
ABC News Business Unit

March 26, 2009—

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.

"The issue is, if they give the funds back, there's that much less available to support markets and make new loans," said Vincent Reinhart, a former director of the Federal Reserve Board's division of monetary affairs and a resident scholar at the American Enterprise Institute.

Others contend that some banks' balance sheets are so large that, with respect to lending, the absence of TARP funds wouldn't make much of a difference.

But Miller said that the TARP funds are, in fact, important to big banks and questioned whether firms like Bank of America could afford to return TARP money at all.

"These guys have very low capital levels and they need as much capital as possible, so I doubt very highly they're going to be able to pay it back," he said.

Suggesting that Bank of America could repay TARP funds, he said, could have just been part of an effort to boost that bank's stock price.

TARP and Bonuses

Five smaller banks have already applied to return TARP funds, according to an analysts' report at the investment firm Keefe, Bruyette & Woods. As of March 2, Bank of Marin Corp., IBERIABANK Corp., Signature Bank, Sun Bancorp Inc and TCF Financial Corp., have sought approval from the Treasury to repay a total of nearly $690 million.

Reinhart said that when a bank seeks to return TARP funds, that can set it apart from struggling peers. But it also helps ease concerns, he said, that the bank may be subject to tough restrictions later on.

Reinhart cited the recent debate in Congress -- amid furor over $165 million in employee retention payments made by bailed-out insurance giant American International Group -- about taxing bonuses at firms that received government aid.

"I think the general principal is that if you're on the TARP list at a later date, it may hamper your ability to raise funds or to compensate your employees, so get off that list as quickly as you can," he said.

Last week, officials at Bank of America, Citigroup and JP Morgan criticized the proposed bonus tax, arguing that it was unfair and could lead the firms to lose talented employees.

JP Morgan urged people to call their senators to voice opposition to the bonus tax. The company set up a toll-free hotline to help them do so.