Why the Banks Are So Eager to Pay Back TARP

By Derek Thompson

Here's the New York Times on the banks' somewhat extraordinary plans to pay back the TARP money in seven months -- maybe years before the Treasury expected:

Having regained a financial footing as well as a bit of their old swagger, major banks are racing to pay back billions of taxpayer dollars ... Now that big banks seem to have stabilized, regulators are trying to determine how and when these institutions should be allowed to return their bailout money.

That's great thing, right? Not exactly, says Ezra Klein:


The banks, he writes, are something like a gambler who knows dark secrets about the casino owner's wife. So if he runs out of chips, he'll just throw a glance at the owner and receive another stack. In other words, he has no incentive to play safe (or smart!) because, when "The House" needs you to be happy, a game of risk suddenly isn't a risky game at all.

The banks are the gambler because the government has no "credible process for allowing and managing a bank's failure." So why not pay back the TARP as soon as you can, cut the strings that hold you down and get Geithner off your neck? It's also a street cred thing, writes TNR's Noam Scheiber. It's a race to be seen as the first healthy bank to seize the comparative advantage in the market.

I think this interpretation makes a lot of sense, but this other side of the coin deserves a look. Bank of America has found it surprisingly easy to begin to raise the $34 billion dollars required by the stress tests, and public confidence in the banking system post-tests is up for the first time all year. The downside of bending over backward for the banks is all too evident: it's been ungodly expensive and the banks could be more difficult to re-regulate after this mess is over. But we've avoided a Lehman-esque castastrophe without electro-shocking public opinion with premanture nationalization rumors, while keeping investors eager to capitalize the most troubled institutions. Not ideal, no. But not bad for a game of messy incrementalism.

This article available online at:

http://www.theatlantic.com/business/archive/2009/05/why-the-banks-are-so-eager-to-pay-back-tarp/18040/