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April 20th, 2009

US: Restrictions on TARP Repayment

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A U.S. official has reiterated that “healthy” banks will be able to repay TARP funds — but only after passing several new tests. According to the Financial Times, these tests will go beyond the “basic information” provided by the Treasury’s stress tests:

The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.

Certain financial institutions like Goldman Sachs and JPMorgan Chase are working hard to rid themselves of their TARP debt. Even so, officials in the Obama Administration have continued to remind the nation’s top banks that many of them aren’t finished receiving federal aid.

Moreover, the president’s top economic advisers feel that they can continue to secure the nation’s banking sector without having to petition Congress for additional funding:

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

This should be of particular interest to taxpayers because if the government decides to invest heavily in equity stakes that turn out to be worth less than they were anticipated, “our” losses could be significant.

Coming next: “How A Velvet Glove Can Became An Iron Fist.”

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One Response to “US: Restrictions on TARP Repayment”

  1. Obama Backdoor Nationalization of Banks? | Obama Exposure Says: April 21st, 2009 at 8:37 pm

    [...] US: Restrictions on TARP Repayment (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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