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June 3rd, 2009

TARP: Looking for an Exit. Is There One?



Repayment conditions seem to be getting tougher and tougher for the TARP banks. This week the Federal Reserve required some firms to raise even more private capital than what they were previously told before than can repay their Federal debts:

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity, less than four weeks after being informed they had enough to withstand a deeper economic slump. Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told June 1, people with direct knowledge said.

Will taxpayers ever see their TARP money returned to them?

The administration claims the capital increases are a preventative measure to protect banks from having a lending relapse once the funds are repaid:

“The Fed doesn’t want to be criticized for allowing people to repay this and then having the banks say we just don’t have the capital to make loans now,” said Lawrence Kaplan, a former attorney at the Office of Thrift Supervision who now works at law firm Paul, Hastings, Janofsky & Walker LLP in Washington. “It’s an exercise to make sure that no one is going to get criticized for allowing these redemptions.”

But not every expert sees eye to eye with Washington’s motives:

“It doesn’t make a lot of sense if they’ve raised well in excess of the initial capital requirement to then be told you need a little bit more,” said David Killian, a portfolio manager at Sterling Asset Management LLC in King of Prussia, Pennsylvania, who manages $500 million including stock in Morgan Stanley, JPMorgan and Goldman Sachs. “It’s government.”

The Fed’s approval of the “initial set” of repayments is due to be announced next week. Our friend Calculated Risk says you can bet that Bank of America, Wells Fargo, Citi, or GMAC won’t be on that list.

The eternal skeptic in us still fears that taxpayers won’t see a return on “their” investment, even if certain firms repay their debt next week. Remember, last month the Treasury was trying to push re-paid TARP funds on smaller banks who were originally excluded from receiving the taxpayer aid.

Related articles:

US: Restrictions on TARP Repayment

How A Velvet Glove Can Became An Iron Fist

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2 Responses to “TARP: Looking for an Exit. Is There One?”

  1. Rebecca Widler Says: June 3rd, 2009 at 4:37 pm

    Hi Tim,

    I like how James Kwawk describes this run to pay back TARP as turning in the older “explicit” guarantee for a newer “implicit” guarantee.



  2. Tim Manni Says: June 4th, 2009 at 9:33 am

    Hey Rebecca,

    Thanks I’ll be sure to check that out. Good hearing from you.


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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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