Geithner: If You Want to Cut the Strings, You Need to Cut All the Strings
Here’s some good news from the Treasury Department. I’ve been complaining for a while that a number of financial institutions seem inclined to repay their TARP money, and then proclaim themselves free from government meddling, all the while taking advantage of a plethora of other emergency support programs that the government has put into place. Now Tim Geithner is saying, rightly, that a bank that wants to repay its TARP money also needs to cut itself off from the “guarantee of debt issuance offered by the Federal Deposit Insurance Corp.”
That’s the right thing to do. Now the next question becomes one of credibility. The official thinking is that the explicit FDIC guarantee lets banks borrow much more cheaply than they otherwise might. A truly healthy bank can repay its TARP money and cut itself off from the guarantee while paying little price, because a healthy bank won’t need an explicit guarantee to borrow pretty cheaply. But under the current circumstances, is the idea that the government would let a non-guaranteed bank fail and default on its loans really credible?
15 Responses to “Geithner: If You Want to Cut the Strings, You Need to Cut All the Strings”
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May 6th, 2009 at 12:25 pm
But under the current circumstances, is the idea that the government would let a non-guaranteed bank fail and default on its loans really credible?
That’s not really the question. The regulators won’t approve premature repayment of the TARP funds unless they are convinced the firm would remain sufficiently well-capitalized afterward. And if the firm would also have to forego the FDIC program, that is going to raise that capitalization bar considerably.
So, the government isn’t going to let a bank do this unless it is convinced the bank is well-capitalized enough that is highly unlikely to fail even without the FDIC guarantees.
May 6th, 2009 at 12:27 pm
DTM:
Which means that likely the only bank getting out from under the TARP program anytime soon is Goldman Sachs.
May 6th, 2009 at 12:31 pm
it seems to me that until the government has decided how to proceed in the future with “too big to fail”(TBTF) that all banks are getting a benefit of government insurance whether they pay back bailout money or not. The only acceptable answer is to require new insurance deposits, and new capital regulations, based on bank size to cover TBTF until arrangements are made to limit bank size.
The regulatory reforms that could wait until the crisis was over can now no longer wait.
May 6th, 2009 at 12:33 pm
Which means that likely the only bank getting out from under the TARP program anytime soon is Goldman Sachs.
Maybe the only large bank, at least (there are some smaller TARP participants who are already paying the money back). Of course that really depends on how their upcoming stress-test-mandated efforts to raise private capital go: in a best-case scenario, at least some of the healthier large banks will be able to raise enough private capital to not only satisfy the stress test mandates but also to pay back their TARP money, all while remaining well-capitalized.
May 6th, 2009 at 12:55 pm
I cannot see how a global investment bank would want any U.S. federal government strings at all. The first question the Chinese Commissar asks an investment bank is, have you cut off all ties to the U.S. federals?
May 6th, 2009 at 12:55 pm
In order to get out from under the TARP regulatory regime, a bank ought to not only pay back what it received under TARP, but also what it’s received from AIG since we taxpayers took it over last October.
Speaking of AIG, has anyone figured out just how many hundreds of billions we’re potentially on the hook for? Or do we need to assume that AIG is a bottomless pit?
May 6th, 2009 at 1:05 pm
The phrase “cut the strings” is fairly misleading. The article seems to indicate that the banks merely need to “demonstrate” that they have the ability to issue non-FDIC-guaranteed debt; they don’t need to completely forego issuing FDIC-guaranteed debt. As stated in the article, the FDIC guarantee is optional – available for a fee in the event a bank wants to avail itself of the guarantee. Banks such as Goldman Sachs have issued both FDIC-guaranteed debt and non-FDIC-guaranteed debt recently.
May 6th, 2009 at 1:12 pm
Maybe I’m missing something, but if a bank decides to forgo FDIC insurance, it’s going to lose most of its depositors. You’ll see a run like you haven’t seen since the ’30s and even George Bailey won’t be able to save it.
May 6th, 2009 at 1:23 pm
JJF,
What is being discussed here is not FDIC deposit insurance, but rather the FDIC’s “Temporary Liquidity Guarantee Program”. See here for information:
http://www.fdic.gov/regulations/resources/TLGP/index.html
In a nutshell, for a fee the FDIC will guarantee new senior unsecured debt issued by eligible banks.
May 6th, 2009 at 1:56 pm
Well, it looks like maybe Goldman, JPMorgan, and BNY/Mellon could get out of the TARP soon(ish):
http://www.nytimes.com/2009/05/06/business/06stress.html?hp
Not exactly a surprising list, but that would be a good chunk of change coming back if this were true.
May 6th, 2009 at 3:32 pm
It’s a game of who blinks first – the banks are counting on Geithner to take TARP money back, cut any attached strings, while keeping the implicit guarantee. Geithner just called their bluff.
May 6th, 2009 at 4:17 pm
Unsound banks should be permitted to fail. To prop them up is to introduce “moral hazard” – to encourage risky behavior. How about we end the FDIC, end the federal guarantees behind Freddie Mac and Fannie Mae, end the FDIC taxes as well?
This crisis, when it comes down to it, is a result of entirely too much meddling in the financial markets. Space does not permit a listing of all the alphabet commissars involved, who were working diligently to promote corporate wealthfare, under cover of “protecting consumers.”
To name one example: the three rating agencies who were blindsided by this crisis are a cartel mandated by the SEC; they have no free-market competition. We don’t actually have a free market in the financial sector, we have a marriage of “socialized risk and private profits”, the worst of both worlds. Real deregulation – which I wholeheartedly advocate – would involve cutting the purse strings from the corporate wealthfare addicts.
May 6th, 2009 at 5:27 pm
[...] Geithner is changing the rules for financial firms that receive government assistance: Geithner: If You Want to Cut the Strings, You Need to Cut All the Strings, by Mathew Yglesias: Here’s some good news from the Treasury Department. I’ve been complaining for a while that a [...]
May 6th, 2009 at 7:21 pm
I’m sure these companies would gladly oblige if the government also lifted it’s monopoly on coining money.
May 7th, 2009 at 8:29 am
with regards to #3 above, I guess there was concurrent thinking
http://www.nytimes.com/2009/05/07/business/07fail.html?hpw