Ten Banks Escape From TARP: Reason To Celebrate?

Today ten of the large banks that received money last year from Hank Paulson’s horribly-misnamed Troubled Asset Relief Program repaid the government a total of $68 billion.  Combined with repayments by smaller banks and dividends paid to the Treasury, taxpayers will have recovered almost $75 billion of the $700 billion TARP program.  Reason to celebrate, right?  Not so fast.

First, there is a strong possibility that this $75 billion will head right back out the door.  Recall that last year Congress authorized the Treasury Secretary – then Hank Paulson – to lend or invest up to $700 billion at one time.  These repayments now give Timothy Geithner cash to “help” pretty much anyone else he wishes.  As we all know, the bailout queue is long and getting longer.  The chance taxpayers recovered anything today is nil.

Second, look at who repaid and who didn’t.  Goldman Sachs (GS), Morgan Stanley (MS) and JP Morgan Chase (JPM) all gave back the money.  Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) didn’t.  Why?  Good question, and neither the banks nor the Treasury nor the Fed is talking.  We do not know if any banks asked to repay the money and were refused, or if they never even asked.  So much for open, transparent government.

Third, should we conclude that the firms which escaped from TARP are stronger and safer than the others?  No.  We should conclude that they escaped from the TARP, and that’s about it.  The “stress tests” they passed have already been proven laughably optimistic, to the point that the Congressionally-appointed TARP overseer is calling for the whole exercise to be repeated.

Barry Ritholtz at The Big Picture blog has an interesting theory.  He suspects the entire TARP exercise was a massive ruse to conceal the fact that Citigroup was on the brink of collapse last fall.  The other banks were not pictures of health, he says, but the real crisis centered on Citi.  The only way to rescue Citi without causing a panic was to create the appearance that all the banks were in the same boat.  That crisis having passed, the bystander banks are now being permitted to go their own way.

Whether Ritholtz is right or not, I don’t know.  I’ve thought for months that Citi is probably on its deathbed.  Regardless, the banking crisis is far from over.  The best case is that we have years of deleveraging and tight credit as asset values are marked to reality and the banks rebuild their balance sheets.  The worst case… you don’t want to know.

Disclosure: no positions