IRA’s Chris Whalen:
(…) the decision to allow the larger banks to repay their TARP money is a mistake of the first order, in our view, and illustrates the degree to which Washington is letting the large dealers call the shots on regulatory strategy. If our estimates for loss rates by US banks prove correct, many of the TARP banks repaying capital now may be forced to come back to Washington seeking more help in Q4 2009 or in 2010. And the large banks not repaying the TARP money bear a stigma that may cause regulators and bankers serious problems as the year wears on.
Whereas the regulators had rebuilt some credibility with the public as a result of the stress test exercise, allowing the largest US banks to exit the TARP before we transit the most serious part of the financial storm strikes us as very reckless. If the Fed and Treasury want US banks to be seen by the public as safe and sound, then allowing them to reduce their capital – before ending dependence on FDIC debt guarantees and Fed repurchase agreements for toxic waste – seems contrary to the public interest.
Third, the repayment of the TARP capital by some banks does not end the GSE status of all of the major banks, Chrysler, GMAC, AIG and GM. While the White House is talking about "exit strategies" for some of these zombies, the reality is that the US government could end up as the long-term owner of both automakers, Citigroup (NYSE:C), GMAC and AIG. The cost of keeping the doors of these zombies – plus the housing GSEs — open will consume all of the discretionary cash flow that Washington thinks is available for other pressing needs. Waive "bye bye" to health care reform, Mr. President, if we are going to feed all of these zombies in 2010.
We are told by one of our favorite Democratic economists that the Obama White House is beginning to understand the concept of resource constraints when it comes to federal spending and obtaining the dollars to spend via Treasury borrowing operations. Until and unless the Obama team accepts that keeping the zombies alive will mean putting aside plans for health care and other political priorities, there is not likely to be any action to resolve any of the GSEs.
But we do see signs of change within the White House. Just as Secretary Geithner was finishing his high profile but low substance visit to China, former Federal Reserve Board Chairman Paul Volcker was observed quietly arriving in Beijing for talks with the senior Chinese political leadership. The Chinese have made it clear, we are told, that the opinions of Chairman Volcker are more reliable than the at times sophmoric statements of Secretary Geithner.
The Treasury Secretary, do not forget, is seen in China, Europe and elsewhere as a representative of the largest US banks. The Chinese and Europeans have an intense distrust of the US dealer community for causing the financial crisis, thus Geithner’s ties to Wall Street work against the interests of the US, both in Europe and in many conservative investor communities throughout Asia.
Related posts:
- TARP Cash Isn’t Moving Forward
- U.S. BANKS: Of Stress Test Idiocy, OBS and Nationalization
- U.S. Banks: Stress Tests Results
- Smaller US banks need additional $24bn
- BANKS’ CAPITAL: Wells Fargo Buffers in Silence
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