Free Markets, Free People

Shakespeare


TARP as Shakespearean Tragedy

Does it strike anyone else as funny that TARP is a poor anagram for “trap”? If Shakespeare had written this play the name would have been much more clever, of course, but I think he would delight in the barely concealed irony of the federal government drawing banks into its lair with the pretense of saving their hides, only to use the money intended to do so as the means of yoking the industry. I’ll bet the banks who took TARP funds don’t find it so humorous.

Since last October when Hank Paulsen forced nine of the largest banks to take an initial injection of $125 billion in TARP funds (among other bullying), the federal government has committed about $12.2 trillion dollars to bailouts and spent about $2.5 trillion on such efforts (er, among other, other bullying). Aside from an increasing assertion of control over the financial and automotive sectors of our economy (among other, other, other bullying), there is very little to show for all this money. Which leaves the rather stark impression that government control was the goal all along — i.e. the method within the madness.

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn’t much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street’s black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ‘em what to do. Control. Direct. Command.

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Here’s a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons [ed.: That's a highly charitable argument]. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can’t a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can’t special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit — until now.

Despite the government’s bullying, it is difficult to feel much pity for the institutions who accepted TARP funds. Surely they must have at least suspected an iron hand inside that velvet glove attempting to feed them. However, if they truly don’t need the money, and have the means to pay it back, then onerous seems too slight a word to express how gripping the government’s control has become:

Financial firms eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp., a senior government official said Tuesday. The FDIC program allows financial institutions to borrow money at lower costs.

The new requirement will make it harder for some institutions to get out from under government rules attached to the bailouts, another shift in a changing landscape for banks. It also illustrates the government’s desire not to have banks abandon the bailout program if they are not financially prepared to do so.

The government’s desire? I don’t recall exactly where that is accounted for in the Constitution. Is it buried somewhere in the penumbras and emanations of the commerce clause? Clearly the “government’s desire” must have some force of law that it can unilaterally decide to allow banks to sink or swim on their own. Otherwise, such desire is wholly irrelevant.

Nonetheless, banks did take the money, and so the government gets to call the tune. Institutions who would have collapsed absent the bailout have little to grouse about in such circumstances. But other firms, who didn’t need the money in the first place, rightfully bristled at the demands being placed upon them and the opprobrium casually tossed their way by the government.

Kim Price’s Gastonia bank accepted $20 million from the Troubled Asset Relief Program to help keep credit flowing as the economy faltered.

Now the Citizens South Banking Corp. chief executive and other community bankers feel that Congress is treating them like villains.

Proposed new TARP rules that could limit bankers’ pay have upset many bank executives here. And the congressional effort has prompted some banks in other states to give the money back.

Paying back the government (although coming at a pretty price) not only seems like a right the banks should have, it just makes good business sense for the healthy ones:

TCF Financial Corp, a Minnesota lender, said it repaid a $361.2 million capital infusion that it took from the U.S. government’s bank bailout program, becoming the largest recipient to repay its funds.

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Regulators, banks and investors once viewed participation in the program as a positive, figuring that it would help healthy banks lend more and perhaps buy struggling rivals.

But participation is now often viewed as an albatross, subjecting recipients to restrictions on such things as executive pay and dividends.

Investors now consider some banks that hold onto their aid as being too weak to return it. Large banks such as Goldman Sachs Group Inc ( GS – news – people ) and JPMorgan Chase ( JPM – news – people ) & Co have said they want to repay their aid soon.

TCF Chief Executive William Cooper this week said holding TARP money put the bank at a “competitive disadvantage.”

He said repaying the aid and eliminating the associated dividend payments will boost earnings by more than 14 cents per share annually.

By inducing banks to take TARP money, whether through tactics or intimidation, the government has neatly cornered the capital flow of the country. Much like Hamlet surreptitiously forced his uncle to publicly face scorn for his act of regicide (by having performed the “Murder of Gonzago,” aka the “Mouse-Trap”), the government has successfully lured failing banks into the public square for ridicule. Whereas Hamlet sought to elicit a sign of guilt in order to justify his vengeance, however, the government seems intent on effusing guilt throughout the banking industry so as to justify its controlling moves. By tainting the public view of the financial sector, the government seeks to undermine public confidence and build a chorus calling for its heavy-handed involvement. As mentioned above, protestations by the beggars for such action protest too much, methinks, but those who truly have no need of the interference have much cause to cry foul.

Hamlet ends with nearly every character dead, and the country being turned over to its greatest enemy. Unfortunately, the financial sector seems destined for a similar result as the government has made clear it will not allow certain institutions to fail, and is callously indifferent to fate of the unchosen. No matter how well those banks who managed to avoid TARP altogether do, the government is now the major mover in game, and the only one with the power to force its will on all the other players. It can, and will, pass laws that favor the winners its chosen, thus leaving the non-assisted banks out in the cold. In the end, firms who conform to market forces (i.e. respond to the desires of its customers), will be supplanted by those which conform to will of the government’s agenda. The trap was set, the mice did enter, and thus their fates were sealed.

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