The Power of TARP

I for one didn’t realize how sweeping the government’s control over the banks who take TARP funds might end up being. In particular, one provision of the program gives the government the right to “unilaterally amend” the terms under which it hands out its cash. Whoa! When you have a counterparty that happens to be the federal government, and it has a unilateral power to amend its contract with you, you have one powerful counterparty! You’d think banks that don’t absolutely need an infusion would be more wary:

The government could increase the dividend it’s being paid for preferred shares, require caps on executive compensation or force banks to halt foreclosures, said David Baris, executive director for the American Association of Bank Directors, in a Nov. 3 letter to Treasury Secretary Henry Paulson. . . .

“This provision grants carte blanche for this or any other Congress to change any of the terms of the agreement,” said Baris. “Congress could do just about anything it wanted.” . . .

So far more than 30 banks have said thanks but no thanks. I can see why.

Joe Conners, chief financial officer of Philadelphia-based Beneficial Mutual Bancorp Inc., said his bank declined TARP money in part because of the amendment.

“You’re signing a contract with a counterparty, and the counterparty in this case is going through a complete management change,” Conners said in an interview. “You’re basically signing away your right to have any kind of remedy if in fact they do change the rules.”

I bet before long a lot of bankers wish they never heard the word “TARP”... Actually, it’s an acronym. . . You get the idea. . . .

Comments

[herbert hoover:]

Fine. Stay out of TARP. Can I have my money back now?

2008 Dec 21 10:14 AM