Why Banks Want to Return TARP Money

The government's financial system bailout/rescue plan focuses on the lack of lending to consumers and businesses as banks in the country preserve cash to repair their balance sheets. The TARP's Capital Assistance Program designed under former Treasury Secretary Hank Paulson provided (and perhaps forced) capital to banks of all sizes, beginning with eight institutions in late October 2008.

Recently, JPMorgan (JPM), Goldman Sachs (GS), Bank of America (BAC) and other TARP recipients expressed their intention to promptly return the taxpayer capital and remove government influence and scrutiny over their businesses. If these institutions are drowning in loan losses and desperately need capital to improve their balance sheets how can they afford to repay the TARP money?

A review of last week's updated FDIC Quarterly Banking Profile (QBP) for the fourth quarter of 2008 provides several reasons why the banks can afford to repay the TARP capital. Despite posting an industry-wide quarterly loss of $32.1 billion and continued deterioration in asset qualify, the industry's cash flow position improved during the crisis:

Total deposits increased by $307.9 billion (3.5 percent) in the fourth quarter, the largest percentage increase in a quarter in ten years. Banks' balances at Federal Reserve Banks increased by $342 billion in the quarter. While 1,069 banks (out of 8,305) reported increases in reserve balances during the quarter, five banks accounted for more than half of the entire industry increase.

So banks flush with cash due to the surge in deposits are parking the money at the Fed instead of making loans. Got it, that explains the government's frustration with banks for not lending. Wait a second, reading further into the QBP shows that most institutions actually increased their loans:

Three large banks accounted for all of the decline in the industry’s loans during the fourth quarter; most institutions grew their loan balances in the quarter. Almost two-thirds of all institutions (64.7 percent) reported increases in their loans and leases, while only about half as many institutions (2,865 institutions, or 34.5 percent of all reporters) had declines in their loan portfolios.

Most banks increased their loan portfolios? Three large, over-leveraged banks restructured their loan portfolios while 64.7% of banks increased lending. Banks simply do not need additional capital to meet demand for loans to qualified borrowers. Furthermore, TARP capital costs banks 5% annually and comes with incredible intrusion into their business decisions. With strong deposit growth most institutions have sufficient cash to meet their funding needs and it should come as no surprise that many want to return the TARP funds promptly. Perhaps the Fed and Treasury, in the face of declining credit growth, have lost sight on the real reason for the lack of bank lending: a lack of demand by businesses and consumers. No bailout or new Fed lending acronym will spur demand, only time will heal these wounds.

Note: Please do not take this post as an endorsement to invest in financial stocks as many significant risks remain.

Disclosure: no positions

Comments

[Big Jack58:]

Wow, someone finally got it right. The route cause of the current recession doesn't reside on the supply side, it's demand drive. And it makes all the sense in the world that the credit based growth wouldn't last forever. When that bubble finally burst, people start to repair their balance sheets .... with deposits not more credit. It's frustrating that our gov't continues to harass the financials in an effort to find ways to get Americans to pick up their debt spending habits. One would think we would encourage people to save and use debt only when necessary (emergencies). This won't kill the economy. Once people have financially sound balance sheets, spending will pick up. However, those big screen T.V.s will be purchased with a debit card and not a credit card.

Mar 26 07:38 AM

[Toeser:]

Overall bank lending is up something like 3-4% over the past 12 months, down from an annual growth rate of 10-12% in the previous couple of years.

If you have healthy GNP growth of 3-4%, then a growth rate in lending above that number means everyone is going more into debt. Duhhh! Hello government. We don't want to return to a 10-12% growth rate in lending, that's what got us here.

Mar 26 08:29 AM

[atavist.avatar:]

Yes indeed. Someone who understands the need for facts in one of these posts is rare, but someone who also knows how to interpret the facts is rare indeed.

Lack of effective demand is the problem as the Obama team fully understands. The Fed, the actions of which can only be described as heroic since 2007, understands this. Clearly they think caution by the banks is constraining the recovery.

Mar 26 08:57 AM

[greedcanbgood:]

I couldn't agree more...someone finally got it correct! Look at consumer debt - at the last report it had actually DECLINED for the first time in a very long time. There's a message there. I understand that we have a leveraged economy and that probably won't change but other than a mortgage and maybe a car, what's wrong with a consumer going back to working with cash?

"Open up the credit markets..." If I hear a pundit say this again, I may hurl...

Mar 26 10:40 AM

[MattZN:]

Actually, TARP costs the banks 9% annually. It's only 5% for the first five years. No bank in their right mind would use the TARP money to fund 15 or 30-year mortgages at 4-6%.

The banks will be able to cycle their loan originations, that's the whole point of the FED plan. The big money center banks have been doing new originations and refis at a heavy clip since January and it will probably increase even more now, but there is still a limit to the number of credit-worthy borrowers out there. That is why the Refi activity is so much higher then the new-loan activity. The media, as usual, doesn't have a clue.

-Matt

Mar 26 01:04 PM

[Doc 224899:]

It may be that Banks have started to recognize that accepting TARP money will carry some obligations down the road that they don't want to be bound to.

Say you are Joes' Bank, and you take TARP money. Then, say that President Obama wants to throw cash from private investors at bad minority mortgage paper to prevent a disproportionate number of foreclosures among first-time minority homebuyers from becoming an issue politically, so he makes a plan that involves banks buying bundles of sub-prime minority mortgage paper. Joe’s Bank wants no part of the bad mortgage paper, realizing it’d be a bad investment, but then the government starts leaning on them to buy the bad mortgage paper, and it looks like regulators are going to come and make an assessment of the bank’s liquidity and patterns of using TARP money unless they buy the bad mortgage paper. Nobody puts it in writing, but when Joe’s bank buys the bad bundled mortgage paper, all of a sudden the regulators aren’t interested in them anymore.

And that's what banks want to avoid.

Mar 26 01:26 PM

[Grouper:]

Interesting information, but it sounds like no one on this board uderstands banking. First of all it is a hugely leveraged business. 6 to 8% real capital, which can include long term debt, preferred stock, common stock, etc. All the rest of the money is FDIC insured deposits or Fed borrowings (costing anywhere from 0% to 4%). That means that $1B in TARP can turn into $15B in loans. The average cost of funding the loans is in the 1% to 2% range, so lending at 6% is extremely profitable. TARP was created because no one else would give banks capital. Buffett did his deal with Goldman and GE at 10% plus in the money (at the time) warrants.

Goldman, Citi, and BOA are trying to repay their TARP debts because they got back door TARP money from AIG. AIG paid out obligations at face value with your money, so now these guys can repay their TARP with free money (really should have been huge losses because AIG was bankrupt, and they should have received nothing).

Mar 26 01:47 PM

[Chris B:]

Despite posting an industry-wide quarterly loss of $32.1 billion and continued deterioration in asset qualify, the industry's cash flow position improved during the crisis..
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When the markets realize that the banks are fine on a cash flow basis, and that their assets are only "toxic" due to mark-to-market accounting, there will be a major pop in the markets.

Oh wait, that already happened since the info is finally filtering down to this website. How much are they up now?

Why do you think the banks have been so reluctant to sell these assets at market prices? Because they know the PV of their cash flows are worth many times that amount.

The only remaining question is if mark-to-market gains will fool investors like mark-to-market losses did!

Mar 26 03:55 PM