Are you impressed yet with the prudence and transparency the Treasury Department has displayed as it manages the redemption of the government’s TARP investments in the country’s big banks?
No? Me neither. From what I can see, the whole process has been a hash.
It’s hard to feel sorry for Bank of America (BAC) or Citigroup (C) for what they’ve had to go through to try to get out of the government’s clutches. They needed the money! But what about the other banks still in the government’s TARP doghouse? In particular—and here I confess to a special a soft spot for one of the best-run big banks in the country—what about Wells Fargo (WFC)?
Wells came through the credit crunch as strongly as any large institution. Yet the company must feel as if it’s been singled out to appear in some banking-industry version of The Twilight Zone. Its nightmare began, recall, in October of last year when Dick Kovacevich was summoned to Washington (along with heads of nine other big banks) and told that Wells would take $25 billion in TARP money, whether it wanted it or not. Which, as Kovacevich pointed out at the time, it did not.
No matter! Down Wells’s throat the $25 billion went anyway.
Cue the creepy music. With the government now a major Wells shareholder, it started to do what governments always do when they get involved in the private sector: meddle. Suddenly once-common business practices, such as sales-rewards trips in places like Las Vegas, became objects of thundering Congressional scorn. Executives found themselves being grilled in front of House panels for no offense other than being bankers. Compensation arrangements were second-guessed. Then there was all the special pleading on behalf of politically connected would-be borrowers.
As I say, a nightmare. If you suspect that all this doesn’t help optimize economic performance, you’re right. Naturally Wells wanted to pay back its TARP money as soon as it could, which was, in fact, the moment it received it. But no! The government wouldn’t say why it wouldn’t take back the money. It just wouldn’t.
And the nightmare continued. The feds then came up with their next lousy idea: that misbegotten stress test foisted on the big banks this past May. Even though Wells’s first-quarter earnings were much stronger than what the test’s “stress case” had predicted, after the test the government insisted Wells raise another $7.5 billion. Might it repay TARP, as well? No dice. Then second-quarter earnings were strong. Then third quarter.
And Wells still has this TARP millstone stuck around its neck.
So what will it take for Wells to be permitted to repay TARP? The government simply won’t say. Instead, Wells is left in a crazy regulatory netherworld where actual rules don’t count anymore, and all that seems to matter is the regulators’ mood at any given moment. Regardless how high the company’s capital levels rise, for example, they never seem to be quite high enough. Back in the good old days, when bank regulators weren’t lunatics, bankers knew what counted as “adequately capitalized” (4% Tier 1 capital) and what counts as “well-capitalized” (6%). They knew what ratios mattered (Tier 1 Capital, Leverage, and Total Risk-Based Capital) and which ones didn’t (Tangible Common Equity, for instance). Which is to say, bankers lived in a rational, predictable world.
No longer. At the end of last quarter, Wells Fargo’s Tier 1 Capital Ratio was 10.6%. Its Leverage Ratio was 9.0%. Its Total Risk-Based Capital Ratio was 14.7%. These numbers are off the charts. And they’d be high even if Wells repaid TARP tomorrow without doing a capital raise. Tier 1 would be 8.1%; Total Risk based Capital, 12.2%. Once the company reports its fourth-quarter numbers, its capital ratios will surely go higher. And yet if other big banks’ experience with their TARP repayment is any indication, Wells will have to raise even more capital before it will be allowed to rid itself of its TARP burden.
This is insane. If nothing else, a government that’s interested in promoting economic recovery should not be insisting that private investment capital migrate into areas where it is redundant. More generally, if the regulators are bent on changing the rules under which the banking industry operates, they should tell the banks what the new rules are, already! Tim Geithner and his gang seem to have it in their heads that well-capitalized banks should have to operate at 10%-ish Tier 1 capital, and that other ratios, such as TCE, are suddenly important. Fine. We’ll see how well U.S. institutions can compete against foreign banks under those rules. In any event, regulators should disclose what the new minimums are and which ratios count, so the banks can comply with them and get out from under the government’s thumb. That way, they can get on with their business and help drive the economic recovery.
But the government is diddling, instead. In the process, it’s not doing the economy any favors, or the banking industry, either. Nor is it showing itself to be especially prudent or transparent. If Tim Geithner wants banks to operate under a new set of rules, he ought to say what they are and get out of the way.