TARP repayment about banker compensation, not financial health

Last week, the New York Times’ Andrew Ross Sorkin posted an article on the real reason behind Bank of America’s expedited repayment of bailout funds to the U.S. Government – the desire to escape onerous government restrictions on executive pay. Too often, repayment of funds lent to the banks under the government’s Troubled Asset Relief Program (TARP) has been characterized by banking industry spokesmen as a return to financial health. It is no such thing.

This issue has been thrust back into the public eye this morning with news that Citigroup, the sickliest of America’s big banks, has won government support for a similar repayment of TARP money.

The problem with the repayments is that the underlying conditions within the banking industry are essentially unchanged since last year. One indicator of how overleveraged and ill the banks are is what was done with the TARP money once it was secured. Rather than spurring an increase in the availability of credit, the money went straight into the vaults in order to shore up the banks’ capital reserves. Today, credit is still tight.

Granted, since last year, the banks have sucked in outsized profits associated with the Treasury Department’s policy of quantitative easing (QE), but that policy is likely to shift in the next few months, and the banks will then have to tackle the rotten assets on their balance sheets. The QE-associated profits and TARP money have, in effect, allowed the banks to place their toxic assets in a coma. But comas cannot last forever.

I suspect that some of the same banks repaying TARP money today will be back tomorrow with their hands out, except next time, they’ll want your money with fewer strings attached.