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Banks Race to Pay Back Government Funds

As Wells Fargo appears in the news as the last large bank to pay back its TARP funds it is important to assess what exactly is going on here.  Equity markets have rallied and credit spreads have tightened significantly with the liquidity priming that the Fed has been more than willing to perform.  On the flip side, consumer loans and mortgages continue to default at historic rates with historically high loss levels.  Many of the banks have made decent earnings from trading revenue and the steep yield curve, but let us not lose site of what this repayment of TARP  really is:  a way to get out from underneath the government’s compensation control and have more independence when fighting proposed regulation.

Issuing stock to pay back TARP does two bad things: 1) dilutes common stockholders 2)reduces bank reserves and capital ratios.

The prudent thing to do for all banks is to earn their way out of their debts, but each of them is so utterly scared to be the only bank left with government controlled salary caps.  I find it almost comical that that banks are worried about losing their “star talent” when the unemployment rate is 10% and thousands of financial professionals in New York still looking for work.

The second reason that banks are looking ravenous to regain their independence is to stave off any proposed regulations.  Just as a teenager has to leave her parent’s house to be free, the banks have to leave the safety of Uncle Sam’s umbrella to show the politicians that they can make it on their own.

I just hope that the economy does not hit another rough patch, because it seems to me that standing at the beggar’s line the second time around will be much more difficult for the American public to stomach.

Matt Davies
Journal News
Dec 13, 2009
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