Idea of the Day: Cutting Purse Strings for Banks that Opt Out of TARP

According to media reports, JP Morgan, Goldman Sachs, BB&T, and U.S. Bancorp, among others, are seeking to repay the TARP funds they received under TARP’s Capital Assistance Program in order to end the additional oversight requirements for TARP recipients. These include stringent reporting requirements, restrictions on the use of funds, a prohibition on mergers or acquisitions, and caps on executive compensation.

While news of banks being healthy enough to leave the TARP program is a welcome sign, such repayment should only be allowed pursuant to one additional requirement: Any banks opting out of the TARP regime also opt out of the various Fed, Treasury, and FDIC programs that have been providing them with easy profits subsidized by the taxpayer. The federal government has committed over $12 trillion in an alphabet soup of guarantees, subsidies, investments, and cheap financing, most of which is not money from the Troubled Asset Relief Program, providing the financial system a major shot in the arm in the hopes that major surgery can be avoided.

If the stress tests have shown that certain banks are now healthy, and the inoculation has been effective, then we need to start figuring out how to wean them off of these government subsidies before they become addicted to them. If banks are “earning their way” out of their losses based on extraordinary government subsidies, then those banks should not also be allowed to opt out of the government oversight that goes with it.

For more on this topic, please see:

• After the Stress Tests by David Min