The World According to TARP

If banks don’t like the scrutiny that comes with bailout funds, why don’t they just return the money?

America’s banking executives are having a tough time. First, they mess things up so badly that they require a humongous federal bailout. No sooner do they get the federal funds than they start complaining about how difficult it is to manage a bank when taxpayers are looking over their shoulders. The logical thing for an executive in such a situation to do would be to make the most strenuous efforts possible to return the bailout funds. Would it surprise you to learn that the bankers complaining most about the shackles that come along with bailout money don’t seem to have much of a sense of urgency about doing so?

In October, Northern Trust, the Chicago-based bank announced it would take $1.5 billion in TARP funds. But now it’s expressing annoyance that members of Congress are teed off about its sponsorship of a golf tournament. The bank, which is in good health, says it didn’t seek the funds but agreed to participate because the government wanted all the major banks to take part. So is Northern Trust making maximum effort to pare expenses, conserve cash, or raise new capital so that it can return the TARP funds and avoid all this scrutiny? Not so much. Last Friday, CEO Frederick Waddell said the profitable bank wanted to repay funds “as quickly as prudently possible.” Last month it declared its regular quarterly stock dividend of 28 cents per share, which costs about $62.5 million per quarter, or $250 million a year—enough to pay down one-sixth of the suddenly onerous obligation.

In this extensive video interview with Chrystia Freeland of the Financial Times, Bank of America CEO Ken Lewis said that taking an extra round of bailout funds to help digest the acquisition of Merrill Lynch had been a “tactical mistake.” If he had it to do over again, Lewis said, he would have taken $10 billion less. This is rich on many levels. The market, in its wisdom, has decided that Bank of America is worth about $18.5 billion. Let’s do a simple thought experiment. If Bank of America had received $10 billion less in cheap, taxpayer-provided capital to soak up losses at Merrill Lynch, would Bank of America’s stock be a) higher, or b) lower? And the mistake of taking too much TARP capital would seem to be an easily reversible one—Bank of America could pay it back or at least return some fraction of the $45 billion it has received. But Bank of America hasn’t done that, either. In the interview, Lewis said the bank would pay back the taxpayers “as soon as we think things are stabilized.”

Back in February, Morgan Stanley CEO John Mack made similar noises about repaying the $10 billion in TARP funds it had received. “Our intent is to pay it off as soon as it is feasible,” he said. Goldman Sachs CFO David Viniar echoed Mack. But neither Morgan nor Goldman appears to have made a significant move to free up cash to make a down payment. Both continue to pay out quarterly dividends.

The challenge is that banks have to pay back TARP funds either by generating cash or by issuing new preferred or common stock. And in this environment, issuing new stock is an expensive proposition. Last year, when Goldman sold preferred shares to Warren Buffett, it agreed to pay a huge 10 percent interest rate. And last fall, when Morgan Stanley raised about $9 billion from a Japanese bank, the preferred shares likewise carried a 10 percent dividend.

Of course, it’s not impossible to pay back the TARP funds. Iberia Bank, which received $90 million in TARP funds last December, decided it didn’t want to have the government looking over its shoulder any more than it already was. In late February, CEO Daryl G. Byrd announced that Iberia would pay back the funds with interest by the end of March. “Our board of directors has determined that continued participation in this program is no longer in the best interest of our company and its shareholders,” Byrd said.

In other words, instead of simply complaining about the financial and cultural restrictions imposed on banks by the TARP, Iberia actually did something about it. It’s true that not all financial institutions asked for—or particularly needed—the bailout funds. But most did. Running a bank is a difficult job these days. But bank CEOs are well-compensated for their troubles. And part of the job is making tough choices about the appropriate use of capital and resources.