The government is planning to detail a complete set of guidelines dictating how banks can repay the TARP, the Wall Street Journal is reporting. The requirements, which may be revealed as early as tomorrow, will likely include a requirement that they demonstrate their ability to borrow without taking advantage of a government debt guarantee program.
The program, a guarantee of debt issuance offered by the Federal Deposit Insurance Corp., allows firms to borrow money relatively inexpensively. Banks have issued more than $332.5 billion under the program since it began last fall.
Firms will have to show they don’t need the FDIC guarantee to issue debt, such as by raising it without the guarantee.
The move signals a potential turning point in the financial crisis, with the some banks beginning to unwind their dependence on the federal government.
The requirement would likely cut right down the dividing line on Wall Street. JP Morgan Chase and Goldman Sachs have already issued debt not backed by the FDIC. Citigroup and Bank of America have not, and both are expected to have trouble doing so.
This is a retreat from the aggressive position staked out by Treasury Secretary Tim Geithner earlier this year. Geithner had said that banks would only be allowed to pay back the TARP after the Treasury assessed the effect on the broader financial system. Now the test seems linked to a bank’s individual financial strength.
Nonetheless, the government’s new position may violate the law. Earlier this year, Congress included a provision in American Recovery and Reinvestment Act that modified the original securities purchase agreements signed by the first TARP recipients. Those agreements made repayment subject to the approval of banking regulators.
But the ARRA, also known as the stimulus act, included a provision titled “No Impedient To Withdrawal By TARP recipients” that barred impediments to repayment and only said the repayment had to be made “subject to consultation” with banking regulators. The change from “approval” to “consultation” suggests that the government cannot condition the repayment. The Treasury Secretary was specifically required to permit repayment, subject only to consultation
The new requirements would seem to explicitly violate the law, which bars the government from requiring that a financial institution obtain replacement funds or from imposing to any waiting period
Here’s the relevant law (which is Division B, Title VII, Sec. 7001, SEC 111(g) of the American Recovery and Reinvestment Act of 2009):
NO IMPEDIMENT TO WITHDRAWAL BY TARP RECIPIENTS.—Subject to consultation with the appropriate Federal banking agency (as that term is defined in section 3 of the Federal Deposit Insurance Act), if any, the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP to such financial institution, without regard to whether the financial institution has replaced such funds from any other source or to any waiting period, and when such assistance is repaid, the Secretary shall liquidate warrants associated with such assistance at the current market price.
That’s about as clear of a statement of anyone could hope for. Far from giving Geithner the authority to reject the TARP payback, it seems to prohibit the Treasury from imposing these new requirements. By seeking to impose the requirements, the Treasury is engaged in almost breathtaking lawlessness.