Letting Banks Use TARP Money To Make Profits On Other Banks

A lot of people and members of Congress are upset that banks that took TARP money may buy toxic assets from other banks.

There does not seem to be any problem with the arrangement. The banks which took taxpayer money should make a profit on the transactions. At least that is the outcome the Treasury is predicting to get private money into the programs. The financial firms that sell their bad paper will not need to raise capital in the future because they won’t have to take future write-offs if the value of these assets keep dropping. They will belong to someone else. That should save taxpayers money as well and may stimulate lending by banks with improved balance sheets.

According to the FT, “The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans. ” JP Morgan (JPM) and other financial firms are considering making investments in this “toxic” paper.

The federal government has entered a stage where it has so many regulations and planned regulations that banks cannot operate freely to try to make money and dig themselves out of the huge holes that buying and holding toxic assets got them into in the first place. If their earnings are going to turn positive, they will need to take some level of risk in lending and acquiring assets. The Treasury, Congress, and the Fed are resisting some of those actions.

Since the government is offering very generous terms for access to the capital needed to buy impaired paper, it would seem that the banks are not risking much by trying to make money off of the misery of their peers. Someone is going to make money on the programs. The banks may as well get in on the process. It may help them pay back the TARP money that they took.

Douglas A. McIntyre