The Fed wants the taxpayer’s money back. It has asked nine large banks, including Bank of America (NYSE:BAC), to give it a timetable for when they will repay TARP funds. All of these banks were put through the government’s stress test of bank financial health earlier this year.

According to Bloomberg, “The Fed’s request may turn up the pressure for banks accustomed to more flexibility on the timing and process of TARP repayment.”

The plan is probably a bad idea.

Moody’s Investors Service says that about $10 trillion in bank debt is due between now at 2015. Over $7 trillion is due within the next three years.

Major banks are not out of the financial woods and their balance sheet problems will get worse in some cases. Although some of the toxic mortgage-backed asset bases have been sold or their values have improved, write-offs on LBO debt, commercial real estate, and consumer credit cards are soaring.

Banks could be caught short on capital within the next year or two if the credit markets do not recover further or if another recession damages the financial markets the way that they were crippled in late 2008.

The Fed and Treasury may want to consider keeping some of the TARP funds in reserve so that they do not have to go back to Congress for new funding later. Congressional concern about deficits would make a second TARP a hard sell. The banking crisis may look like it is over, but that is almost certainly not the case . The quality of many loans on bank balance sheets, big and small, is still bad and there is some reasonable chance that they will get worse.

Douglas A. McIntyre

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