Treasury Gets Its Money Back And Can Afford To Save Another Industry

The Treasury Department is likely to allow 10 banks which owe in money from TARP funds to pay it back a total of $50 billion. The money will probably burn a hole in the Department’s pocket.

Several banks such as Goldman Sachs (GS) which claimed that the money was forced on them will get a chance to write checks and be out from under difficult provisions that went with the cash.

The most critical aspects of TARP loans that the financial firms can jettison are pay caps on executives and the specter that the government could control and manipulate their management and board actions, a set of problems that appears to be emerging at Bank of America (BAC) and Citigroup (C). The likes of Jamie Dimon at JPMorgan (JPM) believe that they can operate their companies without help and earn enough so that they do not require any outside capital.

The banks may be wrong and the “stress tests” of them may be flawed. Organizations and experts, including the IMF, believe that bank losses will mount again as more loans both to businesses and consumers default. If the IMF is right, some of the financial firms will be going back to the Treasury, hats in hand. The Department is bound to drive a harder bargain for money the second time around.

The Treasury may need the addition to its dwindling TARP fund that it will get from the bank repayments. The costs of bailing out the car industry, specifically Chrysler and GM, may be much higher than is being forecast now. Domestic cars sales are still at historic lows. The cuts that the car companies have made may not offset new headwinds including rising gas prices.

Detroit’s suppliers are also at the Treasury’s door asking for as much as $10 billion in aid. The government may not have any choice other than to provide the capital. The car industry cannot run without parts. The parts companies are, in may cases, close to bankruptcy.

Whatever  signs of economic recovery there may be, several industries are facing huge losses over the rest of the years and into next. This includes airlines. They may be the next candidates for federal loans. Insurance companies are still in deep financial trouble. Large pension funds are under-funded. The FDIC may need more capital as it closes bank after bank.

The Treasury may be getting $50 billion in repayments from America’s largest banks. But, part of the economy are getting bad enough that the Treasury may have to turn around and ask those banks for loans.

Douglas A. McIntyre