Saturday, March 19, 2011

Frankenbanks.

Andrew Sorkin's financial blog at the NYT reports on the status of the payback of TARP loans. What the authors reveal is troubling. It seems that the taxpayer is getting straight-armed by some banks who still owe us hundreds of millions yet are turning substantial profits or buying up other troubled institutions or loans.

Some of this makes sense: if a given bank's management is floundering, then acquisition by better management using TARP may be a cheaper long-term solution than letting the bank go belly up and sticking the FDIC with the cleanup costs.

Such a decision, however, should not be based on the acquiring bank using only cheap money from the rest of us, but on the bank risking some of their own skin. This may change the attractiveness of such purchases. Other drawbacks for subsidized acquisitions are that it is driving banks to become even larger - more "too big to fail" - and private capital investment decisions become less local.

There are a myriad of unforeseen consequences caused by Uncle Sam fronting cheap money to troubled banks for indefinite period of time. So, bankers, first things first: focus on insuring your solvency, and then pay us back ASAP.