The Troubled Asset Relief Program (TARP), which allowed the
United States Department of the Treasury to purchase or insure up to $700 billion of "troubled" assets, is now in the eye of the storm. Some of the recipients of TARP bailout money are eager to repay the money as soon as possible and that too at any cost. With several Wall Street analysts suggesting that the move is in the right direction, you could, as well, be tempted to believe so. John Fitzgerald Kennedy once said, “Too often we... enjoy the comfort of opinion without the discomfort of thought.” Look closely, you begin to question the motives behind the rush to repay the TARP money.
Can these banks justify TARP money repayment?
JPMorgan Chief Executive Officer Jamie Dimon’s mock letter to U.S. Treasury Secretary Timothy Geithner at the 31st Annual NYU International Hospitality Industry Investment Conference read, “Dear Timmy, we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did.” Can he justify the repayment of TARP money in an environment where equity and credit markets are yet to recover fully from subprime crisis contagion effects?
Since the onset of subprime crisis, investment banking is bit out of fashion and traditional banking (also called core banking) is in vogue. Traditional banking is defined as borrowing money cheap and lending money dear. This definition can be stretched to capital asset pricing model (CAPM) where it means borrowing money cheap to retire costly equity or debt to minimize weighted average cost of capital (WACC). Does the bankers’ rush to repay TARP money suggest lowering of WACC?
A review of investor presentations and conference calls (dating back to December 2008) by executives of some two dozen banks around the country found that few cited lending as a priority for accepting TARP money. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future. Few months later, many bankers seemed to have changed their minds. For instance, in May 2009, Bank of New York Mellon Chief Executive Robert Kelly said at a UBS financial services conference, "It is now a negative to have TARP.
