Bank of America's (
BAC) repayment of its TARP funds, I couldn't help but think of a post I wrote six months ago called "Asymmetric information and corporate governance in bank bailouts." The gist is of the post is about the same as Yves' and it was inspired by lessons of the S&L crisis of the 1980s.
Big banks like Bank of America which are leaving TARP are well-capitalized by most standard metrics. Even Citigroup is well-capitalized (see here) and they have yet to leave the TARP program. But, this is more a result of quantity of capital over quality of capital. We can't know the true financial condition of any of the big banks; I have my doubts – especially if the economy turns down again.
The S&L crisis is quite instructive in thinking about the moral hazard and poor incentives now in place in the financial system. In an act of wonderful transparency, the FDIC actually has a startlingly even-handed chronology of S&L crisis events on its own website.
Focusing on the policy remedy after the initial banking losses occurred, the FDIC says:
1980-1982 Statutory and regulatory changes give the S&L industry new powers in the hopes of their entering new areas of business and subsequently returning to profitability. For the first time, the government approves measures intended to increase S&L profits as opposed to promoting housing and homeownership.
This policy promotes what is known as ‘reaching for yield.' And the S&L's did just that by piling into the nascent high yield market with disastrous results when that market went bust. The Keating Five scandal was an outgrowth of the crony capitalism which occurs when favoured sectors of the economy meet economic disaster.