Why We'll Never Know If TARP Leads to More Lending
There's been much outcry over making sure banks use their TARP money for lending...rather than corporate jets, Vegas vacations, dividends, repurchases, or even shoring up their reserves.
For today's post, I'm leaving aside the whole "isn't this what got us into this mess" side of things.
Let's assume that the goal is making sure banks are using TARP money to make more loans and unfreeze the credit markets. Geithner's financial stability plan has a few steps that seek to ensure this from banks taking future government cheese:
- Limiting dividends to $0.01 per quarter.
- No share repurchases.
- No acquisitions of healthy firms.
- Banks must submit to the government (who will make publicly available on www.financialstability.gov) a plan on how they will use TARP money to increase their lending and report on their lending activities on a monthly basis. Plus, they must "include a comparison to their most rigorous estimate of what their lending would have been in the absence of government support."
Totally onboard with the first two...dividends and repurchases just enrich shareholders at taxpayer expense. Fair enough on #3...if you need government money, you shouldn't be buying rivals (remember when Citigroup almost bought Wachovia...yikes!).
As for #4, I'm fine with the transparency. The more people that see this stuff, the better. But don't be fooled. It will be very easy for the banks to use the TARP money however they see fit.
Let's take a simple scenario. If I give you $20 and say, "You have to use this money to buy food." You say "Fine." You take the $20 and buy food. Then you take the $20 you would have spent on food anyway and buy a DVD.
Did you comply with my terms? Yes. Did you really spend the incremental money on food? No. You spent it on a DVD.
As long as you planned on spending at least $20 on food to begin with, you'd have no problem technically complying.
And I put no weight on the "rigorous" what-if lending scenarios. I'm going to make the wild guess that every bank that takes money will say that they lent a lot more than they would have without TARP money. Manipulating financial models to support bad decision-making is kinda their stock in trade.