This is Bad News? Banks Return TARP Money, Media Frets

Posted April 1st, 2009 at 3.47pm in Entrepreneurship.

Yesterday, four small banks became the first in the country to pay back taxpayer money received from the government. The banks – Old National Bancorp of Indiana, IberiaBank of Louisiana, Bank of Marin Bancorp in California and Signature Bank of New York – returned a total of $338 million to the Treasury. That’s a tiny fraction of the nearly $200 billion in capital provided to banks under the government’s TARP program, but the amounts are expected to swell as more banks join the queue to hand back their subsidies.
One would think this would be universally cheered as good news. What could be better than taxpayers getting their money back from banks that no longer need it? Yet, much of the media coverage of the paybacks has been glum. The Washington Post, for instance, reported that the move “underscored concerns about the health of a key element of the federal economic recovery program.” The worry is that public outrage and government scrutiny of the activities of aid recipients is encouraging banks to return the money earlier than planned.
Well if you are concerned about the health of the TARP program in itself, that is a worry. But if your focus is the health of the economy, not so much. Whether spurred by taxpayer outrage or not, each of these institutions have concluded that they don’t need federal help. And the Treasury Department in each case has agreed returning it will not make them unstable. That’s cause for celebration, not regret.
But won’t banks be able to lend more if they keep the federal money? Maybe, maybe not. Overall, the banks own judgment is that they will do better without the cash. And investors seem agree, with stocks in all four banks rising on the news. Granted, the calculus may have been different if the taxpayer money were available without the accompanying government scrutiny. Who wouldn’t take string-free taxpayer money? But even then there’s no guarantee the capital would result in more lending. In any case, the goal of the TARP program was to ensure the stability of the banking system, not to put lending on steroids.
There’s been one more fret about the TARP paybacks – that it will “damage confidence in banks that cannot pay back the money.” In other words, if healthy banks pay back their bailout money, there will be doubts about institutions that don’t pay theirs back.
Huh? That’s the way markets are supposed to work. It’s a good thing when consumers and investors can tell the good from the bad. The job of policymakers should be to further the spread of this information, not suppress it.
Kudos should go to the four banks who returned the money. Hopefully, they will be followed by a long line of others.