The Unintended Consequences of Gov't Intervention

Michelle Caruso-Cabrera
General Assignment Reporter

Senator Christopher Dodd’s executive compensation amendment is having unintended consequences that are damaging the very banks Congress is supposedly trying to help.

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As part of Senator Dodd’s last-minute amendment about executive compensation, he put in a provision making it easier for the banks to pay back the TARP money to the government.

This is directly from the bill signed into law:

“…the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP without regard to whether the financial institution has replaced such funds from any other source…”

Under the old TARP rules, a bank could only give the money back after it had replaced it with other capital, presumably raised from private investors. With the above words, that requirement is gone.

Now, here's where the unintended consequences start to play out. On Friday, Standard & Poor’s said the Dodd provision changes the way they view the QUALITY of TARP money. The credit rating agency, which determines the ratings on the banks and decides whether a bank lives or dies, says the provision means that capital is on no longer "permanent" in their eyes. That's crucial because, as a result, they are no longer going to use it when determining certain capital ratios, which help them determine their ratings on banks. 

Banks have to maintain a certain amount of capital to make sure they can cover any losses they have from bad loans. If they don't, regulators can shut them down, or, at a minimum, they face downgrades by the ratings agencies. If they are downgraded, their borrowing costs go up. If their borrowing costs rise enough, they can no longer stay in business.

In other words, as a result of Dodd’s ammedment, banks will have a tougher time convincing the ratings agencies they are in good financial health. I can't imagine that's what he intended, but that's the problem with government intervention: it causes painful results no one wanted, but now we all have to live with them.  

Citigroup , Bank of America , Wells Fargo , Goldman Sachs , Morgan Stanley , are just some of the banks that have recieved this government money.

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