The Guest Blog

Busch: Godfather TARP Part 3


There was very good news out yesterday from the financial sector on efforts to raise money via share sales. One major financial institution was successful and one regional institution announced their intentions. This comes on the heels of successful capital raises $8.6 billion from Wells Fargo and $4 billion from Morgan Stanley .

The big Kahuna of TARP, Bank of America Corp , raised $13.47 billion through a 1.25 billion share sale with an average price of $10.77. Coupled with the $7.3 billion from the sale of its stake in China Construction Bank Corp, BofA is about halfway home towards raising the $34 billion that the "Stress Test" results say they need. However, BofA has received $45 billion in funds from TARP and will not likely be able to pay that amount back any time soon. As the bank says, they want to do it by 2012.

Regions Financial Corp. will offer $1 billion in common shares and $250 million in new convertible preferred shares, a total of about half of what the Southeast regional bank was told it needs to raise by the government according to the WSJ. Regions received $3.5 billion in TARP funds, but these share sales are part of the $2.5 billion needed to meet the "Stress Tests" capital requirements.

The fact that financial institutions are finding willing buyers for their offerings is a very good sign that investors believe these institutions will survive and thrive. But the TARP funds are a major problem for financial institutions. The problem is they want to send it back to the government, but the government has other ideas.

Should Banks Repay TARP?

Monday on Power Lunch, Steve Liesman and I agreed that it was a great idea to allow banks that are able to pay back the TARP cash. The concept was to introduce competition to this process of payback by allowing banks that can, to do so as this would put pressure on others to follow suit. The message from the US Treasury would be: don't sit on your hands with the taxpayers money, get out and raise it via the private sector.

Unfortunately neither Congress, the US Treasury, nor the White House must think this is a good idea. According to the NYT, regulators would refuse to let a single major bank exit first, which might have given that institution considerable bragging rights. "Instead, around June 8, the Federal Reserve expects to identify a group of banks that are ready to leave the bailout program, according to a Federal Reserve official, who was granted anonymity because of the Fed’s policy against speaking publicly on such matters. The Treasury Department will handle the timing of the payments, this person said."

Why would they do this?The official line is that the Congress, the White House, the Fed, and the US Treasury don't want to be in the position of ever going back to Congress to get more funds should the economy take another nose dive. The subtext is that the US government wants to retain control over the financial system and bring about major changes to the structure of the banks.

Special Coverage On Including

This control is not limited to capital structures. Why waste a good crisis? This control extends to how banks are run and issues over employment. JP Morgan's Jamie Dimon brought to light a restriction placed on TARP recipients: they are restricted from hiring skilled foreign workers under H1-B visa rules. ".... the provisions, which apply to lenders in receipt of government aid, had forced JPMorgan’s executives to “look 40 or 50 overseas [graduates] in the eye”and tell them their job offers had been rescinded" according to the FT.

It's this social engineering focus rather than business focus that makes every TARP recipient want to pay it back as soon as possible. They try to get out, but the government drags them back in. Right now, there is no balance between the interests of controlling/regulating/engineering banks versus the interests of creating a profitable/shareholder-value enhancing institution that will re-start their lending.

Unlike Al Pacino, let's hope we don't end up on the steps of the theatre lamenting the loss of a child and regretting the decisions that got us there......


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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and and you can follow him on Twitter at .