"Bank ‘Profits’ And Paying Back TARP Can’t Mean A Return To The Status Quo"
Today, Citigroup joined a stream of banks pronouncing that they are once again making “profits.” Goldman Sachs and JP Morgan have both claimed profitability and said they intend to pay back their TARP money soon. Wells Fargo also posted a profit, leading CNBC’s Larry Kudlow to proclaim, “what’s the first message? Banks are turning profitable. They’re in better shape than people think.”
Leaving aside the “creative accounting tricks” that some of the banks used — including Goldman Sachs changing its accounting calendar to make December disappear — this seemingly miraculous turnaround has led some, like TIME’s Douglas McIntyre, to declare the banking crisis over.
But not so fast. As the Washington Post reported, “even as they clamor to exit the most prominent part of the bailout program by repaying government investments, firms continue to rely on other federal programs to raise even larger amounts of money.” Indeed, the FDIC has helped companies “borrow more than $336 billion…and financial firms hold more than $1 trillion in emergency loans from the Federal Reserve.”
So why the rush to get out of TARP? Maybe because “only the capital investments by the Treasury require the companies to make significant sacrifices, such as restricting executive pay.”
There are two points to make here. The first is that one profit announcement doesn’t mean a bank is healthy, and as Fortune noted, the banks are playing up “an obscure measure of their profitability to show how strong they are — but surging credit losses may hint otherwise.”
Second, the Obama administration should make it very clear that paying back TARP doesn’t mean a return to business as usual. As FT’s Jake Gapper wrote, by returning TARP money, “Goldman wants to escape the burdens of political control while retaining the benefits of public backing“:
Goldman hopes to go back to paying employees what it wants, buying and selling more or less what it fancies and operating as before…Even if Goldman repays the equity, the world has changed irrevocably because it is a government-backed enterprise…[W]e now know unambiguously that Goldman is a “systemically important financial firm.” In other words, Goldman is too big to fail and would be bailed out by the US government if its balance sheet failed. That privilege should come with weighty conditions.
And going forward “that privilege” shouldn’t exist, because there shouldn’t be an institution large enough to invoke it. As Justin Fox wrote, “it would be monumentally stupid not to come up with some new way of organizing our financial system after this crisis.” This is true, whether or not the banks are still holding TARP money.