Don’t Pull Back That TARP Oversight Just Yet

Our guest blogger is David Min, Associate Director for Financial Markets Policy at the Center for American Progress Action Fund.

statestState Street Bank announced today that it would issue $1.5 billion in new stock, with the proceeds intended to be used to repay the $2 billion in preferred stock and warrants it issued the government under the terms of the Troubled Asset Relief Program. State Street is just the latest bank (joining Goldman Sachs, Morgan Stanley, JP Morgan Chase, and others) to announce its intention to try to exit the TARP program, which imposes some additional requirements on banks, including executive compensation caps and additional reporting requirements. However, with forecasters predicting additional downpours, it’s too early to pull back the TARP.

Even if we wish away the myriad criticisms about the results of the stress tests, including reports that banks were able to negotiate their results with the regulators, it’s not clear to me that we should allow the banks deemed “healthy” by the stress tests to so easily escape the additional oversight requirements that have been imposed on them in exchange for their participation in TARP.

Instead, the true test for whether banks are healthy enough to stand on their own should be that they can survive without access to the $12 trillion “alphabet soup” of federal subsidies, guarantees, and cheap financing that is currently providing easy profits for the financial sector. We should not be defining “healthy” banks as those that can “earn their way out of trouble,” when those earnings are entirely subsidized by the taxpayer.

At a bare minimum, banks seeking to opt out of the TARP oversight regime by repaying their TARP obligations should also be forced to opt out of the FDIC’s Temporary Liquidity Guarantee Program, which provides an explicit government guarantee on senior bank bonds (the FDIC ordinarily only guarantees deposits, and in return for this, they have extensive regulatory powers over the risks being taken by banks with these deposited funds), and a number of Fed programs which provided subsidized financing to troubled banks, secured by distressed assets such as toxic MBS and CDOs.

The principle governing banks right now ought to be this: if the taxpayer is helping you out, then you can’t opt out of the relatively minor restrictions imposed by TARP oversight. And the other side of the coin is this: if you want to opt out of those TARP oversight restrictions, then you also need to stop taking taxpayer money, both from TARP and elsewhere.