Are we being shortchanged by TARP repayments?

The headlong rush by big banks to pay back their TARP bailout loans -- Citigroup is the latest candidate looking for the exit -- has prompted a lot of stock-taking about this widely detested $700-billion program.

Among the questions being aired: Has the Troubled Asset Relief Program worked? Have the taxpayers made a profit on the deal? Did we force loan terms upon those banks on the brink of extinction last year that were too steep, or not steep enough?

One question that perhaps isn’t being raised enough is this one: Should we let the banks repay the money?

To put it another way, by allowing the banks to exit the emergency program that saved their butts in the fall of 2008, is the government giving up what could have been an effective tool of leverage over this misbehaving industry?

After all, the TARP loans made the government a shareholder in some of the nation’s biggest financial institutions. Treasury officials had pledged that they wouldn’t exercise that power to influence corporate decisions -- which prompts another question: Why not?

And while it’s true that the House of Representatives last week passed a plan to significantly tighten financial regulations, it will remain a work in progress until the Senate weighs in. The big banks, mostly restored to their traditional status as nongovernment entities, are spending heavily -- millions of dollars each in lobbying expenditures -- to buy themselves seats at the drafting table.

“We haven’t done anything to restructure the industry,” says Dean Baker, an economist at the progressive Center for Economic and Policy Research in Washington. “Now we’re debating a financial reform bill, but I wouldn’t bet on huge regulatory changes. The industry lobbyists are everywhere.”

Sure, it’s a bit frivolous to ask whether a lender should ever turn down a borrower’s offer of full repayment. In each case the repayment has been approved by the bank’s federal regulators. Only two of the nation’s largest banks, Wells Fargo and Citibank, are still holding loans.

Yet it’s not at all clear that the banking industry is safely out of the weeds.

“There’s the potential for another shoe to drop in commercial real estate loans that could involve massive losses,” observes Robert R. Bliss, a former Federal Reserve bank economist now teaching at Wake Forest University. “They may be acting hastily.”

Indeed, the banks want out chiefly to escape what they think of as onerous conditions imposed on the loans, such as $500,000 caps on the cash compensation of their top brass.

As approved by Congress in October 2008 and ultimately administered by the Treasury Department, TARP staved off the apocalypse facing the nation’s banking system. The program was originally set to expire at the end of this year, but Treasury Secretary Timothy F. Geithner is extending it to next October.

The idea was that by injecting billions of dollars of cheap capital into the financial system, the government would buy time for the housing market and other economic sectors to improve, reviving the banks.

It was assumed that the nearly worthless assets on their books, chiefly mortgage-backed securities, would eventually recover some value. Strengthening the banks’ balance sheets, meanwhile, would render these toxic assets not so toxic -- a healthy bank being able to survive a dose of poison better than a sick bank.

The implicit bargain was that in return for a government lifeline, the banking industry would get its house in order -- placing a lid on excessive pay, knocking off improvidently risky trading, helping strapped homeowners, etc. Almost none of that has happened.

What makes the banks’ haste to exit TARP even more unseemly is that while they grouse about the largely toothless constraints on executive pay, the government deal was extremely generous by almost any measure. The loans carried an initial interest rate of 5%, much lower than what spavined institutions such as Bank of America and Citigroup would have been able to get anywhere in the universe.

The government, in return, got warrants convertible into shares in the rescued bank companies. The assumption was that as the banks recovered, the taxpayer would be able to reap some of the windfall, as the warrants would rise in value.

The banks can negotiate to buy those warrants back at fair market value once they repay the loans. But TARP’s Congressional Oversight Panel calculates that in the first few negotiations this year, the government received only about two-thirds of that value, depriving taxpayers of about $10 million in gains. (Later deals, such as one with Goldman Sachs for $1 billion, were better.)

“The public did not take a fair piece of the upside in the institutions that were rescued,” Damon Silvers, a member of the oversight panel, told me last week.

It’s hard to dispute that TARP achieved its immediate purpose. The U.S. economy and the financial industry aren’t exactly in the pink, but certainly the sense of imminent collapse that prevailed last fall has been purged from the system.

But it’s hard to find much else to praise about TARP. The housing market may be stabilizing, but that’s because of continuing life support from the government, not the banking industry. Bank lending remains at a low ebb, though to be fair, the sluggish economy has sapped demand for bank credit from households and small businesses.

More to the point, there are precious few signs that the banking industry has sworn off the appetite for risk that brought it so low in the first place. Of the big banks, only Goldman Sachs has taken any steps to refashion compensation policies so executives addicted to short-term trading profits get that monkey off their back. Goldman’s new policies don’t mean its people still won’t be grotesquely overpaid, however.

It’s unsurprising that TARP never became a fans’ favorite. The public hates it because it looks purely like a rich-man’s bailout, while the average strapped taxpayer has been left to twist in the wind. Bankers resent the loan conditions, which they feel are unduly punitive. The administration’s diversion of some of the money to help companies such as General Motors and Chrysler makes it look like a corporate slush fund, which no one likes.

That government officials, bank executives, lawmakers and taxpayers are all sick of TARP points to the possibility that regulators are allowing the banks to leave it because of politics, not prudence.

What was best about TARP was that it placed a congressional stamp on the government’s determination to rescue the banking system. Implicitly, this gave the Federal Reserve and Treasury the go-ahead on rescue programs that may have been even more effective.

What is worst about the rush to repayment is that it suggests that the crisis has passed. It hasn’t, and the bankers know it. They just want to party like it’s 2007. TARP teaches us that when they come for a bailout the next time, we should cut ourselves a better deal.

Michael Hiltzik’s column appears Mondays and Thursdays. Reach him at, read earlier columns at, and follow @latimeshiltzik on Twitter.