Exit of 10 Large Banks from TARP

It it noteworthy that the decision by the government to allow 10 large bank holding companies including JPMorgan Chase, Goldman, and AMEX to repay more than $68billion in loans and exit TARP has been greeted with some diapproval among the more liberal policymakers and media pundits.

They claim that allowing the banks to extricate themselves from government interference will hamper efforts at forcing the restructuring of the banking sector to limit executive compensation, participation in non-bank financial products, forced lending to credit defaulters, and other social programs. Such claims give some credence to the charge that TARP is a backdoor to nationalization of banking, and with it a model for nationalizing such other sectors such automobile.

In fact, the escape from TARP should be seen as a triumph of market forces. TARP hampered the ability of the banks to hire the best talent, which are necessary for long term competitive advantage, reduced flexibility in jettisoning broken business models, and straight jacketed management from dealing creatively with borrowers, lenders, shareholders and other stakeholders in the community. The freedom from government intervention is the only way the, admittedly wrenching, market adjustments can be made quickly so the macroeconomy can stablize.

Goldman Sachs and TARP

The blowout quarter reported by Goldman Sachs, its plans for a second tranche of IPO, and its intention to pay off the TARP bailout early (swapping out taxpayers, who had no choice in investing, with shareholders, who choose to invest) is the best evidence for the mishandling of the banking crisis by the Feds.

The economic models of investment banks and retail banks are very different. The former is inherently riskier because of the markets into which they sell their products and services. Yet, risk is not cause of the problem in this banking fiasco. Clearly, Goldman understood risk and managed it well; reaping the benefits. It's part of the 'white shoe elite'. The retail banks that suffered did so because of ambiguity, for which there is no managing. Ambiguity comes from the lack of managerial appreciation for the complexities and differences between the investment and retail banking business. Investing in mortgage insurance is very different from investing in credit default swaps (another type of insurance). Such ambiguity clouds the consequences of managerial decisions, resulting in 'me-too' strategies.

The TARP and other regulatory bodies want to treat all banks the same way by forcing them to take bailout money even when they did not need it. Those inclined to conspiracy theories say the tactic is a backdoor to control the largest banking institutions. Regardless, it's time the Goldmans of the financial world stop worrying about how they appear to the politicians and throw our money back at them. Investors and taxpayers - UNITE!