Banks Returning Bailout Money (Updated)

This New York Times article made me scream. Loudly.

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.

The bailout money never should have been lent to banks that didn’t require it. There were many deficiencies in the Paulson bailout plan, one of which is that it didn’t impose conditions from the very beginning. One of the benefits of the Swedish model was that the restrictions placed on banks that sought help were so stringent that the banks looked for private capital first. The government was, quite seriously the lender of last resort, which was the point. That banks took federal bailout money that they can afford to return (presumably because they aren’t insolvent or can find private capital), means that the government wasn’t acting as a lender of last resort. The Fed and the Treasury Department need to disclose what the criteria were for determining whether a bank qualified for bailout money, because clearly these banks shouldn’t have.

And, as a final note to Republicans, socialism is patriotic.

C. R. Cloutier, the president of MidSouth Bank of Lafayette, La., and a survivor of the savings and loan debacle, said that his institution received $20 million from the rescue fund because he and his board believed it was patriotic and would help them offer loans during a recession. [Emphasis added.]

Addendum: I agree with some of the bankers complaints, in that it may be unfair to now impose conditions on banks that received bailout money when there were no conditions. However, as long as the participating banks can escape the conditions by returning the money, I don’t think this poses a significant moral problem. The fault for the lack of conditions lies with the Congress, not with the banks.

Update: The idea that we didn’t collect FDIC premiums from banks for a decade makes me scream too. If only Geico were so accommodating as to accept my argument that I needn’t pay premiums because I hadn’t been in an accident recently.

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Published in: on March 11, 2009 at 5:07 pm  Comments (2)  
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2 CommentsLeave a comment

  1. If one company takes money and the competition does not, then the competition is at a disadvantage. So of course banks that don’t need money will take money. Instead, we should let the few failing banks bankrupt. The situation cleans itself up until the government intervenes.

    • Well, yes, I don’t really fault the banks for taking free money. One of the advantages of placing conditions on the money is to make banks look for capital elsewhere before turning to the government. However, this doesn’t go to say that we should find some way of helping failing banks. No bank ‘goes bankrupt’ in the way other companies do. The FDIC takes the bank into receivership and guarantees the depositors. There would and will be nothing clean about a FDIC take over of Citi or Bank of America. More importantly, the ripple effects of bankruptcy would cause counterparty and depositor panic. There exists no reasonable way for large banks to go bankruptcy without open government involvement. All that said, bailouts should end and the government should take balance sheet insolvent banks into receivership sooner rather than later, so the bank can be broken down into profitable entities and resold while protecting depositors.


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