Banking Law

Late this afternoon, The Wall Street Journal reported that one of the conditions that the federal government will place on banks that have taken a TARP CPP investment and who want to repay the investment will be to prove that they no longer need any special FDIC debt guarantees.

The program, a guarantee of debt issuance offered by the Federal Deposit Insurance Corp., allows firms to borrow money relatively inexpensively. Banks have issued more than $332.5 billion under the program since it began last fall.

Firms will have to show they don't need the FDIC guarantee to issue debt, such as by raising it without the guarantee.

Some banks have shown they can live without the FDIC guarantee, apparently on the theory that there are plenty of potential suckers buyers who are eager to scarf up all the good bank debt that they can lay their hands upon.

Several major banks have already taken steps to show they don't need the assistance. J.P. Morgan Chase & Co. recently sold $3 billion and Goldman Sachs Group Inc. sold $2 billion, while BB&T Corp. issued $800 million and Northern Trust issued $500 million. All of that has been either 5-year or 10-year debt.

By contrast, various units of Citigroup, Inc. issued a total of $7 billion in FDIC-backed debt last week.

The program, created in October, allowed banks and holding companies to issue certain senior unsecured debt with a government guarantee, for a fee. The purpose was to facilitate lending between banks and make it easier for lenders to issue debt, because investors knew there was a government guarantee on the offering.

The requirement to forgo the FDIC guarantee would make it most difficult for firms like Citigroup and Bank of America Corp. to get out of TARP, since they are likely to be more reliant on the government's aid. But those banks are also seen as the least likely to pay back TARP anytime soon.

Citigroup and BofA end up wedged into the government's arms like crack addicts to their dealer. Jamie Dimon, on the other hand, appears ready to lead J.P.  Morgan Chase back to the land of the TARPless. He'll love every minute of his new life, rest assured.

I can't wait to see how Treasury prices the warrants that CPP recipients will also have to pay back and what other roadblocks the Feds may throw in the way of banks rushing out TARP's back door in a bid for life without "Barney and the Boyz" telling them how much they can charge for snacks in the employee break room vending machines and what brand of soap to use to  launder the hand towels in the executive washroom. Federal banking regulators are embarrassed enough about the failure of the entire CPP program to stimulate lending activity by the recipients (a fool's dream to begin with), and really can't want to live with the consequences of one of these TARP Babies giving back the money and then biting the dust. I expect extra special capital levels for those who want out, as well as a sour look from their primary federal regulator and a parting shot along the lines of "I better never see you here again with your hand out, Missy, because if I do, I'll slam the door in your face!"

Over at The Business Insider, John Carney points out that these road blocks appear to violate both the spirit and the letter of the American Recovery and Reinvestment Act of 2009. In John;s words, "the Treasury is engaged in almost breathtaking lawlessness." Such characterizations used to be applied to just about every action of W and his crowd of "Walkers on the Dark Side." I guess "The Change We Were Waiting For" hasn't gotten the word to Treasury that that's not the way the federales are supposed to roll these days.

And to think that a mere six months ago, small banks were complaining because they'd been left out of the first round of TARP. Today, they can't bail out quickly enough.