Treasury Secretary Tim Geithner announced a plan to provide small, community banks with additional TARP funds, using the proceeds from bigger banks that are tying their brains in knots trying to repay their own TARP funds as soon as legally possible.
... Hooray?
Sure, I don't think anyone will argue that community banks are being unduly neglected. When AIG (NYSE:AIG), Citigroup (NYSE:C), and Bank of America (NYSE:BAC) can snap their fingers and demand hundreds of billion of dollars, while community banks are left to fend for themselves, the double standard that exists between those "too big to fail" and "too small to care about" is huge.
Also, many of these small community banks successfully avoided the absurdly stupid practices that buried their megabank peers six feet under. They also serve thousands of small and midsized businesses that may be locked out of the lending market.
If anyone seems worthy of a little boost, it's them. Right?
Maybe …
The "benefit" community banks will receive -- or deserve, for that matter -- from a fat infusion of taxpayer capital seems questionable at best.
Remember, TARP was originally conceived last September, when the financial system was facing complete and utter meltdown. It was designed to prevent catastrophe ... not to "jump-start lending" or "get loans out to struggling communities." My belief is that this was simply the rhetoric that made its passing politically feasible.
That said, receiving TARP funds is nothing to celebrate. As Stephen Labaton of The New York Times wrote earlier this year:
Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.
Huzzah! This is what community banks are looking forward to? I think not. This is not the kind of thing CEOs are clamoring for -- unless they truly, desperately need it to survive.
JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon recently called holding TARP funds a "scarlet letter."
IBERIABANK (NASDAQ:IBKC) -- a Louisiana-based regional bank -- returned its TARP funds earlier this year, saying "The program places our company at an unacceptable competitive disadvantage."
Which, frankly, it should. Bailouts aren't supposed to be fun.
Look, despite the hue and cry, I truly believe TARP was necessary to prevent our financial system from permanently imploding. (It succeeded in this regard, by the way.) But it should not be viewed as a tool to boost banks whose failure doesn't threaten systemic financial collapse.
However vague it may be, there's a line between protecting the viability of the financial system and socializing banking. Providing capital to banks that might simply feel left out of the party is tiptoeing dangerously close to the latter.
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