Geithner To Allow Banks To Repay Tarp Although TARP Panel Says Stress Test Was Flawed

In another case straight out of the Twilight Zone, Geithner will allow banks to repay TARP funds although a TARP panel advises running the tests again because the tests were so flawed.

Bloomberg is reporting JPMorgan, Morgan Stanley Among 10 Banks Repaying TARP.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley were among 10 lenders that won U.S. Treasury approval to buy back $68 billion of government shares, freeing them from added oversight that curbed lending practices, hiring and pay.

“These repayments are an encouraging sign of financial repair,” Treasury Secretary Timothy Geithner said in a statement today. “But we still have work to do.”

The decision to allow the biggest repayments to the Troubled Asset Relief Program reflects surging financial stocks and rising pressure from banks to free themselves of political interference. U.S. firms unveiled plans to raise more than $100 billion since government stress tests of the 19 largest banks found that 10 needed $74.6 billion of additional capital to weather a more severe recession.

In addition to JPMorgan, Goldman Sachs and Morgan Stanley, American Express Co., Bank of New York Mellon Corp., BB&T Corp., Capital One Financial Corp., Northern Trust Corp., State Street Corp. and U.S. Bancorp all said today they are repaying the funds.

The approved firms didn’t include Bank of America Corp., the biggest U.S. bank by assets, and Citigroup Inc., each of which have accepted $45 billion from the government. Wells Fargo & Co., the nation’s largest mortgage lender and the recipient of $25 billion in government aid, also wasn’t on the list.

“There will be a question that potentially overhangs some of those names that haven’t returned TARP,” said Scott Siefers, an analyst at Sandler O’Neill & Partners LP in New York. “How are you going to get out from under it and what will it mean for me? Are you going to issue more shares somewhere down the road?”

Firms buying back the government’s preferred shares also have the right to repurchase warrants the Treasury holds “at fair market value,” today’s statement said.

Of the 10 Banks approved, all but Northern Trust was on the list stress test banks. I called it a cake walk not a stress test at the time. See Fed Determines Banks Need $74.6 billion in Fantasyland Scenario, $599 Billion in Cakewalk Scenario for details.

Banks Need New Stress Tests

Meanwhile it's important to note that the TARP Congressional oversight panel says Banks Need New To Repeat Stress Tests.

The Congressionally-appointed panel overseeing the Troubled Asset Relief Program (TARP) recommends running again the stress tests on US banks, as economic conditions have worsened, its chair, Harvard University professor Elizabeth Warren, told CNBC Tuesday.

"We actually make recommendations to do it all over again right now," Warren told "Squawk Box."

"We've already blown past the worst-case scenario on unemployment," she added.

Other reasons for concern are that the model used in the Treasury's stress tests stretches on less than two years, while many commercial mortgages are coming up in 2011, 2012 and 2013, Warren said.

Please see Optimistic Unemployment and Housing Forecasts Looking Downright Silly for charts showing just how bad the stress test assumptions were.

Grading The Tarp Report



Congressman Hensarling "The economic justification for the TARP no longer exists. It's clear to me now that the original goals of financial stability and taxpayer protection are no longer the aim of the program. It's increasingly being used to promote the economic, social, and political agendas of the administration".

Elizabeth Warren responds by defending the model methodology, but not the model's assumptions, the model's timeframe, or the model's transparency. She also recommends rerunning the tests now because "We have already blown past the worst case scenario on unemployment".

Nonetheless, Geithner has said it is OK for nine stress test banks to repay TARP funds even though it is now clear the stress tests were stress-free.

Warren went on to say "The Treasury should give us enough information about the models so that outsiders can run them. ... Let us play with it. [What happens] if the numbers shift if you go out 3 years, if the unemployment rate goes up another point, if the GDP shrinks by another point ...."

It is clear Warren was attempting to stay out of the Congressional politics of this mess. However, in doing so, she ended up heaping a sickening amount of undeserved praise on the Treasury. Parts of the interview were tough to take.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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