Ok, ok, I know what you're thinking: "Not another post about the government's 'stress test' for banks!"
But this one's different, I promise. The results are finally in, and they aren't as dire as once feared. In fact, some banks even want to start paying back some of the funds they received from the Troubled Asset Relief Program (TARP). The stress tests have revealed that other banks - 10 out of the 19
tested, in fact - must raise capital in order to keep going, but the
government isn't indicating that any of the banks will go under either
now or if the economy worsens.
It's already known that Bank of
America will have to raise $34 billion in additional capital. BofA has
started looking for ways to do that, including selling its stake
in China Construction Bank or converting the preferred stock that the
government now holds into common stock. That would make the taxpayers
the majority shareholder in the bank.
Despite this $34b
shortfall, BofA's shares still went up along with the rest of the
financial industry as investors signalled their overall optimism in
anticipation of the results' release.
Some banks are pretty
optimistic themselves, and have asked the government to allow them to
retun a portion of the bailout money they received from the government
months ago. The banks have two main reasons for wanting to do so.
First, it shows investors that they are financially strong and
confident; and second, it would get them out from under the
government's harsh rules concerning executive compensation that were
instituted as a condition of receiving the funds.
Department isn't committing to anything yet, however. Treasury wants
to make sure that the banks are actually healthy enough without the
TARP money to keep lending. The government has set a condition
(the government, as we all know, is very good at setting conditions)
that banks will have to show that they can get by without an FDIC debt
guarantee that allowed firms to borrow money on the cheap.
In order to get the green light to repay TARP, banks will need to show
the government that they can issue debt to private investors without
the guarantee. Several banks have already begun doing so.
the banks have demonstrated their ability to issue guarantee-free debt
to the government's satisfaction, the banks can return the TARP money
and start handing out lavish executive compensation packages again.
Which will encourage risky behavior and probably wind up fomenting another financial crisis.