When the nation’s biggest banks were bailed out in 2008 via the $700 billion Troubled Asset Relief Program, the money came with a few (very loose) strings, including restrictions on executive compensation and some requirements for the amount of capital the banks would have to raise in order to escape from TARP.
But as a new report from the Special Inspector General for TARP shows, even these restrictions were too much for some of the nation’s biggest banks — including Bank of America, Wells Fargo, and PNC — who lobbied for easier payback requirements so that they could be freed from restrictions on paying bonuses. And Treasury obliged their requests:
Federal banking regulators relaxed the November 2009 repayment criteria only weeks after they were established, bowing at least in part to a desire to ramp back the Government’s stake in financial institutions and to pressure by institutions seeking a swift TARP exit to avoid executive compensation restrictions and the stigma associated with TARP participation. The large financial institutions seeking to exit TARP were notably persistent in their efforts to resist regulatory demands to issue common stock, seeking instead morecreative, cheaper, and less sturdy alternatives that provide less short- or long-term loss protection than new common stock. Bank of America, Wells Fargo, and PNC, for example, requested expedited repayment, but each institution balked at issuing the amount of common stock required by regulators.
The practical upshot of weakening standards and letting banks repay their bailout funds early is that several of them were likely too weak to confidently stand on their own. As CNN Money put it, “this report is the first in many months to raise new questions about the health of some of the biggest banks after they were allowed to stand on their own two feet.”
Not all regulators were on board with allowing the biggest banks to leave TARP. Federal Deposit Insurance Corp. Chairman Shelia Bair, for instance, said that the banks’ repayment plans were based on a “gimmick.” “That just mystified me. The point was if they’re not strong enough, they shouldn’t have been exiting TARP,” Bair said. But Treasury still saw fit to let banks repay TARP and get back to paying outsized bonuses. But hey, at least they’re cutting down on office foliage!