The Only Surprise Is That Anyone Is Surprised

Mon, 20 Jul 2009 13:14:35 +0000

Binyamin Appelbaum's article in today's Washington Post, "Bailout Overseer Says Banks Misused TARP Funds," could have been drafted last October when the legislation was passed and held for publication until the IG's report came out. The examples of "misuse" cited are as follows:

Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government's financial rescue program.

The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

Banks that took TARP money couldn't lend because they were in (or nearly in) financial distress: they had liabilities that were nearly as large as their assets. This creates the well known problem of debt overhang. The only way that a bank in distress can make new loans responsibly is if it first pays down its existing liabilities. It is ridiculous to now be surprised that many of them did so and also claimed to have increased their lending.

That we got some incremental lending out of it is not the point -- the main thing we got was the opportunity to compensate uninsured, unsecured creditors of distressed banks. There was no good reason for the (future) taxpayer to have to do that. If the government had the objective of increasing bank lending, it would have gotten more bang for its buck if it had invested its money in banks that had no debt overhang.