Wednesday, December 09, 2009

The Folly of TARP & Government-Mandated Capital Raising

I had to laugh when I read yesterday's Wall Street Journal article concerning the federal government punishing Citigroup and Wells Fargo with heavy capital requirements before they can repay the TARP money they were forced to take.

If anything points to the veracity of Anna Schwartz' comments about the financial sector crisis of last year, this episode would be it.

Why are we letting some middle-level bureaucrats dictate what sort of capital levels these two banks require, when the obvious, better solution is to let the capital markets signal that. Under-capitalized banks will see their equity prices fall. If they are in a jam, where dilution to raise capital further depresses equity values, then, eventually, some other bank management will take over those assets at the depressed price.

That's how the market votes on managerial (in)competence.

Government mandates for capital are just stupid. Just as the Fed can set a funds rate, but can't actually control market appetites for Treasuries, or force banks to lend, arbitrary capital requirements set by mediocre regulators won't actually have much meaning to investors.

This latest dustup over banks trying to repay government funds shows clearly what a travesty Hank Paulson's and Ben Bernanke's TARP plan always was.

Now, as of this morning, Treasury Secretary Geithner sent a letter to Congress notifying it that he will extend the TARP slush funds and dubious authority until next October.

To add comedy to this act of governmental overreach, Geithner claimed both that the financial sector is still in need of help, but, magically, the government assistance will now actually aid "main street."

Good luck with that, Tim. It hasn't worked yet.

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