Repaying Tarp

US Treasury faces another unwelcome burden

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Bouncers usually restrict access into a club, not man the exits. Yet, the US Treasury – having made a show of limiting troubled asset relief programme funds to “healthy” banks – must now attempt to control a stampede for the doors. State Street on Monday became the latest large recipient to state its intention to repay the government, announcing a $1.45bn equity raising and an offering of debt not guaranteed by taxpayers. Its shares shrugged off the impending dilution to rally 8.5 per cent.

Consolidation of the custody bank’s conduits helped rouse investors. A mark-to-market hit of $3.7bn is a price worth paying to alleviate uncertainty, especially as a portion of the writedowns will flow back to earnings should the assets continue to pay out. In any case, with the KBW Banks index more than double its early March low, it makes sense for banks to raise money now, whether or not they wish (or will be allowed) to pay back their public debts.

The markets’ mood music indicates that wriggling free of Washington’s shackles for now trumps any earnings erosion to come from pricier capital. The powers that be, then, singularly failed to avoid creating a stigma linked to government support. The congressional brouhaha over executive compensation no doubt was key, both in motivating management to seek an early exit from the Tarp club and in cementing investors’ perception of a competitive disadvantage in hanging round too long.

Managing the paybacks, now likely to happen in batches of banks, is another unwelcome burden for the Treasury. But repayments are also unhelpful to its goal of supporting lending. As more banks clear the requisite hurdles, pressure will increase on those remaining. That means greater temptation to show strength at any cost – such as Citi’s pricey offer of unguaranteed debt last week – or to exit Tarp prematurely. Somebody call security.

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