Lieutenant Island Views : Commentary About Finance, Politics and Baseball

If Goldman Returns its TARP Funds, Will Others Follow? | March 24, 2009


Given that Wall Street functions largely as a “Land of Lemmings” where one idea, regardless how good or bad, is usually criticised and then copied if it is seen as potentially beneficial to either personal pecuniary interests or corporate revenue generation. Right now, many on Wall Street believe that repaying TARP money certainly addresses the first point and could serve the second (or give a competitor a leg up if not followed). The article attached goes into detail on many of the implications of possible paybacks. One that seems to be missing is details on how many of the banks can raise the capital quickly. One needs only look to a bank’s loan book for the answer. To the extent that a bank can find a way not to “roll” a large revolver, use a technical covenant default to reduce exposure, not reapply toxic loan sales to new credits or generally accellerate a cutback in corporate lending (because that’s where the large loans are and Congress is not focusing on corporate liquidity), it can free up capital for repaying the government. Unfortunately, the casualty of this is a major reduction in corporate credit just when we need to help corporations make it through the downturn with available loan capital. In no small way is this part of the “unintended consequences” we addressed in our earlier piece on Congress’ compensation legislation. Even if the bill does not become law, the simple passage by the House has put the fear of God into banks. The really bad news is that the Lemmings of Wall Street may march their corporate clients into the sea to rid themselves of the yoke of TARP!

http://www.nytimes.com/2009/03/24/business/24sorkin.html?_r=1&scp=2&sq=if%20goldman%20returns%20aid,%20will%20others?&st=Search

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2 Comments »

  1. If giving out this money was a good idea… questionable I know…. What kind of negative impact could banks lining up to return the money while we are still in this recesssion have?

    Comment by federalistblogs — March 24, 2009 @ 5:30 pm

    • Is your question of a rhetorical nature, a trick question or a polite way of mocking my prose, i would like to know.

      TARP was probably a decent idea that needed to be flushed out before it was voted on or executed. It’s problems started with Paulson’s totally reckless approach to selling it (the world economy is collapsing, I am the only hope so give me a free hand) to it’s thoughtless and disingenous execution (forget about buying toxic assets, I need to give out money to financial institutions with no strings attached) were enough for him to be in my all world Hall of Economic Shame. Returning the money by cutting corporate lending, if that’s how it is done (and i see that as a distinct possibility) makes a poor Paulson execution worse. As i intimated in my earlier comment on Congress’ compensation legislation and in the above post, the economy can’t have a major decrease in corporate lending. To do it so banks can pay guys more is utterly shameless and a hideous outcome from an ill thought out Congressional Bill (which i am sure was not contemplated when the bill was written). i hope this response is helpful.

      Comment by bosox4 — March 24, 2009 @ 7:27 pm


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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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