Big banks may get green light to repay TARP funds as soon as today

Banks have been chomping at the bit waiting to repay their TARP funds and get the government off their backs. So far, the government has only allowed about 20 smaller banks to pay back the funds and get out from under its control. According to The Washington Post, however, it seems that other banks could get the good news that they will be allowed to repay their TARP funds as early as today.

J.P. Morgan Chase (JPM), Goldman Sachs (GS) and American Express (AXP) are three of the big banks that are expected to get the okay. While all three banks made application for permission to repay TARP last month, some wonder if this is more for show than an indication banks are ready to stand on their own. Banks can still tap cheap loans, debt guarantees and, of course, the biggest promise of all -- that big banks are too big to fail. So it's more like sending these banks out with training wheels than allowing them to fend for themselves.
Banks are recovering more quickly than the rest of the economy thanks to the government bailout funds. The Federal Reserve made more than $1 trillion in emergency loans. The FDIC continues to help banks borrow money with a promise that it will repay the loans if a bank defaults. Treasury officials continue to fear the collateral damage of a big bank failure.

Simon Johnson, an MIT professor and former chief economist at the International Monetary Funds, told The Washington Post, "It's good from an individual investor point of view, it's great for the banks, but from a system point of view it's very dangerous."

Yet no opposition to the payments has come to light. Congress wants out of what has become a very unpopular program. The administration likes the show of success for its banking strategy. But the possibility of long term changes in the way the banks operate and compensate their employees may be lost.

And, the elephant is still in the room. Banks still have billions, possibly trillions, of dollars of toxic assets on their books. Banks don't want to write down the assets to the level needed to sell them so the government shelved a plan to encourage investor purchases of mortgage loans. This plan is now seen as an insurance policy in case banks need more help in the future.

While the banks are showing signs of recovery only thanks to the trillions of dollars the government and the Federal Reserve put into the system, not because they can stand on their own, the system is still fragile: Foreclosures continue to mount; bankruptcies are being filed at the rate of more than 6,000 per day.

It leaves me wondering why the government has chosen to focus almost all its funds towards propping up some private institutions while letting so many consumers and small businesses fend for themselves.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies.

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