Will TARP repayment kill the zombie banks?
Filed under: Economy
Use two buzzwords in a sentence and you're asking for trouble. But since $12.8 trillion of taxpayer money is at stake, it's a risk I need to take. The Treasury is poised to announce that it will let some banks that got Troubled Asset Relief Program (TARP) money -- JPMorgan Chase (JPM) and Goldman Sachs (GS) -- repay the money. The only problem with this is that such repayment will damage the zombie banks -- those that our tax money is propping up which would otherwise fail.
How will TARP repayment harm zombie banks? As I posted, it all comes down to money and people. Wall Street pays better than anywhere else on the planet. At least 60 percent of the revenue goes out to its employees every year. If Goldman no longer has TARP money, it could be free to pay its people as much as it wants without suffering the political pressure that comes from holding on to taxpayer money.
Free from those pay limits, the TARP-free banks would have an enormous competitive advantage over the rest. That's because they could offer big pay packages to the top producers at the zombie banks. This would leave the zombie banks with shrinking revenues and high costs -- a recipe for slow-motion financial failure. This leaves soon-to-be-appointed Wall Street pay czar, Kenneth Feinberg, with an important decision: Should banks that repay their TARP money be freed of pay restrictions?
The answer may be 'yes' if those same banks also swear off of the $1 trillion in emergency loans they've gotten from the Federal Reserve and the FDIC. If Goldman and a few of its peers become TARP free but still use these government loans, it seems to me that they should continue to be subject to pay limitations.
If they pay off all the government loans as well as the TARP, then I think they should be free to start poaching talent from their weaker rivals. Of course this will leave the U.S. with the challenge that it has yet to face squarely -- whether to kill the zombie banks quickly and completely or let them die a gradual and lingering death. Because once the government-free banks start to hire the zombie banks' producers, those are the only two likely outcomes.
I don't think the U.S. has figured out who will pay the enormous cost of a quick failure. When Japan got into a similar mess in the late 1980s, we told it to force its banks to write off the bad loans but it declined to do so. Now we are refusing to follow that same advice we happily gave Japan back then. So we risk going the way of Japan, which has spent 20 years in economic purgatory.
Unfortunately, the U.S. is missing the key point. People will do what they're paid to do. If you pay Wall Streeters to bring in big deals fast to make tens of millions in annual bonuses, that is what they'll do. If you put those bonuses in escrow and pay them out to the bankers only if those deals make money for investors -- using the escrow to repay investors' losses if the deals go bad -- then they'll bring in fewer good deals to maximize their incomes.
To fix the system, Feinberg should change Wall Street pay along these lines -- this will make Wall Street a smaller place but one that does a good job of financing technology-led growth. And that -- rather than paper entrepreneurialism -- is what American capitalism should be all about.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 2)
6-08-2009 @ 11:17AM
Patriot Games said...
I have a problem with all of this..."THEY", "THEM", created this entire mess to now create a new mess, and it is perfectly obvious that it's the same old game "THEY" play with the stock market....run it up, build excitement, get all the suckers to buy in HIGH, make the sh*t out of money, the pull the plug, crash it, get all those suckers who bought in High to Sell Out LOW, and make the Sh*t out of money!!!! Now "THEY", "THEM" are doing the same damned thing with TARP, banks, The FED, Bonds, and Taxpayers. It is obvious this whole thing is a scam...and it all started here -
http://www.break.com/usercontent/2009/4/SubPrime-Slime-705089.html
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6-08-2009 @ 11:38AM
Dr. Dan said...
We DO still live in America. Let them fail. We will survive. Let's get the pain over with, rather than protract it and make it worse for the rest of the next decade. The author of this article sounds more like a socialist cheerleader than a reporter. Bush made the monumental mistake of opening the door to this, and Obama has driven a fleet of trucks through it. The government has proven only one thing - it cannot run anything efficiently. When will we learn?
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6-08-2009 @ 1:24PM
John said...
But, we trust the government to be able to run our wars for us...
6-08-2009 @ 1:48PM
Dr. Dan said...
The government only funds our military. When it is run by the generals, our military is unstoppable - i.e. Gulf War I and II. When the politicians try to manage it, we end up with disasters like Vietnam. America is best when the government gets out of the way. We have nothing to apologize for, except the results of the last election.
6-08-2009 @ 12:14PM
John Hayes said...
The people making the big money are just lucky. I can't or don't believe that there are not qualified people who are willing to work for half of what they make.
This isn't the NBA or NFL where there is a much more limited pool of talent because you have to take physical talent into account.
Another point is that to a person they lack the personal integrity to follow long tern business strategies . Take a look at the smaller banks who are being run by people with integrity that didn't run their companies into the ground by bad decisions.
Seems to me what is really being said is that the crooks want to be in charge of fleecing the system without restraints..
Poaching talent ha ha . I am sure the stockholders don't want all that bogus talent. They sure did well didn't they.
The only way Bank execs seemed to earn their money was because they took too big of risks and it worked for awhile. It was an illusion they didn't deserve
the money they made and it won't work again in the future.
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6-08-2009 @ 12:43PM
Sharon said...
Will Tarp paybacks kill the Zombie banks? How stupid is that...a ZOMBIE BANK IS ALREADY DEAD. Wall Street and FED/Government stock market manipulation is getting desperate now to keep the Economy together. Unfortunately, I believe they are already too late. The Government put WACHOVIA and many OPTION ARM banks/lenders into moratorium...BING the word which means those loans that have already started to reset are on the backburner..if released today, the Economy would be BUST as ALL those BANKS would fail! We the people should finally say NO MORE..let the CROOKS in the/BANKS/FED/WALL STREET go down the tubes...ANYTHING has to be better than this.
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6-08-2009 @ 12:41PM
rip300rog said...
Let the banks fail. Capitalism doesn't work if one enterprise is subsidized while another is on its own. Too much government involvement already. If the culture of Wall Street has brought them to the point of collapse then they need to collapse. It is only thru failure that the system can correct itself. Same with the auto industry. The previous poster is right about the smaller, leaner local banks are doing ok, because they don't operate in the go go go culture of Wall street with phony profits designed to give out big bonus checks all to executves who are taking ridiculous risks. Risk should have its reward but it goes hand in hand with paying the fiddler once the dance is over.
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6-08-2009 @ 12:55PM
Cindy said...
Bottom Line ~ what Mistakes did Bush Not Make!
We all know, to well Bush was sitting Back on his Laurels! Another Words Not DOING ANYTHING! "On Vacation" Most of His Term in Office!
It was Chaney who was Running Our Country! Screaming TERROR TERROR! What Happen to Our RIGHTS! That TOO was Controlled, all in the Name of TERROR! A GREAT DISTRACTION to Keep the Focus Elsewhere!
BOTTOM LINE:
THE REASON BANKS ARE ABLE TO PAY BACK THE TARP FUNDS~
The very people who it was because of ~ they received the FUNDS. They have Screwed! They Namely
CHASE;
HAS SENT many Customer Credit Card Customer Letters Notifying their Customers that they where not Making enough Monies off their Business and because of this Needed to Raise Interest Rates. Also Keep in Mind that these Customers Always have had All Good Credit Standings and Also High Credit Score. Never Ever Paid a Late Fee or Waited Till the Due Date to Pay! Also Mentioned if anyone Customer Refused to Take the Higher Interest Rate that The Account Would Get Closed!
Another Words Slam their Good Credit Rating because a Credit Account would get Closed!
So in the same sense take it OR ELSE! Then with those who did Figure OH Boy! OK Then they Get the Bigger Screwing to find in less than 2 Months their NOW CREDIT LIMIT Gets REDUCED! After the Month before Being Given a Special at not Having to Make a Payment DUE TO GOOD CREDIT STANDING! THEN the Second Month Having the NOW NEW INTEREST RATE ON THE FULL BALANCE ~ MANY Have received LETTER REDUCING THEIR CREDIT LIMIT! And CHASE REFUSES TO GIVE INFO OF WHAT WAS THE FACTOR OTHER THAN VAGUE LIST WITHIN LETTERS SENT!
IT SEEMS ITS ANOTHER WAY THEY ARE GETTING AROUND DOING BUSINESS AS IT SHOULD BE! What’s GOOD FOR ONE SHOULD BE GOOD FOR ALL!
Where’s the Fairness in the Way GM was handled when they Asked for a Small Amount as Compared to the $$$ of these Banks? Now they Want to Change the Agreement AGAIN!
This Needs to be CLOSLY MONITORED!
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6-08-2009 @ 1:17PM
Greg said...
"Free from those pay limits, the TARP-free banks would have an enormous competitive advantage... because they could offer big pay packages to the top producers at the zombie banks." If I put a Stingray motor in my 1959 vintage VW, because of its overall lighter weight it would out-perform a Stingray. Now, to anyone who is the least familiar with automotive performance, the latter is obviously bunk--for many reasons. The former, though, seems about right to me; I know little about automotive engineering, but I'm at genius level compared to what I know about economics. The point I'm getting at: is Peter Cohan as smart about jobs and pay scale competitive advantages in restricted knowledge disciplines as auto engineers are about making cars go fast? If he is I wish he would put forth his objective calculations on the matter.
Is there really so much difference across the spectrum of money managers that offering double pay would attract applicants of double productivity? Or would Goldman be paying its staff of managers twice as much as any Zombie Bank for pretty much the same level of productivity? And, if one should take the top producer at the ABC Bank and move her to the XYZ Bank, can one expect her to be among the top producers at XYZ, or might she, for reasons I can only guess, just blend into the middle, or even the lower ten percent of XYZ?
In short, is Cohan's thesis backed with objective data, or simple anecdotal evidence and personal dogma?
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6-08-2009 @ 1:17PM
nick said...
What I here is if they let the banks pay back the government that they got to give ACORN money every year and other Obama slime projects, he is trying to protect slugs like CNBC and the thug who runs GE. Give us a break we can't trust a tax cheat!!!
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6-08-2009 @ 2:04PM
Donovan said...
I received the same letter as Cindy stated in her post. Well all I can say. Chase's letter, is a direct threat. And I for one do not deal well with being threatened. For those of you who have received letters like Cindy and I have from Chase. May I suggest you file a complaint with the OCC your local States Attorneys Office, and State Senator.
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6-08-2009 @ 2:08PM
dan said...
I believe there has been 37 banks failures..........so they are failing one by one, which I would think would be much easier than letting them all fail. Can someone here tell what a person is to do if the dollar fails?
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6-08-2009 @ 2:14PM
dan said...
Sorry, there is a glut of MBAs in the market, and this argument that the too big to fail banks would get the cream of the crop doesn't fly for me. I don't have an MBA and I saw this coming in 99 and I know someone personally that doesn't have one, and learned banking by starting from the bottom up, and now runs the bank. Something to think about: Why haven't any banks in Canada failed, or for that matter in Japan?
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6-08-2009 @ 2:40PM
marc said...
Very simple: They didn't get into subprime lending, because they rightly felt it was too risky. But then they also didn't have Janet Reno threatning to sue them if they didn't loan money to people who weren't qualified. Maybe now down payments will be law. It's a very good idea, if you got 20 grand in the house you're not likely to walk away from it if the market drops, you'll work as hard as you can to pay it off. And also it proves you do have the income to handle the payments.
MARC
6-08-2009 @ 2:14PM
Scott Kochman said...
"Unfortunately, the U.S. is missing the key point. People will do what they're paid to do. If you pay Wall Streeters to bring in big deals fast to make tens of millions in annual bonuses, that is what they'll do. If you put those bonuses in escrow and pay them out to the bankers only if those deals make money for investors -- using the escrow to repay investors' losses if the deals go bad -- then they'll bring in fewer good deals to maximize their incomes."
Why are deals that lose money for the stockholders good deals?
How many jobs are there available at JP Morgan and Goldman Sachs that they will drainm all the other banks of their talent?
How long will JP Morgan and Goldman Sachs last if they hire all these people who get big bonuses for making deals that lose money for the stockholders?
Isn't that what got the "zombie banks" into trouble in the first place?
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6-08-2009 @ 2:43PM
marc said...
Buy gold and sliver coins, the real money as per the
Constitution.
MARC
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6-08-2009 @ 2:46PM
Bad2thebone said...
This entire argument is stupid. We The People are stupid. We make decisions based on emotions rather than researching the issues and making informed "intelligent"decisions. Abortion to Bail-outs.
We rely on people like Bill OReilly and Keith Olbermann to manipulate our thinking, but since most American's just react to situation and are not proactive to the facts...well, you get what you pay for. You don't get to complain, whine and moan when another talking head tells the people "to hide" "the sky is falling". American's are given daily doses of everything is great, it's the economy stupid and conversely everything is just terrible the worse it's ever been. Well folks that old Jewish philosopher Moishe Pupic once said "it is what it is".
Get off your lazy dependent arses and get a grip on YOUR lives, it's not up to THEM to tell you what is right or wrong or up or down...but until you take the assertive steps in your lives you will be living by their rules and their "opinions".
You still have time to fix your lives now get off the couch turn off the tv/plasma/lcd et al and take PERSONAL responsibility for the banks, stock markets, car companies, religious institutions and anyone else you follow off the cliff. Now STOP it...take back your lives back for YOU.
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6-08-2009 @ 3:06PM
dan said...
Gold is a myth when the dollars fails, it's still worth what it's worth when you go to cash it in in the new currency. Gold goes up in good times and down in the recessions.
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6-08-2009 @ 3:14PM
dan said...
The heart of this melt down is that the multinational corporations and banks are buying our Congressman. Example: Senator Baucus has taken more money from the insurance industry and will not allow a debate over single payer health care. As long as these well paid elites are having their campaigns finance buy corporate America, we the people will continue to lose our jobs to Asia and Europe because of capitalism for the rich and crapitalism for you and I. The free market doesn't exist in the world, it's only in their heads. Every nation protects its vital industries, except the US, and soon the workers here will unite and take our country back from the economic royalists who have destroyed this once great nation. The first step is to institute public financed elections. Make it illegal for any government elected official to take money from private interests. Next is shut down K Street lobbyists. These are a few things that would stop this madness....
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6-08-2009 @ 3:24PM
flalaw said...
ok....so the banks are bankrupt..the gov gives them billions in bailout funds...so now they show a profit and the profiteers invest...so now they have money to pay back the bailout funds.......I still fail to see how they will turn a profit...Monopoly money!!!
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