Citigroup became the latest bank to pay back the TARP funds lent by the government in the midst of the financial crisis. Citigroup will pay back $20 billion, while the government will sell off the equity stake it obtained in Citigroup as part of the loan package. As things stand now, the government could make a tidy profit on that equity sale.
Critics have maintained that the banks who received TARP funds have been in such a hurry to repay them because they want to remove any government restrictions on executive compensation. If that’s true, you actually have to credit the government with creating an effective incentive for these banks to get their houses in order. As galling as it is to see generous pay packages handed out to banking executives soon after they repay their TARP funds, it is better than if those banks remained dependent on government capital for an extended period of time.
Incentives aside, the speed with which TARP money is being repaid is a reminder that bankruptcy is often as much a matter of timing and liquidity as it is of a company’s — or individual’s – net worth. The banks aren’t completely out of the woods yet, but so far it looks like the government made the right move to buy them some time to restore their liquidity.
The key to a more complete banking recovery is probably improvement in the job market. This, with an assist from the low mortgage rates the government continues to support, will stabilize housing. That in turn will shore up bank loan portfolios, and eventually encourage new lending. As long as banks manage their lending risks more responsibly, that will put them back into a steady, profitable business — and maybe even will allow bank rates to finally rise.
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