What happens to returned TARP money?

Answers to your questions about the news.
April 21 2009 5:21 PM

Payback Time

What happens to returned TARP money?

Where does the money go?
Where does the money go?

Treasury Secretary Timothy Geithner told Congress Tuesday that he expects about $25 billion from the Troubled Asset Relief Program to be repaid by banks within the year. Both JPMorgan and Goldman Sachs have said they want to return their TARP money, and six smaller banks have already repaid theirs. Where does the returned money go?

Back into the program. If a bank wants to return its TARP money, it gets siphoned back—by wire, usually—into the original pool. In his testimony, Geithner said there's $110 billion left of the original $700 billion allocated by the TARP program. So once the expected $25 billion is returned, the remaining stash should reach $135 billion. (You can track the returned dollars at The Big Money's TARP-o-Meter.)

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Funneling dollars back into the TARP, rather than putting them in the Treasury's general coffer, has two advantages. For one, it keeps the money on hand in case banks need another bailout. That's a plus since it would be politically difficult for Geithner to ask Congress for more bailout money. At the same time, taxpayers can see the TARP account creep back up toward its original level. If, say, 50 percent of the money eventually gets returned, the Treasury can brag that it spent only half.

Why are banks so eager to return the money? It lets them show how strong they are. If Bank X doesn't need bailout money, the thinking goes, investors will choose them over government-dependent Bank Y. Returning the money also lets banks escape the executive pay caps that were a condition of the loans. In February, Obama announced a $500,000 limit on salaries at the bailed-out banks. If they return the cash, they'll no longer be bound by that limit and could therefore hire talent away from their salary-capped competitors. Finally, banks want to return the money because they're currently paying a dividend on it—as high as 5 percent—to the government. No more loan, no more dividend. (Banks can also avoid the dividend by converting the government's preferred stock, which has a high payout, to common stock.)

Of course, there are risks to letting the banks return money. One is that they'll need it again, which would create a public relations snafu. Then there's a systemic risk problem: If one bank appears stronger than others, the weaker ones might get hurt as investors yank their money, and short sellers bet against them. That's why Geithner is insisting on completing the stress test—which measures the banks' strength—before deciding which big companies get to return their money.

On the other hand, letting banks give back their money could help morale. Back in March, Federal Reserve Chairman Ben Bernanke told60 Minutes that one indicator of a turnaround would be the banks beginning to raise their own private equity. Returning TARP cash shows that they've raised enough private money to survive on their own, which could boost investor confidence.

Got a question about today's news? Ask the Explainer.

Explainer thanks Peter Cohan of Peter S. Cohan & Associates and Roy Smith of New York University's Stern School of Business.

Christopher Beam is a writer living in Beijing.

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