Frank urges Obama to accept Tarp repayments

Frank urges Obama to accept Tarp repayments
By Edward Luce and Lionel Barber
Copyright The Financial Times Limited 2009
Published: April 24 2009 17:43 | Last updated: April 24 2009 17:43
http://www.ft.com/cms/s/0/54c51d8a-30ec-11de-8196-00144feabdc0.html


The Obama administration should seize the political opportunity offered by Goldman Sachs’ and JPMorgan’s request to repay $45bn in troubled asset relief funds, says Barney Frank, the influential Democratic lawmaker.

Both banks are lobbying Tim Geithner, the US Treasury Secretary, and the Federal Reserve, for permission to repay the money in order to escape the tight restrictions on executive compensation that Capitol Hill imposed on Tarp recipients.

But Mr Geithner, who will next week release the results of the “stress tests” on the nation’s largest 19 banks, has shown reluctance to differentiate between the banks. In an interview with the FT, Mr Frank said the Obama administration was missing a political chance to showcase the return of taxpayer money.

“Geithner says I worry about it from the political standpoint,” Mr Frank said. “It’s the one argument for which I have no sympathy: If people could see, some people are taller than other people. Of course there are different levels of strength between the banks…compensation restrictions were a necessity to win support for Tarp.”

Some of the 17 remaining banks have argued that such a move would give Goldman and JPMorgan an unfair competitive advantage by enabling them, for example, to poach their best employees. They also argue that the two banks would continue to receive other kinds of public subsidy, such as loan guarantees.

But Mr Frank dismissed these arguments as special pleading. “Yes we have other forms of subsidy but a direct capital infusion is qualitatively different. Beyond that if you have a purely private company and they want a private plane, what do I care?”

Mr Frank, who, as chairman of the House financial services committee, is probably the most influential lawmaker on the financial sector bailout, also warned that politics would prevent the Obama administration from getting any more financial bailout funds out of Congress.

Mr Geithner has said that he has $110bn left over in Tarp funds and has the option of converting the government’s preferred equity into common equity – a measure that would pad out bank balance sheets. “It had better be,” said Mr Frank when asked if there was enough money to recapitalise the banks after the stress tests next week. “It is a paradox: If this [Geithner plan] works you will get more money from Congress. But then you won’t need it.”

Mr Frank said that the administration had handled the financial crisis relatively well, but it has also slipped up on occasion. “They made a mistake with Geithner: they put him out there when he wasn’t ready,” he said. “Geithner sometimes gives the impression that he’s giving a bar mitzvah speech and his voice is going to crack. He misses the politics of paying it [Tarp funds] back.”

However, he said Mr Geither and Mr Obama had been unfairly criticized for failing to offer simple solutions to what is a complex crisis. “A solution cannot be qualitatively more elegant than the problems at which it is aimed,” he said. “All these criticisms ignore the fact that this problem stinks. They are criticisms of the problem.”

In particular, many liberal economists, such as Paul Krugman, the New York Times columnist, had been “premature” in their demands for bank nationalization – a scenario Mr Frank said he would not rule out later on. “Loads of my liberal friends were a month ago demanding significant intervention (nationalisaton),” he said. “It was premature.”

Mr Frank said that there were other ways for Mr Geithner to boost bank capital if next week’s stress tests revealed a big shortfall – for example by imposing a “haircut” on bondholders by mandating debt-for-equity swaps, a step the administration has been unwilling so far to take.

“Risk is inherent in the nature of being a bondholder,” said Mr Frank. “[As for] subordinated debt: Why the hell is it called subordinated?” However, he added: “To the extent that imposing haircuts would cause a daisy chain effect you have to be worried about it.”