Banks that want to pay the government back its TARP money (and free themselves from TARP strings) may have to prove, first, that they can issue debt in the markets without requiring government guarantee of that debt, today’s New York Times reports.
Since late last year, banks have been able to issue debt that comes with an FDIC guarantee. Roughly, then, the FDIC has granted big, sophisticated global creditors the same kind of assurances that it has long offered to small bank depositors. Recently, a few banks, including Goldman, have issued debt without the guarantee.
But a bank’s ability to issue unguaranteed debt isn’t proof that the bank has gained market confidence.
The past year’s events have demonstrated that the government thinks that these banks are “too big to fail.” The government has stepped in to offer bailouts of all shapes and sizes so that lenders to financial institutions – from Bear Stearns to AIG — have not had to take big losses. (Yes, Washington Mutual and Lehman Brothers creditors took big hits, but that shows panicked inconsistency rather than a changed policy.)
Lenders to banks like Goldman and Citi, it follows, likely think that the government will protect them from whatever happens in the future, whether any new debt carries an official guarantee or not.
The government, since it still hasn’t created an orderly way for big, bad financial companies to fail and for their creditors to take losses, has encouraged this complacency.