Is TARP Really a TRAP?

The Treasury’s capital purchase program, the system for injecting capital into the nation’s banks, may look like a give away on the surface. But look a bit closer and there’s an interesting catch.

TARP (Troubled Asset Relief Program), of course, went from being an asset purchase program to a capital investment program and therefore needs a new name. Under the Treasury program, the government will invest $250 billion in the nation’s banks. A Treasury spokesperson says $158 billion has already been committed with another $92 billion to go. The hope is that new capital will get banks lending again. And many small banks, major small business lenders, are lining up now.

But here’s the rub: In section 5.3 of the agreement there is language that says if Congress wants to put new conditions or requirements on the banks, those new terms can be applied retroactively to banks who took the money. So in January if Congress wants to require banks that have received capital stop foreclosing on homes or up their lending activity, they can.

The American Association of Bank Directors sent a letter to Treasury Secretary Henry Paulson in early November asking that the government delete or modify the provision. David Baris, Executive Director of the AABD, says the Treasury has not responded to the letter.

Bank consultant Bert Ely says that is going to give some bankers second thoughts.

It is a blank check for Congress to put conditions on money that has already gone out. I think banks will go through the process, but the more they look at this they’ll decline it at the end.

Now, the program is aimed at investing capital in healthy banks. If that's the case and they don't really need the money, it's hard to understand why a bank would agree to a deal that could change over night. Guess we'll see how many banks sign on the dotted line once they read the fine print.

    Before it's here, it's on the Bloomberg Terminal.