Last week, Bank of America (NYSE: BAC) announced its plans to repay the TARP funds that it received. Some perceived this as a ceremonious win for the Troubles Asset Relief Program, and interpreted it as an indication that the bailed out firms have rebounded, and about to embark upon widespread growth. Unfortunately, this is likely not the case.
Bank of America will be paying back the $45 billion in taxpayer provided bailout money. Further, other banks have repaid earlier this year as well, meaning the government has or expects to have back $200 billion in those funds at a timeline much faster than anyone envisioned. Is this a good thing?
The banks are clearly getting back on their feet, as in the third quarter earnings releases most of the major institutions did turn profits, their first since 2008. Financial markets have also stabilized in the past 11 months, while the jobs report also shows unemployment may be flattening out. But, this should not be interpreted as evidence that a fast rebound is coming. Instead, it should be read as the same old activity.
BofA’s business has improved a bit, but not enough to warrant such a tidal change. Although the Federal Reserve approved the payback plan, Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation came out against the plan, stating that she did not think the firm was health enough.
Bank of America was desperate. During the search for the next CEO, who must take office quickly given Ken Lewis’ planned retirement at the end of this year, the firm was unable to appease candidates concerns regarding pay restrictions. As a firm under TARP restrictions, any compensation decisions must be vetted with treasury compensation czar Kenneth Feinberg. In order to offer a competitive compensation package, the firm needed to repay the bailout money, or run the risk of having a less than stellar candidate at the helm during this critical juncture in the firm’s history.
In the past eighteen months, the firm has displayed an aggressive growth strategy in new products and markets, as evidence by the acquisitions of Countrywide and Merrill Lynch. The next CEO will play a critical role in integrating those business units, and creating the model of the firm in the new paradigm.
Will the bank’s desperate act make for a better firm in the future? Well, to raise the funds to pay down the TARP, they needed to sell new shares worth $18.8 billion, thereby diluting the existing shareholders. BofA will face many challenges in the coming year, and though this effort is designed to improve that outcome, it may also prove to be disastrous.
