You're Allowed To Do That?

Banks received TARP money in exchange for agreements with the federal government to offer back dividends, among other things. And now, some banks are flat-out not paying them anymore.

At least three small, cash-strapped banks have stopped paying the U.S. government dividends that they owe because they got $315.4 million in capital infusions under the Troubled Asset Relief Program [...]

Treasury spokeswoman Meg Reilly said Monday that "a number of banks" that got taxpayer-funded capital under TARP are no longer paying dividends to the government. "Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base."

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week.

Remember that whole "sanctity of contracts" that the United States cannot abrogate, during the AIG bonus debate? I guess that's no longer operative.

Yves Smith writes:

Plenty of folks, including yours truly, were skeptical of Treasury's claim, made often with a straight face. that the government was exercising care on who got TARP funding (as in it was not just handing out dough willy-nilly, but did have an eye to getting taxpayer dough back). That of course presupposes that the banks getting the money were just a little bit bad off, as opposed to in Serious Trouble (belied by the aggregate size of the effort) [...]

Given that there are no formal penalties for suspending TARP dividends, save a negative reaction in the markets, which would affect stock prices and borrowing rates, there consequences of missing payments may be de minimus. While three small banks missing payments is in theory no biggie, the action does point up the disconnect between the PR of TARP (protect the taxpayer) and practice (protect the banks). Even if the result of pressure to bolster capital levels, this precedent may encourage others to follow.

OK, if you still think the banks are solvent, let's just for one day pull the plug on all the special vehicles that the Federal Reserve and the Treasury Department and the FDIC have been offering these firms, and watch the entire financial system absolutely melt. What this means for the future is that we're propping up a sick system, just as Japan did in the 1990s, and their experience shows a lost decade with little or no economic growth, because the money dumped into the black hole of the banking system does nothing for the larger economy. That's why we're going to see 10 percent unemployment soon, that's why the so-called "real" economy is cause for such concern, and that's why those of us hearing about these "green shoots" are not impressed.

And I have to agree with Atrios- what exactly is recovering in this recovery if everyone is broke and out of work and the numbers for everything except Government Goldman Sachs bonuses are down? I understand that unemployment is a lagging indicator, so please don’t spam the comments with that (it is an insight so trite it ranks up there with “correlation does not equal causation.” Thanks. I had intro to stats as an undergrad, too.).

And I’m being serious. What exactly are we basing these claims of green shoots and recovery on other than pixie dust?

The root cause of this is the dysfunctional financial system, and that system is not being fixed. So the public suffers the consequences.