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Uncle Sam Economy: Not Exactly a Level Playing Field

Posted by Larry Doyle on June 9, 2009 8:08 AM |

As we navigate the landscape of the Uncle Sam Economy, we will soon realize that the “playing field” is anything but level. What does this mean? How can we most appropriately manage? Will there be opportunities? Let’s break out our compass and project what is on the horizon.

As Bloomberg reports, U.S. Said to Plan Approval for 10 Banks to Repay TARP:

The Treasury is preparing to announce today it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.

JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.

Allow me to provide further color:

1. Why are these institutions keen to repay TARP funds, which are widely held to be a cheap source of funding?

As none other than Pimco’s Bill Gross said of Uncle Sam, “don’t turn your back on him.”  I would agree. Uncle Sam is not a good business partner. His agenda runs much farther afield than the bottom line focus of these institutions.

Make no mistake, the greatest motivation for these institutions to repay TARP funds is to be freed from the shackles of compensation controls. The major assets of financial institutions ride down the escalator and go out the door every evening. Operating under compensation caps is a surefire way for an institution to achieve “extreme mediocrity” over the long haul. Why?

The strongest employees will gravitate toward more attractive and financially rewarding opportunities.

2. From an investment perspective, how should we think of TARP recipients versus prospective non-TARP recipients?

In my opinion, the non-TARP institutions will be viewed much more as “growth” opportunities. Why? They will be able to more aggressively allocate capital and take risk unencumbered by Uncle Sam and his minions.

The TARP recipients may very well gravitate more toward a utility-type of business in which they provide basic services while simultaneously fulfilling elements of Uncle Sam’s social agenda.

Geithner, Bernanke, Obama and team will discount this reality but I believe it is a strong likelihood within the financial industry, much as it will be within the automotive industry.

3. From a borrower’s perspective, how should we think of TARP recipients versus non-TARP recipients?

Perhaps initially there will not be much disparity in the relative pricing of different products, but I do believe the disparity will grow over time. All we need to do is review the undercutting of prices within the insurance industry by AIG to see the potential for the same within the financial industry. As borrowers, we will likely have more opportunities to comparison shop going forward. It is not inconceivable that certain non-TARP institutions decide to exit select businesses as pricing becomes non-economical.

4. The greatest question remains, will any of these institutions, both TARP and non-TARP alike, ever be allowed to fail?

The fear of failure at one point was the greatest motivator for innovation and real long term success. Having violated this moral hazard by unprecedented margins, the cost to capitalism will only be known far down the road.

As such, the need to prudently and proactively navigate the economic landscape will remain of paramount importance. The need for Sense on Cents will grow ever stronger.

That’s a good thing!!


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