Los Angeles Tech Writer

In the news today, the Federal Reserve has "allowed" a handful of banks to repay their TARP (Troubled Asset Relief Program) funds.

That as a whole the TARP-recipient banks didn't lend was interesting, but predictable, given the TARP requirements. That they want to repay the funds as soon as possible to get out from under the attendant regulations is just slightly more prudent than applying for the funds in the first place. Nothing new there, then.

Although Congress somewhat trumped Mr. Geithner on the repayment rules when it passed the American Recovery and Reinvestment Act of 2009, that the Federal Reserve thought to keep the banks indebted for longer (e.g. not allowing them to repay the TARP funds) in order insure their "stability"...well, let's examine this logic.

I have always understood that the most stable, the most credit-worthy businesses and individuals were those that did not owe money, or at the least had revenue significantly greater than debt - the ability to easily service debt, or even better, to have none. The further from insolvency, the better the financial position. Am I not right? Apparently though, that is not the case if you ask Congress or the Federal Reserve.

Just exactly how is a corporation's financial stability strengthened if it:

1) accepts an enormous amount of money (repaid with interest, of course) to guard against future economic downturns, but

2) must liquidate its holdings and/or raise private capital (ahem, incur further debt) in order to bring its level of capitalization up, and cannot repay the borrowed funds until its creditor says it may?

Let's "stress-test" TARP using a different scenario.

You've taught your twenty-something son to balance his checkbook and to pay down his credit card each and every month. For a long time he does, and you're proud of him.

But as time goes by he spends a little beyond his income, carrying a balance on his credit cards that he cannot immediately service. He then invests in a sidewalk power-washing business that he outfits using credit cards. He now has a couple of employees and with business expanding needs to add more. But the credit card companies cut his limit in half, at which point he exceeds his credit line. His interest rates go into the usury stratosphere. He is upside down.

You sit him down and say, "Son, you need to change the way you are managing your fiscal affairs and I am going to help you."

Son says, "Wow, Dad, that's great! Tell me what I need to do."

"Okay. First off, a couple of my old friends are going to loan you some money. Actually, a lot of it. But I want you to hang onto it - don't pay off any of your bills."

"What?"

"That's right - just listen for a minute. You hang on to the money - don't use any of it. Then start selling your business stuff as well as your belongings, take a second job and save as much of that money as you can. My friends want to see whether you can amass sufficient capital to protect against something like this ever happening again. If you spent it, well, that would defeat the purpose, wouldn't it? So you have to hang on to what they give you, as well as whatever you get from your second job and the liquidation. But once you have enough of your own money, then you can pay them back. With interest."

"What?? I don't get it, Dad."

"Don't worry about it - they'll let you know how much you'll need to raise of your own funds. You just do what I've explained and everything will be fine. Oh, though there are a couple other conditions for this loan I should mention, though."

"What conditions?"

"Well, first of all, you can't take any bonuses from your business. And neither can your partners. Or your employees, really. So that means the bonus plan you were telling me about last week has got to go. And you can only take a maximum of $18,000 a year in compensation. And last year when you bought out your original partner? Well, you have to get that money back. And those new power washers you bought this spring so you could expand your business? You have to sell those.

"And you have to have an independent board review your employee compensation plan every six months or so. My buddies want to comprise that board, so they are going to want to take a look-see at your employee compensation to make sure everyone is focused on long-term rather than short-term results. So you'll have to get that written up. Oh, and that nice kid who's on a work visa that you were going to hire - I can't remember his name. You can't hire him - you'll have to find someone else.

"Also, you won't be able to do any traveling, like to that power washer convention in Vegas you told me about. No more fishing trips, and don't buy yourself anything nice. Same for your partners, until my buddies approve your request to pay back the money."

"Until they...what? I can't just pay the money back at any time?

"Oh, no, no. You have to wait until they say it's okay to pay it back. That will depend on general market conditions. But they will let you know."

"Uh, Dad, thanks, but I don't think I'm interested."

*******

Hopefully your dad would never do that to you. Which begs the question, why would our central bank?