How Did Banks, in Dire Straits Just Last Year, Pay Back TARP Money?

BY Jeffrey Brown  December 28, 2009 at 10:12 AM EDT

bank; via Getty Images

Question: Hi, Paul. I really enjoy your attempts to make this banking mess clear to us. My big question that I don’t seem to be reading anywhere: If most of the banks were in such dire straits last year about this time that they needed so much TARP bailout money, WHERE did they get the billions to pay it all back within a year? From fees? From China? From fancy accounting and book cooking?

We all know the reason they wanted to pay back — so they wouldn’t be under more federal regulations. Maybe you can find this out for us and make it clear too.

Paul Solman: Several sources. Fees, sure. Also their usual “profits” on loans, from which they don’t have to subtract loan losses they’d otherwise incur, now that “mark-to-market” accounting rules have been suspended.

And how about this too: Banks can issue their own debt at relatively low interest rates, since the Fed is keeping rates at rock bottom. The banks then invest that money in something that pays a little more.

In addition, banks can make a few bucks by redepositing money with the Federal Reserve, which pays them 0.25 percent a year in interest. May not sound like a lot, but last I looked, U.S. banks had nearly a trillion dollars on deposit with the Fed. One quarter percent of a trillion is $2.5 billion dollars.

And banks have sold new stock to the public. Citibank just raised $17 billion dollars this way – money explicitly dedicated to paying back the government and getting Uncle Sam off Citi’s back.