Monday, February 23, 2009

The Unintended Consequences of Gov't Intervention

As part of Senator Chris Dodd’s last-minute amendment about executive compensation, he put in a provision making it easier for the banks to pay back the TARP money to the government.

On Friday, according to Michelle Caruso-Cabrera, Standard & Poor’s said the Dodd provision changes the way they view the QUALITY of TARP money. The credit rating agency, which determines the ratings on the banks and decides whether a bank lives or dies, says the provision means that capital is on no longer "permanent" in their eyes. That's crucial because, as a result, they are no longer going to use it when determining certain capital ratios.

With weaker capital ratios, banks will have a tougher time convincing the ratings agencies they are in good financial health.

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