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Bank of America TARP Repayment: An Emancipation Proclamation?

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Shareholders are just at the beginning of its intimate relationship with the government.

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Since the beginning of the year, I've joked with my clients that at the top of Ken Lewis' daily to-do list were two simple words: Repay TARP.

For Mr. Lewis and his too-big-to-fail bank CEO brethren, it would appear that the immediate capital benefits of the TARP have been significantly offset by greater government involvement in daily bank operations, most notably compensation practices.

To read the media reports this morning, though, TARP repayment will bring Ken Lewis (and Bank of America (BAC) shareholders) a long-awaited liberation from the chains of government.

At the risk of raining on the parade, I'd offer that regulatory liberation is, at best, delusional -- particularly for an institution of the size and significance of Bank of America.

While technically Bank of America is no longer bound by the explicit rules of TARP, as the largest deposit-taking institution in the United States, the implicit contracts remain. And should it not abide by them, I have no doubt that any one of Bank of America's major regulators -- the Federal Reserve, the FDIC, the OCC -- would gladly introduce new regulations to "clarify" matters. (Never forget that "risk management" regulations are a very effective tool to address any number of objectionable items, including compensation.)

Finally, I think it's also worth remembering that, for good or bad, regulation runs in cycles that last decades in length -- not months or even years. I think it's fair to say that Bank of America as well as all other TARP and non-TARP banks, are just at the beginning of their more "intimate" relationships with the government.

To put it bluntly: Hell hath no fury like a regulator scorned.

And for those wondering what the future of banking looks like, I'd offer that one need only look at the nuclear-energy industry after Three Mile Island for a glimpse of what's ahead.

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Position in SPY, SRS, and JPM.
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