Can Geithner stop banks withdrawing from TARP?

By Felix Salmon
April 21, 2009

Tim Geithner is sensibly laying out pretty strict criteria for when he will allow banks such as Goldman Sachs and JP Morgan to repay their TARP money. It’s not enough that the banks themselves be healthy, he tells the WSJ: he will also consider “the overall health of the financial system and the flow of credit”.

I’m happy about this: the healthier banks were slated for inclusion in the TARP program for a reason, and that reason hasn’t gone away. What’s more, banks like Goldman and JP Morgan seem to think that repaying TARP funds will give them an artificial advantage over the rest of the big players, especially when it comes to things like executive compensation. Is there any reason for the government to let them have that advantage, when their too-big-to-fail status gives them an automatic “Geithner put” in the event they blow up?

Still, relations between Treasury and Wall Street are not healthy right now, and Nemo has been checking out Division B, Title VII, Sec. 7001, SEC 111(g) of the American Recovery and Reinvestment Act of 2009 (scroll down a bit here to find it):

Subject to consultation with the appropriate Federal banking agency (as that term is defined in section 3 of the Federal Deposit Insurance Act), if any, the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP to such financial institution, without regard to whether the financial institution has replaced such funds from any other source or to any waiting period, and when such assistance is repaid, the Secretary shall liquidate warrants associated with such assistance at the current market price.

That’s pretty unambiguous: Goldman and JP Morgan can pull out unilaterally if they’re so inclined — and if they’re foolish enough to want to seriously annoy the government.

In normal times, no bank would be remotely inclined to do something which the Treasury secretary has quite explicitly told them he doesn’t want them to do. But these of course are not normal times, and this is going to be an interesting test of Geithner’s control over a fractious Wall Street. If he lets Goldman and JP Morgan withdraw early from the TARP any time soon, he’s going to be seen as very weak for the foreseeable future.

21 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

You raise an interesting point- this could concievably turn contentious if JPM and GS insist on paying back the funds without Geithner’s blessing, but I have a feeling a compromise will be reached. It’s not in anyone’s best interest to put a line in the sand- the banks certainly can’t afford any more negative publicity, and the Treasury could use the repaid funds at this point.

Agree with above comment, Treasury will need the money sooner rather than later, and doesn’t to go back to Congress, common sense will prevail.

“artificial advantage”? What artificial about an advantage resulting from the fact that they’re relatively well capitalized and more profitable than others? That’s as natural an advantage as can exist in a capitalist system.

Maybe it would be better to prevent them from paying back the funds. To support that view, however, you’d have to argue that an artificial handicap is a good idea.

I think it’s time you read Atlas Shrugged…

Posted by Fred | Report as abusive

i hope the government help people ,instead banks who take our money and increase (APR) for the credit,and also cut these credit then people can going to buy and then we have chance to let the factory work and production increase

Posted by victor | Report as abusive

This is what happens when public companies allow the federal government in to their business. The reason many banks now want out of TARP is because the Feds changed the rules after the fact. They should sink or swim on their own. None of this too big to fail stuff.

Posted by BubbaRight | Report as abusive

Geithner can always convert the TARP debt into stock if he doesn’t want it to be paid off prematurely, can’t he?

Posted by Bob | Report as abusive

Bob –

As a minor correction, the TARP injections are not “debt”; they are preferred shares.

There are two problems with your suggestion. First, the preferred shares are not convertible into common stock. Treasury can offer to convert them, but it would be up to the bank whether to allow the conversion. Second, converting to common gives up even the pretense that the taxpayers will ever be repaid.

Of course we all want the money to be repaid, but not until the system has healed. A few financials reporting earnings that are half faked and half the result of arbitraging Fed-fixed with market interest rates does not count as “healed”.

The only reason Goldman wants to repay the TARP is to get out from under any Congressional interest in their executive compensation. Never mind the $13 billion stealth transfer via AIG, the $30 billion they have issued in FDIC-insured debt, the arbitrage between loans from the Fed at 0.5% and longer-duration government bonds… All of which represent injections of taxpayer wealth. Goldman figures if they repay just the $10 billion in the TARP, they can continue to suckle from the public teat without any “interference” from Congress.

Oh, and Fred, in “Atlas Shrugged” did the Masters Of Industry only survive because they were receiving hundreds of billions of dollars in explicit and implicit government subsidies? I guess I missed that part.

@Nemo – In Atlas Shrugged, the world went to hell because leaders of industry allowed feckless bureaucrats to tell them how to run their businesses. Maybe you should read it.

At the risk of repeating myself…

These companies are receiving over $1 trillion of taxpayer-funded life support. If they were “left alone”, they would be BANKRUPT.

Ayn Rand was insane, but even she did not advocate handing hundreds of billions of dollars of taxpayer money to failed businesses, I don’t think.

Nemo, they ARE bankrupt. They’re not going to get better. And you clearly have zero awareness of Ayn Rand’s work – so if you want to avoid beclowning yourself further, either refrain from talking about it or read one of her books.

Let the banks pay the money back with the warning that the only thing certain in the future is that they will not receive another dime from the Treasury during Obama’s presidency. Good luck and have a nice day.

Posted by vachon | Report as abusive

instead of tarp maybe it should be called trap.remember the song hotel california……you can check out anytime you want but you can never leave.

Posted by jlh | Report as abusive

Let any/all repay, BUT…

1) such entity may NOT under ANY circumstance receive any government assistance for a period of five years
2) any guarantees by any government agency — Treasury, FDIC, etc. — on any existing borrowings of that entity get voided

So, if they don’t think they need any help — or want any help — that’s fine, but let’s take away ALL the benefits and eliminate the “Geithner put”

Posted by TANSTAAFL | Report as abusive

They should be in bankruptcy. This is all crap.

Posted by jason | Report as abusive

let them withdraw from the TARP….but not before paying for the CRAP they done…with a loan repayment penalty fee for early repayment worth…errrrrrrr 1.5% worth 30 billion…on the top of the interest the two trillion that would bring to the Treasury (worth some 525 billion for the seven months the monies were used).

So gents from Ivi League educated at the dirty tricks school, pay back to the taxpayers chest the above dosh, not just the principal.

Douth the little tax dodger would push them though…at teh end of the day, they are part of the same gang.

Posted by McChavelli | Report as abusive

Considering the irresponsible acts of this Obama and his admin (Obama)– still in campaign mode and not governing…, and they want to use TARP to promote a Socialist/Marxist agenda so that Feds can take over Banks, it’s only wise for GS (Goldman Sach), JPM (JP Morgan) want out of TARP system, especially since the rules are being used to undermine banks.

Posted by Herb | Report as abusive

So why haven’t the banks given the TARP $$ back already? If Felix can find this provision, surely the banks’ lawyers can — if they didn’t get it inserted in the first place.

Geithner can stop banks giving the money back by explicitly withdrawing the Geithner put; making a public statement that to give the TARP $$ back is to reject Government help; that a bank that rejects Government help is on its own and that its counterparties should understand that. A nuclear option, if you like.

But Geithner doesn’t have to do that. He can privately tell bank CEOs that if they go beyond talking about giving the money back, if they actually begin consultation with the appropriate party, he’d be forced to make such a public statement. That would be enough. If he told them that, they’d be limited to making statements about how they really wanted to give the money back — unless they wanted to call his bluff.

Perhaps he’s already quietly made such a threat.

I find it laughable that we are saying that these banks cannot be “forced” to keep the money while they claim that they didn’t actually need or want the money but were “forced” to take it. They were forced to take it but can’t be forced to keep it. Strange. Very strange.

Posted by Tom Cole | Report as abusive

Nemo,

GS and JPM took the money not because they were in trouble but because Paulson was worried about the signal it would send to the entire economy about the one bank that REALLY, REALLY needed the help: Citi. That was exposed pretty quickly and almost immediately after taking the funds Jamie Dimon at JPM began talking about paying it back ASAP. It was only after the government changed the rules in the middle of the game that it became more urgent.

this is a test

Posted by test | Report as abusive