Can Geithner stop banks withdrawing from TARP?

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.


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