Announcing a third-quarter operating loss, the government-owned automaker said it would begin paying down its $6.7 billion debt to the U.S. government ahead of schedule. Most financial experts would agree that paying off debt is a good thing.

The government extended almost $50 billion in financing to GM but agreed to convert most of that into a 61 percent equity stake in the automaker. A congressional oversight panel said the government was unlikely to recover all of the financing it provided GM.

Banks that paid off their government bailouts early were able to shrug the pay czar off their backs and return to the time-honored practice of paying their executives whatever they pleased. It’s unclear whether GM will be able to do the same once it pays off the government. After all, taxpayers will still be majority shareholders after all debts are paid. Ken Feinberg may well wind up with a desk at GM’s HR office.

So why pay this money back before it is due? It’s not as if the prepayment is being funded from genuine earnings. In effect, GM is using money borrowed from taxpayers to pay them back. With expectations so low, and markets gradually accepting that the worst may be behind it, is this trip really necessary?

How long will it take the U.S. government to disentangle itself from the financial services sector?

More than 16 years, according to a new Piper Jaffray paper.

“The more likely answer may be that the U.S. government may never be fully repaid,” reads the paper, “Opportunities for Private Equity in Financial Services,” released last week.

The estimate is based on assumptions, including that $3 trillion of U.S. government funding has to be fully repaid and no addition funds are drawn from $23.7 trillion in commitments. 

For private equity investors, who are the focus of the paper, that’s the new reality to keep in mind when making decisions about invesmtents in this field.

“The U.S. government’s direct stakeholdings in the financial services sector will persist for many years and private equity investors should be prepared for the U.S. government’s involvement to span multiple investment, economic and political cycles,” it reads.

Still, the industry that includes banks, insurers, specialty finance and financial technology companies is likely to present ample opportunities for private equity to invest, according to the 49 page report, which also includes a sector-by-sector update on the state of affairs.

“We believe that in this period of extinction, re-birth and evolutionary change, the financial services sector will present many complex challenges for private equity investors but those will be outweighed by extraordinary opportunity,” the paper reads.

An almost heart-warming effort is being mustered by CIT bondholders to keep the troubled lender from getting put under the TARP or stumbling into a much-anticipated bankruptcy. Some $3 billion in survival cash is seen in the pipeline — money that could strengthen CIT’s finances and allow it more time for a debt restructuring. An announcement is expected before the markets open this morning.

What kind of terms might bondholders extract from CIT? Before TARP was modified to target executive pay for those who sought its shelter, banks such as Citigroup and then-independent investment house Merrill Lynch paid what were seen as shockingly high terms on mandatory convertible debt. They were the kind of rates Citi customers paid on credit cards; nothing like traditional bank funding rates.

So, a CIT deal could, and perhaps should, come with a variety of stringent terms. If these are effectively passed on to desperate small and medium-sized businesses that CIT serves, the cost of this rescue could be blamed for stifling the recovery.

CIT, the small-business financing company that provides funding for airlines, railways, retailers and manufacturers, should have little trouble securing some kind of government aid, whether in the form of a short-term loan, as seems to be the most likely scenario, or even a TARP or FDIC bailout.

Public antipathy toward bailing out financial companies was pretty much exhausted months ago. Plus, with banks still skittish about lending, CIT serves a clientele that has both ready demand and strong support in conservative corners of Washington that have long touted small business as their base.

The more hearty free marketers say CIT clients will be able to find funds elsewhere if the company does go under. But in the current environment, might a government agency be just as likely to fill that role as the banking sector?

CIT, the small-business financing company that provides funding for airlines, railways, retailers and manufacturers, should have little trouble securing some kind of government aid, whether in the form of a short-term loan, as seems to be the most likely scenario, TARP or even the FDIC.

Public antipathy toward bailing out financial companies was pretty much exhausted months ago. Plus, with banks still skittish about lending, CIT serves a clientele that has both ready demand and strong support in conservative corners of Washington that have long touted small business as their base.

The more hearty free marketers say CIT clients will be able to find funds elsewhere if the company does go under. But in the current environment, might a government agency be just as likely to fill that role as the banking sector?

As several large banks rush to the market to raise capital, one question remains: What’s the correlation between their ability to raise equity now and their strength in the face of a deeper recession if the early signs of a possible recovery prove false?

This morning Morgan Stanley joined the bandwagon of banks raising capital to pay back TARP. The Wall Street bank said it intends to raise $2.2 billion in common equity to satisfy a supervisory condition to enable it to redeem TARP preferred capital. It follows JPMorgan Chase and American Express, which announced their plans Monday.

The offerings come after the Fed said Monday the government will announce next week which of the 19 stress tested banks will be allowed to repay the funds. One condition for repayment is that they are able to raise money in the public equity markets.

But these banks are raising money at a time when investors are betting on a recovery. The S&P 500 posted its highest close in seven months on Monday, as reassuring economic data reinforced hopes that demand will stabilize. The Dow climbed to its highest finish since January.

The stress-tested banks have already been tested for their ability to deal with a steeper downturn. So what does their ability to raise capital in this market really prove?

News that top investment banks want to pay back their TARP funds is welcome news for the M&A market. Though the tens of billions of dollars in capital that will slosh out of the banks and into government coffers may sap the banks of the funds to make big buys, the fact that most post-stress-test capital-raisings have gone smoothly must be encouraging for dealmakers.

Plus, banks that are unable to pull themselves from the government teat will have a whole lot less pricing power. It was interesting to see HSBC commenting on Tuesday that it expects industry consolidation in the second half of this year and in 2010. Though they may be looking more closely at non-U.S. assets, given the burns on their fingers from their foray into the U.S. mortgage market, that big global may sit out the next round of mergers. Will they be missing the boat, particularly given the conviction of many analysts that the U.S. economy will be the earliest to recover?

A key question that could rain on any M&A party is asset quality, and the radiation emitting from the toxic assets still poisoning the financial system. While most of it has been moved to the bomb shelter balance sheet of the U.S. taxpayer, there is little conviction that valuations will have the golden glow of yesteryear, and plenty of lingering fear that the glow is the toxicity of the lost decade.

Not much rides on Goldman Sachs‘ success at shedding TARP – just the future of Wall Street, the recovery of the U.S. and global economies, and saving whatever shreds remain of the American Dream. Though it may take some financial finagling to extricate itself from the government’s grip, Goldman’s storied stable of financial savants is as capable as any of casting off the yoke of socialism.

For Wall Street, Goldman fights for the right to pay people whatever the market will bear, enshrining the guiding principal of the marketplace that it is not how much money one earns, but how much more than the other guy. For the economy, everyone knows we need a healthy banking sector to run our particularly high-octane form of capitalism. As for the American Dream, what this country needs most in this time of financial peril is a hero, someone who can stand up to the regulatory Frankenstein shambling from the wreckage of such spectacularly failed government efforts as AIG and Lehman Brothers.

The only question really for Goldman shareholders is how big a bonus Lloyd Blankfein should get if he manages to achieve these lofty goals.

Christopher Kaufman; DealZone Editor

Deals of the day:

* Hong Kong Hotel and property owner Harbour Centre Development said it would sell its equity stake in a Hangzhou property firm to Chinese real-estate developer Greentown China Holdings for 1.3 billion yuan ($190.2 million).

* Cement equipment provider China National Materials Co will pay 1.01 billion yuan ($147.8 million) to its parent company for cement producer NBM, the firm said.

* Avocet Mining said it plans to buy Oslo-listed Wega Mining ASA for about $78.4 million in shares in a move that would create a gold company with annual output of almost 300,000 ounces.

* Telecom operator Tele2 said it would form a joint venture with Nordic rival Telenor to build a fourth generation mobile network in Sweden.

* A proposed buyout of eBay Inc’s Skype led by private equity, including Warburg Pincus and Kohlberg Kravis Roberts, and the Web telephone company’s co-founders is unlikely to be completed, the Wall Street Journal cited sources as saying on its blog on Monday.

* Total SA boosted its hostile takeover offer for UTS Energy Corp by more than a third to C$1.75 a share on Monday, though its sweetened offer was quickly branded as inadequate by some of the Canadian oil sands developer’s biggest shareholders.

* BT Group, the British telecommunications carrier that holds 31 percent of India’s Tech Mahindra, said it backed its affiliate’s plan to acquire a stake in scandal-hit Satyam Computer Services.

(PHOTO: Lloyd Blankfein (R), CEO of Goldman Sachs, walks by the New York Stock Exchange in New York October 10, 2008. REUTERS/Shannon Stapleton )

Given his bank gobbled up the biggest broker on Wall Street and the biggest mortgage lender in the country, one can be forgiven for thinking Bank of America’s Ken Lewis is talking his book. After all, going on CNBC and sounding confident is his primary role right now, with the days ticking down to the release of first-quarter results on April 20 and the bank’s annual meeting nine days later.

In the network’s lengthy interview, there wasn’t much said about shareholder pressure to unseat him after eight years at the helm of the bank. And, having taken $45 billion of federal bailout money and absorbed Merrill Lynch and Countrywide, he had little incentive to talk about bold measures at this point.

The Wall Street Journal says Lewis is set to sell the bank’s Columbia Management unit and may be looking to unload First Republic Bank, though it is not considering a sale of its stake in hedge fund BlackRock. While he spoke earnestly about repaying taxpayers, repeating his regret at having tapped TARP as heavily as he did, Lewis said it would be several quarters before the bank could do so.

That assumption appears to assume the U.S. economy is showing more than only a false bottom right now. The odd pop in housing prices here and there, and a month of somewhat less shockingly dismal auto sales figures, have convinced Lewis to buy into the recovery theory currently making its way through the markets. “We’re at a point where you’re seeing mixed signals, just small mixed signals, some housing sales a little better than you’d think, or some car sales not being quite as bad as you’d think,” he said. “It signals that you’re getting close to the bottom.”

Deals News:

* Norwegian engineering group Aker Solutions will buy shares in four companies from Aker to strengthen its position in offshore and energy, the two companies said. Aker said Aker Solutions will pay 1.39 billion Norwegian crowns ($205.9 million) for shares in the companies.

* Dow Chemical completed its more than $15 billion acquisition of Rohm and Haas, and immediately sold Morton Salt as part of a plan to scale back debt stemming from the merger.

* Sanofi-Aventis has bought Mexican generic drugmaker Laboratorios Kendrick as part of its strategy to expand in emerging markets, the French drugmaker said.

* Belgian semiconductor specialist Melexis is to buy the vision business of Sensata Technology in a deal expected to close by the end of this month.

* Elpida Memory said it was considering letting Taiwan Memory Co (TMC) take a stake of around 10 percent in the Japanese PC memory maker in a move to cement their new partnership.

(PHOTO: Ken Lewis, Chairman, Chief Executive Officer and President of Bank of America, speaks during the Wall Street Journal Deals and Dealmakers conference, in New York, June 11, 2008.  REUTERS/Chip East)

Potential buyers of a large AIG business could be the latest to get some “relief” under the $700 billion Troubled Asset Relief Program (TARP).

In approving a revised AIG rescue package, the government has also agreed to give potential bidders of the insurer’s assets at least a bit of what some of them have been clamouring for – access to capital.

AIG has received significant interest from buyers for its aircraft leasing unit, International Lease Finance Corp, Chief Restructuring Officer Paula Reynolds said.

But despite the interest, the process is taking time as bidders look for the funds to pull off a deal. The company has $33 billion of debt, some of which starts to mature in October. It had a book value of about $7.5 billion as of Sept. 30.

Before AIG tanked in September, ILFC had it good, with access to the insurer’s blue-chip credit ratings. Now, the loss of those ratings along with the upheaval in capital markets would force any bidders for the unit to think carefully not only about how to finance the acquisition but also how to run it on an ongoing basis, not an easy task as the financial crisis persists.

But to potential bidders’ relief, AIG will consider using some of its new $30 billion equity commitment from TARP to help with ILFC debt that comes due this year, if – as a source with direct knowledge of the matter pointed out – that becomes an impediment to the unit’s sale.

(Photo: REUTERS/Eric Thayer)