Treasury Secretary Tim Geithner, fresh off of getting walloped by Treasury Department lawyers telling him that he can’t exempt PPIP players from pay caps just because he wants to, may be in for another legal wake-up call.
Geithner has said that he’ll employ a broader range of criteria for evaluating whether banks such as Goldman Sachs and JP Morgan will be permitted to repay their TARP financing. It won’t just be about the health of the individual bank. He plans to evaluate a potential payback based on “the overall health of the financial system and the flow of credit.” The message was clearly directed at Goldman and JP Morgan and it read: You may not be able to get out from under the TARP.
Does he have the legal authority to create the criteria for paying back TARP money? Almost certainly the answer is that he doesn’t have this authority. Geithner’s assertion of this authority is over-reaching, and perhaps a troubling indication that Geithner doesn’t understand that his authority is limited by law.
The American Recovery and Reinvestment Act actually goes out of its way to prohibit this kind of “systemic” criteria. Nemo and Felix Salmon point us toward the Division B, Title VII, Sec. 7001, SEC 111(g) of the American Recovery and Reinvestment Act of 2009.
NO IMPEDIMENT TO WITHDRAWAL BY TARP RECIPIENTS.—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 about as clear of a statement of anyone could hope for. Far from giving Geithner the authority to reject the TARP payback, it seems to prohibit the Treasury from imposing these new systemic requirements. “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,” Salmon concluded after reading that statement.
We suspect that, if it has even been considered, the Treasury might be hanging its hat on the lead-in phrase “Subject to consultation with the appropriate Federal banking agency” to impose the systemic test. That’s more than the phrase will bear. A more natural reading would be that the right to pay back the TARP might turn on the health of the individual bank. And, even if that is the case, it seems to empower either the FDIC or the Fed to determine whether the TARP can be repaid rather than the Treasury Secretary.
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