No matter how healthy an individual bank may be, the government may not let it pay back the bailout funds, the Wall Street Journal is reporting. Instead, the Treasury will consider the overall health of the banking system. What this means is that the healthiest banks may find themselves TARP hostages of the unhealthiest banks.
In an interview, Mr. Geithner laid out some broad principles, including the need to consider the overall health of the financial system and the flow of credit in judging whether banks can repay their government investment. Among large banks, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. have both said they want to repay the government.
“We want to make sure that the financial system is not just stable, but also not inducing a deeper contraction in economic activity. We want to have enough capital that it’s going to be able to support a recovery,” Mr. Geithner said.
In a sense, this is just the logical conclusion of the logic of systemic risk. The bailout wasn’t meant to rescue any individual firm but to avoid systemic failure. Once you are following that line of policy, there’s no reason the interest of one firm’s managers, creditors or shareholders should be allowed to re-introduce systemic risk by exiting the TARP system. If it sounds perverse that it is now government policy to prevent the market from figuring out which financial institutions are the weakest and to force the strong hands to drag along–or, perhaps, be dragged down by–the weak hands, well you haven’t internalized the logic of the bailout yet. “We all drown together” as someone once said.