Preventing Banks From Repaying TARP Is Pointless

So the Treasury has decided that banks like Goldman Sachs (GS), which claim they’re ready to cut a check and repay TARP, won’t be allowed to return the money just yet. Only once it’s determined that such a move would be “in the national interest,” whatever that means, will they be able to do it.

In other words, if it makes another systemically important bank look bad, then they’ll have to keep the money.

Megan McArdle has problems with this idea:

I’m not clear what the point is.  At this point, everyone knows which of the systemically important institutions can probably repay the money, and which of them can’t.  Perhaps the idea is to keep Goldman from carrying out its purported plan to bust the compensation caps and thereby poach top talent from the other firms.

On the other hand, this seems certain to discourage financial institutions from participating in any future Treasury programs. 

One reason why some observers have opposed TARP repayments is that Goldman Sachs would still enjoy implicit (or explicit, even) backing from the Treasury. This is undoubtedly true. Goldman is clearly too big to fail, with or without TARP, and the government has a policy of “no more Lehmans.”

Now if there were some plan where the Treasury said, “We’ll back you with TARP capital until you’ve slimmed down and changed your business so that you’re no longer to back to fail,” then sure, Goldman hasn’t done that yet. But Treasury hasn’t made that demand. That’s not the plan. The goal is to have no more failures, not to have institutions that can safely fail.

So there’s no good reason other than not wanting to make some banks look bad not to let Goldman repay the money. And as Megan notes, we already pretty much know which ones look bad and which ones don’t.

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