Running The TARP On A Whim And A Prayer

Banks like Goldman Sachs (GS) are saying they want to pay their TARP loans back. They are financially healthy and don’t want the government restrictions that being in the program brings.

The Administration believes that it is the best judge of whether to allow the money to repaid, which means bank executives at public companies once again have little control over their fates when it comes to the government’s desire to micromanage the credit system.

The Treasury Secretary has come up with some criteria of his own and he plans to apply them to the evaluation of whether individual financial firms can send the government a check. According to The Wall Street Journal, “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.”

Since the Administration does not have a reasonable picture of how much the government’s tax revenue and deficit will be over the next two years and private economists cannot, in most cases, make accurate guesses about when the recession will end, it is hard to see how the Secretary will know that it is safe for banks to go back in the water without their federally provided flotation devices.

Deciding what represents a “stable” financial system cuts both ways and the Administration should know that. The banking system may face another round of trouble if too large a portion of the TARP is paid back and financial firms suddenly need capital, but the government could use that taxpayer money from Goldman Sachs as dry powder if other sectors of the system become troubled. There is a great deal of talk that the large insurance companies will need cash. The Treasury may not be able to run to Congress for those funds. Having the repaid TARP funds might come in handy.

Geithner says that he know best, or at least better than anyone else, what the future of the American financial system looks like. But, based on his past predictions about things like the demand for the purchase of toxic bank assets under the new public money/private money program, he has shown that his forecasts can be well off the mark.

Douglas A. McIntyre