The administration is expected to release the results of the stress tests this week. According to David Leonhardt, no banks will be judged insolvent. But some will be judged insufficiently capitalized. In other words, sick, but not dead.
And the Obama administration means to heal them without returning to Congress. One of the ways they'll do that is to encourage quick payback of taxpayer money from those banks that aren't underwater:
Banks that are deemed to be healthy would be given the chance to repay the money they borrowed from the government last year if they met certain conditions. The conditions could include showing that they would still be healthy after the repayment; could issue long-term unsecured debt without government guarantees; and could raise money in equity markets. Repayment would allow the Treasury to reuse the money to help weaker banks.
It certainly appears to be the case that Congress's skepticism towards further TARP appropriations has generated a lot of creativity in the Treasury Department. The question is whether it's healthy creativity. It's not clear that it's a good thing for the Treasury Department and the banks to both have an incentive to see the TARP money paid back early. If that money comes back too quickly, the banks could be excessively fragile. But if some banks are rushing to repay, that creates an incentive for other banks to do the same: It will be taken by the market as a sign of economic health. Creditors will be fearful of the laggards and good young talent will flow to their competitors. It's basically what Goldman Sachs tried to do a few weeks ago, and Geithner seemed none too pleased by the stunt. Now, however, he appears to be making it official government policy.
Update: Zach Carter thinks this might not even be legal.
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