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According to The Wall Street Journal, Timothy Geithner has indicated that the health of individual banks won't be the sole criterion for whether financial firms will be allowed to repay bailout funds. But as Felix Salmon writes, it's not clear that he has the authority to impose new conditions on TARP participants. The relevant line in the law isn't too hard to parse:
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.So we're watching a collision between Timothy Geithner's preferences and Goldman Sachs's incentives. Geithner wants to maintain order in the financial sector until the chaos ease and confidence returns. Goldman wants to slip out of TARP early in order to be the first bank back standing. There's a lot of money to be made from that reputational boost. But if they do that, and reap all the profits, then others will feel pressured to follow, even at the potential cost of their fiscal health. Salmon notes that "in normal times, no bank would be remotely inclined to do something which the Treasury secretary has quite explicitly told them he doesn’t want them to do. But these of course are not normal times, and this is going to be an interesting test of Geithner’s control over a fractious Wall Street. If he lets Goldman and JP Morgan withdraw early from the TARP any time soon, he’s going to be seen as very weak for the foreseeable future." It's also worth saying that Goldman's efforts here really undercut any claims that Wall Street feels a social responsibility in the aftermath of the collapse. Goldman's decision to jailbreak from the Treasury Department will make it far harder for the government to stabilize the financial sector. That's not to say it's a bad decision for Goldman, and obviously Goldman doesn't owe anything to anyone save its shareholders. But those who suggest Wall Streeters are in the game due to a love of functioning capital markets (and yes, I have heard this lately) are now watching a Wall Street firm choose short-term profits over functioning capital markets.
