Goldman Sachs says they’re ready to pay back TARP money, but what happens once they do it?

To some of you I’m sure there is nothing that gets your jollies going better than a juicy headline from the likes of Perez Hilton.  While infatuation with Hollywood celebs requires a certain amount of mental retardation, my RSS readers point to similar stories that take place on Wall Street.  Yes there are sites like these.  The buzz lately has been about banks paying back the TARP money.  Goldman Sachs says it’s ready, and JP Morgan wants to do the same, referring to TARP money as a “Scarlet Letter.”  But the Treasury department seems to be reluctant in allowing Goldman the opportunity to pay it back.  Why?

As JP Morgan pointed out, having TARP money brands you as a bank that needs some serious help.  From the tiniest banks to the largest institutions everyone has complained that taking TARP money has given them a bad brand.  Companies that are able to pay back the TARP money will be able to reestablish their brand as stable; this will not only bring in new business, but also top talent from the other banks.  Why top talent?  Aside from everyone wanting to work for a stable company, not being under the trap of TARP means you compensation can no longer be restricted.

So the Treasury doesn’t want to give one bank an advantage over another, and the Treasury may try everything they’ve got in order to force banks to keep the TARP money.

But let’s assume that the Treasury DOES allows the banks to pay back the money.  What happens then?  One would assume that since the government had to borrow money to fund the TARP fund, they would retire the debt.  One would of course be wrong, one is an idiot for making such an assumption. Imagine the banks are one person, and TARP is a credit card with a $700 billion limit.  When you pay off your card every month (as you should) does your bank close down your card or do you just have that much more to borrow again?  That’s right, TARP is not a loan, it’s a line of credit.  If Goldman Sachs were to pay off the $10 billion they borrowed, it would simply become another $10 billion the government can loan out again.  As it stands right now the Treasury has about $135 billion left, so this would just make it $145 billion.

Well that is okay I guess so long as the debts are paid off once the TARP shuts down for good.  That’s not going to happen either (what’s with your bad assumptions?).  The way the law is written now, that money will simply be treated as normal income by the Treasury and go into the big pool of the federal budget.  This way it will get treated as pork, likely going to help pay for tattoo removals in Mission Hills, California.

It’s possibly that TARP money won’t find it’s way into the normal budget.  Congress wrote the rules and they sure can change them if they want.  Perhaps the money will go towards setting up a new agency that will lend money to the banks if needed in the future.  I mean, we’ve already got the Fed and FDIC that can do that, and obviously the Treasury is capable as well, but it sure wouldn’t hurt to have a 4th one too.  Knowing our government this is to be expected.

Now much of this is highly opinionated, so I want to make sure you get the facts out of this:

  • Goldman Sachs wants to pay back TARP, the Treasury might not let them.

  • Paying back TARP does not mean the government will retire the debt, there is no stipulation for that.

Should the government decide banks can pay back the TARP loans, I suggest they do it in a grand fashion.  You know how when people win big amounts of money there is a huge PR thing and they hand over one of those giant checks?  I think that’s how banks should pay back TARP money.

Photo:cindy47452, Jeff Foust

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categories: banking, government