US to put conditions on Tarp repayment

The purpose of government intervention in private corporations was to prevent a collapse of the financial institutions and credit-intensive manufacturing corporations. Now it appears that the government, having gotten a taste of controlling the private sector beyond laws and regulations, does not want to give up control.

The excuse is that the government wants to be certain that these institutions and corporations are financially sound again. Then, when there is evidence that is the case, the government rejects the evidence and says it want to be really certain....

US to put conditions on Tarp repayment

By Krishna Guha and Daniel Dombey in Washington

Published: April 19 2009 23:31 | Last updated: April 19 2009 23:31

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

“Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.”

His comments come as Goldman Sachs, JPMorgan Chase and other relatively strong banks are pressing to be allowed to repay their bail-out funds. On Sunday, Lawrence Summers, President Barack Obama’s top economic adviser, told NBC’s Meet the Press that repayments could eventually help the government provide further resources to help the sector. Such a move could also allow healthier institutions to differentiate themselves from weaker banks and free them from constraints on executive pay, and other activities, that come with bail-out money.

“Not surprisingly different banks are in different situations; they are going need different levels of assistance of taxpayers,” Mr Obama told a press conference at a summit in Trinidad on Sunday, while promising: “I’m not going to simply put taxpayer money into a black hole.”

The official, meanwhile, said banks that had plenty of capital and had demonstrated an ability to raise fresh capital from the market should in principle be able to repay government funds. But the judgment would be made in the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”.

The official said former Treasury Secretary Hank Paulson was right to treat all the banks the same way in late 2008 at the peak of the crisis but it was now necessary to differentiate more between institutions. Stronger ones should be encouraged to raise more capital, while the government would target its interventions to support weaker ones.

“What we want is for the differentiation to be more based on knowledge rather than some big uncertainty.” He said the bank stress tests reaching completion would provide that basic information.

The debate over the respective funding needs of stronger and weaker banks comes as the Obama administration confronts deep political resistance to any further authorisation of federal funds to bail out the sector. On Sunday, Rahm Emanuel, Mr Obama’s chief of staff, told ABC that while some of the country’s biggest banks “are going to need resources”, the administration would not need to obtain more funding from Congress.

Copyright The Financial Times Limited 2009