May 16, 2009

It was my understanding that there were penalties for early repayment of TARP loans, but this Daily Beast story doesn't mention it. According to them, Goldman Sachs will soon be out from under government control:

Wall Street may have another reason to hate Goldman Sachs: The venerable firm with contacts throughout the federal government looks as though it may be the first financial institution to be allowed to repay government bailout money, The Daily Beast has learned. Repaying its TARP loan would free Goldman from various restrictions, including those on the compensation of key executives.

The decision as to which banks would be given the green light from banking regulators, most notably the Federal Reserve and the Treasury Department, could be made as early as next week, these people say. Goldman already has a tentative approval from the Treasury and is awaiting approval from the Federal Reserve, according to one person with knowledge of the matter.

JP Morgan feels comfortable they have convinced both the Treasury and Fed that they should be allowed to repay the money along with the first group of banks.

During the height of the financial crisis the federal government handed out billions in aid to the big banks in an effort to boost capital levels depleted by bad real estate loans and bonds. While the bailout money helped stabilized a spreading financial panic, it also led to massive government ownership of some of the nation's largest banks and controls on business practices and compensation.

As the financial crisis has abated, some banks, most notably Goldman Sachs, JP Morgan Chase, Bank of America, and Morgan Stanley have said they can now repay the money and get out from under federal control. The government must first approve the measure; last week it announced results of so-called stress tests to determine which banks have the most capital to withstand further erosion in business conditions. The government also announced two conditions to repay the money: The issuance of debt that is not backed by FDIC insurance and sufficient so-called "tier one" capital levels. Tier one capital is the strongest capital in the market.

Based on the stress tests, Goldman Sachs and JP Morgan were deemed to be among the strongest of the big banks; unlike Morgan Stanley, Bank of America and Citigroup, both Goldman and JP Morgan were not required by regulators to raise capital levels. Since that time, officials at Goldman and JP Morgan have been pressuring regulators to allow them to repay the bailout money that was granted from the Troubled Asset Relief Program or TARP.

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