The Government Becomes a Loan Shark.

When I first heard rumblings in the Wall Street Journal and elsewhere that the government would not allow big banks to repay their TARP loans, I thought it was either a genuine misunderstanding or an unfair partisan canard against the Obama administration. But the stories continue in the press and Tim Geithner has not done what he needs to do to kill this story: publicly announce that almost any bank that wants to pay back the TARP can bring a "check" to him personally.

It used to be that when you borrowed money from the mob, you could almost never get free. Once the mob got its hooks into you, you found that they owned you.

Now instead of the mob, it's the federal government that won't let you free, even if you want to pay off your loan with interest.

From my vantage point, this appears to be a naked power grab by the government, trying to get more and more of private enterprise within state control. This shift in government policy should be resisted vigorously. The TARP loans, after all, purported to be loans, not fraudulent credit scams. In Congressional hearings, the legislators certainly wanted the funds paid back as promptly as possible.

The latest press report is in the Financial Times, with analysis at Legal Insurrection (via Instapundit):

The Financial Times reports that banks and other financial institutions which received TARP funds may not be allowed to repay the loans. Yes, that is correct:

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."

I understand that there are systemic issues as to liquidity, but I don't recall any discussion when TARP passed that the government would not allow the loans to be repaid. The original purpose of TARP was to rescue failing financial institutions and stabilize the housing market by using federal funds to buy bad mortgages; and then TARP was changed to provide direct investment into financial institutions in order to stabilize balance sheets and provide liquidity.

According to the Financial Times article, the purpose has morphed yet again, this time into a recession management tool:

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".

Something is wrong here. This is taxpayer money, to the tune of $246.73 billion, handed out to banks to avoid a banking system collapse. That collapse, if it ever were a real threat, no longer is a threat. If this were a consumer loan, the banks which received the money could cry fraud:

JPMorgan Chase Chief Executive James Dimon said Thursday that his firm is eager to return the $25 billion they've received from the government, and will do so as soon as possible.

"We could pay it back tomorrow," Dimon told reporters Thursday morning. "We're waiting for guidance from the government."

The justification for refusing to take the funds back is that the administration wants more lending. But maybe the problem is not a lack of liquidity, but a lack of credit-worthy borrowers. If we force banks to keep the money, the next step will be to require banks to lend the money by lowering credit standards, which is exactly the policy which got us into this problem in the first place. And to the extent the banks want to remove executive compensation restrictions to keep personnel, forcing the banks to keep the money and the restrictions may feel good, but it won't get banks to lend.