Why Goldman Sachs Should Repay Its TARP Money

It's time to identify which firms can stand on their own and which would fail without taxpayer aid

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You call this a problem?

With Congress and other parts of the government getting overinvolved in the private sector, Goldman Sachs and a few other banks are speeding up plans to pay back taxpayer funds they've received under the financial rescue plan. Their reasons are obvious: Nobody wants to be the next AIG, hauled before Congress and flogged for making too much money while dipping into taxpayer pockets. Proposed new rules on executive pay - and even mid-management pay - at bailout recipients could interfere with the normal way firms hire people and run their operations. And the volatile nature of populist politics is the antithesis of the predictability every business craves.

[See 5 lessons from the AIG and Merrill Lynch bonuses.]

It's good news that Goldman - which has gotten $10 billion in direct government aid - and possibly a few other banks are considering paying back their federal loans as soon as possible, and ending their stormy partnership with the U.S. government. Washington, with its long list of costly problems and trillion-dollar deficits, could use the money back. And with hasty, punitive new corporate governance rules suddenly popping out of Congress, the government is proving it may actually be capable of running banks worse than they've been running themselves.

But hold on. Some people feel that if the healthier banks return their bailout money, it will leave the weaker banks that still need the money even more exposed and vulnerable. "If Goldman succeeds in returning our money, it could put pressure on other banks to give their money back, too, lest they appear weak," writes Andrew Ross Sorkin in the New York Times. "It could create even more chaos in the financial system if some banks gave back the TARP money, only to howl soon after that they still needed it after all."

Chaos in the financial system. Hmmm. I say we risk it.

 [See what’s outrageous about the Merrill Lynch bonuses.]

First of all, the original bailout plan was designed back in October, when the financial system really was at a point where it could completely seize up. The risk of a chain reaction of failures and bank runs meant that all the big banks were standing at the edge of a crumbling precipice, like Wile E. Coyote, watching fissures form right beneath their toes as they stared into the abyss below.

That's why former Treasury Secretary Hank Paulson ordered nine of the nation's biggest banks to accept a big pot of bailout money last fall, whether they felt they needed it or not. It signaled they were all in the same mess together, and that there was no stigma associated with getting bailout money. For the dozens of smaller banks that ended up needing a bailout, that reduced the chance that depositors and trading partners would abandon them, making failure self-fulfilling. Where would they go, after all - to a bigger bank that was also getting bailed out?

[See 7 surprises buried beneath the AIG bonuses.]

We've backed away from the edge since then - and it's time to identify the weakest banks and let them fail if they can't make it on their own. Capitalism isn't like an elementary-school soccer game, where nobody keeps score and everybody wins just by participating. It's a Darwinian ecosystem where the threat of extinction forces organizations to adapt and make smart decisions in order to survive. "There's something fundamental about the need for failure," says Syd Finkelstein, a professor at Dartmouth's Tuck School of Business and author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. "We're tinkering with the genetic DNA of a capitalist society."

The worry, of course, is that another major bank failure could bring a repeat of the Lehman Brothers wipeout last fall, when the firm's unexpected collapse triggered a near-panic. But Lehman was unique in many ways, and the situation is different now. Most bankruptcies occur with plenty of advance notice as the firm tries one thing after another to stay solvent, and eventually runs out of options. The financial system can easily absorb failing firms, as long as there's advance warning. Wachovia and Washington Mutual essentially failed, and were taken over by other firms, with the government effectively brokering the deal. For failed banks that don't have a buyer - like IndyMac - the FDIC is capable of running the show until accounts are wound down or transferred to other banks in an orderly way.

[See how secrecy threatens Geithner's bank-rescue plan.]

We even have new tools to deal with firms at risk of collapse. The government's new "stress tests" for banks will help regulators know which companies are in the worst shape, so the feds should know if a sick bank is trying to return its bailout money as a publicity stunt. The nine-bank bailout last October was also meant to to inject capital into the banks to prop up lending, but there are now other programs in place designed to do the same thing. And Treasury Secretary Tim Geithner has called for powerful new rules to deal with huge firms, like AIG, that are basically insolvent and can only survive with taxpayer help. What are we waiting for?

If Goldman set the precedent and gave back its taxpayer funds, it would put pressure on other firms to get healthy fast and get off the government dole. The firms that can't stand on their own should be identified, with Congressional hearings and plenty of debate on whether it's in the public interest to save the firms or wind them down. We're already doing that with General Motors and Chrysler, in fact. Financial firms no longer need to be treated more delicately.

[See 9 bailout surprises from GM and Chrysler.]

Meanwhile, banks that truly don't need the money should make it available for other uses. Wells Fargo Chairman Richard Kovacevich, for instance, has been bellyaching about how his bank never needed the bailout money it took, and has been forced to cut its dividend (plus cancel lavish junkets) on account of government strictures.

So give the money back!

This is getting ridiculous. Forcing firms to take taxpayer money they don't want? With trillion-dollar federal deficits?

It's time for the government to let failing firms fail and get out of the way of those that can succeed on their own - even if they have to muddle along for awhile. The government's real efforts should be dedicated to the huge firms like AIG and Citigroup that can't make it on their own right now but would cause huge shock waves if they went down. Meanwhile, let Goldman Sachs go back to being Goldman Sachs. Wall Street could use a profitable firm.


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Goldman Sachs
AIG, Inc.
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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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