The US Treasury Department views Goldman Sachs' plan to repay government bailout funds as a sign of strength but is concerned that it could further stigmatize weaker banks dependent on government money, according to a source familiar with the Obama administration's thinking.
The source said Treasury is concerned that Goldman's plan to return $10 billion in taxpayer money "will harm the recovery effort."
Goldman Sachs said today it had a "duty" to repay the government money it was given in October. The company sold $5 billion of common stock at $123 a share, and plans to use the proceeds and other resources to repay the taxpayer money received under the Treasury Department's Troubled Asset Relief Program (TARP).
Another source familiar with Treasury Department talks said Goldman's plan to repay the money will be seen as a pocket of strength in the financial industry, but will in turn create pressure on other banks to prematurely return their bailout funds.
The Treasury Department did not provide any immediate comment.
Goldman's announcement goes counter to a meeting US President Barack Obama had with a group of bank executives last month. At that meeting, the administration relayed the message that the large banks should keep the TARP funds for now, the source said.
Obama's concern was that it would be "very bad" if banks gave the funds back, only to have them subsequently seek more bailout funds if economic conditions deteriorated further, according to the source.
Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official, said Goldman's plan will be a test case to see if Treasury tries to hold up the repayment.
"We haven't had a big bank actually blaze that trail," Mr Abernathy said. "I think we'll be looking to see to what extent Treasury facilitates the exit or inhibits it."
A number of small banks have returned TARP money, but none of the largest banks, instructed by the Treasury Department in October to take bailout funds in an attempt to de-stigmatize the program, have repayed the funds.
Mr Abernathy said the government has two roadblocks it can put up. One is that the bank has to get the approval of its regulator to pay back the funds. The second is that Treasury has the opportunity to write regulations on how a bank can repay the money.
"Our reading is that Treasury doesn't intend to write those regulations," he said.
Mr Abernathy said banks want to be liberated not only from the executive compensation and dividend restrictions that come from TARP, but also from its stigma.
Reuters