Returning TARP Money: The Case of Goldman & BofA

Back in the fall of 2008, after the Bush administration urged Congress to pass the TARP legislation, then-Secretary of the Treasury Henry Paulson made clear that government investments in preferred equity of weak financial institutions was to be temporary.

Now, in the spring of 2009, we learn that Goldman Sachs and BofA, both wishing to repay the TARP money that the government requested them to take, must have permission from the feds to do so.

How did this come to pass?

Why would there need to be any permission given? If a bank can pay back its TARP funds because it has either made profits or found other investors, that's a good thing.

If, upon repaying the TARP money, a bank is essentially insolvent or has inadequate capital, then the Fed can find it so, and have the FDIC close it.

This afternoon, on Fox News, Judge Andrew Napolitano noted how curious it is that, as BofA CEO Ken Lewis wants to repay that bank's TARP funds, the SEC is suddenly investigating an allegation that Lewis and the BofA board knew of the Merrill Lynch bonus payments and failed to inform shareholders prior to their vote to approve the acquisition.

Napolitano laid out other relevant details, including the Fed's and Treasury's pressure on Lewis to make the acquisition, despite Lewis' reticence, concern over capital adequacy and due diligence.

Now it looks like there will be a full-scale fight between BofA, the SEC, Treasury and the Fed as to who knew what, when.

In the meantime, according to Napolitano, BofA's desire to get rid of the federal government as an investor is being met with the SEC investigation as a form of coercion.

Many have opined that the center of American finance has moved to Washington from New York. Given what is occurring with Goldman and BofA as they reasonably attempt to repay their TARP funds, it's troubling to see that much of what governs the US financial sector has become more political than economic or financial.