Let banks pay back TARP now

(breakingviews.com) -- The Obama administration's conditions on the repayment of bailout funds by banks shouldn't go too far.

Relatively strong firms like Goldman Sachs (GS, Fortune 500) and JPMorgan (JPM, Fortune 500) have been agitating to shuck off what the latter's boss, Jamie Dimon, recently called a "scarlet letter". If they have adequate capital, or can raise it privately, the banks should be allowed to pay the government back. Regulators should still be able to rein them in if need be.

The conditions lawmakers retroactively attached to the U.S. Treasury's Troubled Asset Relief Program have chafed - especially the politically charged limits on executive pay. Bankers, dismayed by these, the potential for more Congressional meddling and the reputational concern Dimon referred to, want to pay the TARP funds back - despite the higher cost of raising money in the open market.

This shouldn't be discouraged. Yes, it will put banks that can't pay TARP back under an uncomfortable spotlight - an understandable worry. But in fact, the results of the government's stress tests should do that anyway if the tests are meaningful and the results are disclosed.

And by proving they can do without TARP, stronger banks may be able to attract private capital on somewhat better terms - exactly the sort of development the government should encourage.

Meanwhile, getting some capital back would help replenish the Treasury's bailout coffers, which will probably be called on again soon to prop up weaker banks and automakers, among others.

Finally, the government shouldn't worry too much that allowing banks to pay back TARP will allow them to wriggle free of regulators' embrace. Yes, it may release them from executive compensation limits.

But aside from their everyday regulation - tighter than before in the case of Goldman and Morgan Stanley (MS, Fortune 500) because of their new bank holding company status - banks have issued massive amounts of government-guaranteed short-term debt, and benefit from a range of new emergency lending facilities.

Those are levers regulators - and Congress, if it chooses - can use to influence their behavior. And it's likely that any new oversight regime will be much more intrusive. Even if they repay TARP capital, banks will be under regulators' thumbs for some time to come.