Wall St. to Goldman: Remove the TARP

Is Goldman's Lloyd Blankfein ready to roll back the TARP?

Goldman shares have surged since the market hit a recent low in early March.

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NEW YORK (Fortune) -- Wall Street is counting down to Tuesday morning, when Goldman Sachs is due to report quarterly earnings. But the firm's first-quarter profits aren't the main source of suspense.

Instead, investors are betting that Goldman (GS, Fortune 500) will put itself on track to become the first big bank to wean itself from direct government support.

The Wall Street Journal reported Friday that Goldman may announce a multibillion-dollar stock offering along with its first-quarter numbers. A sale would be Goldman's first capital raise since it got $10 billion from Treasury in October in the first round of Henry Paulson's Troubled Asset Relief Program.

Goldman dismissed the stock-sale report, and questions about how soon the firm might repay TARP funds, as speculation.

Still, a stock sale would give the firm a chance to cash in on the past month's financial sector rally. Goldman shares have surged 70% in the past month.

The bounce has boosted Goldman stock to around $125 a share -- a level it hasn't traded it since shortly after the collapse of Lehman Brothers and the near implosion of AIG (AIG, Fortune 500) in September forced Goldman to raise new funds. Goldman ended up selling billions of dollars in stock to investors, including Warren Buffett's Berkshire Hathaway (BRKA, Fortune 500), that month.

Goldman executives have said they want to repay government funds once they get regulators' blessing. But the timeline of any repayment remains unclear, depending in large part on decisions being made by officials at the Federal Reserve and Treasury.

And though investors would welcome any move toward TARP repayment as a sign of strength, some analysts question whether it makes sense to return cheap government funds at a time when the financial system is still under stress and investors and the government are closely scrutinizing bank capital levels.

Regulators are conducting so-called stress tests of the nation's largest banks, including Goldman, to determine if they need to raise more capital. The stress tests are not expected to be completed until the end of the month, and according to several reports, the government has instructed executives at big banks not to discuss the results. Goldman declined to comment.

Goldman isn't required to raise new capital before it repays the Treasury. But analysts expect it would sell either stock or perhaps part of its stake in a Chinese bank to further bolster its balance sheet before returning TARP funds.

Paying back TARP could reduce Goldman's Tier 1 capital ratio -- a measure favored by regulators -- to 13% from over 15%, according to calculations by Bernstein Research analyst Brad Hintz.

But doing so wouldn't hurt Goldman using another measure of capital, the tangible common equity measure investors have been focusing on amid deepening problems at big banks like Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500).

A TARP payoff could also save the firm some $500 million in annual preferred stock dividends, Hintz wrote last month. It would also free Goldman from federal oversight of its pay practices.

That's noteworthy because Wall Street's desire to pay off TARP loans has intensified as complaints about federal involvement in the banking sector have risen.

Jamie Dimon, the CEO of JPMorgan Chase (JPM, Fortune 500), warned in a speech last month of the dangers of the "vilification of corporate America." Less than a week later, Dick Kovacevich, the chairman of Wells Fargo (WFC, Fortune 500), pronounced the government's plans to test the balance sheets of big banks "asinine."

Goldman execs have been considerably more politic. Asked last month at a conference whether Goldman would become the first big bank to return TARP funds, Gary Cohn, the firm's co-president, replied that he would be surprised if anyone "is really in position to give back TARP money till the results of the stress tests and first-quarter earnings are out of the way."

Regardless of whether the firm decides to sell stock, investors will be also waiting to see if Goldman can bounce back from its dismal last quarter and if its earnings justify the recent runup in the company's share price.

For the first quarter, which ended in March, Goldman is expected to report a profit of $1.60 a share, according to analysts surveyed by Thomson Reuters. Consensus estimates have been steadily rising during the past few weeks, with analysts expecting a profit of just $1.21 a share in mid-March.

Goldman lost $2.1 billion, or $4.97 a share during its fiscal fourth quarter, which ended in November. That was the company's first loss since it went public in 1999.

This is the first time Goldman is reporting results with a first quarter that ended in March. Previously, Goldman's first quarter ended in February, but the Wall Street giant changed its fiscal year to correspond with the calendar year after the Federal Reserve approved its request to become a bank holding company.

Goldman applied for bank holding company status in the midst of the credit crisis. The move could allow Goldman to raise more money from deposits, though executives have said they don't expect to change their strategy of focusing on trading and investment banking.