Financial Times Editorial Comment: Golden fetters

Financial Times Editorial Comment: Golden fetters
Copyright The Financial Times Limited 2009
Published: April 14 2009 20:05 | Last updated: April 14 2009 20:05
http://www.ft.com/cms/s/0/1e3ebb64-2920-11de-bc5e-00144feabdc0.html


In a touching display that its freedom is (almost) not for sale, Goldman Sachs, the investment bank, pleased markets this week with a plan to exit the US troubled asset relief programme. The government should take note, and be worried.

Lloyd Blankfein, Goldman’s CEO, says the bank escaped the subprime mortgage storm with less damage than its competitors. When the wholesale funding markets on which it depended suddenly froze last autumn, Goldman was naturally not above taking money where it could find it. With little ceremony, it converted itself into a bank holding company to be eligible for the Tarp then being put together by the US Treasury.

The bank now intends to be the first to throw off the government’s golden fetters – $10bn in the form of preferred stock and share warrants. The issue of $5bn in new common stock and strong quarterly earnings of $1.8bn may soon put it in a position to do so. Other banks are likely to follow. Life under the Tarp is better than death, but not by much. It puts strict caps on executive compensation. And Congress’s promiscuous imposition of conditions, such as a petty and self-damaging limit on skilled foreign staff, suggests more meddling to come.

The desire to leave the Tarp is by itself healthy: better to have banks face the discipline of markets than the corporatist cosiness of state aid.

But the short-run effect could be to prolong the recession. The US banking system is still woefully undercapitalised for the size of its balance sheets. The battered capital ratios must be boosted so that lending to the wider economy picks up. If banks instead shrink their capital to exit the Tarp, this will delay the credit expansion recovery relies on.

If sufficient private capital is raised to substitute for public funds, that is of course welcome. HSBC’s recent rights issue shows that some banks may be able to. But many financial giants who need all the capital they can get are in no position to spurn government money.

The government must be vigilant. The Tarp legislation provides that banks can only leave the programme with the government’s permission; it is not enough to pay the money back. The US Treasury should not let banks out of the Tarp until they have enough capital for the desired level of lending. It must also speed up the “stress test” that is supposed to reveal whether banks are well capitalised, and force them to accept – or keep – government funds if not.

Banks, Goldman Sachs seems to be saying, have nothing to lose but their chains. True, but for the rest of society, much more is at stake.