Banks Paying Back the TARP Billions: Bad for the Economy?

March 26, 2009— -- Banks that decide to swiftly pay back billions in government aid may score points with angry American taxpayers, but will they hurt the wider effort to shore up the banking system and the economy?

That's the question some are asking after news that Goldman Sachs and Bank of America, two of the nine original recipients of funding from the Troubled Asset Relief Program, may repay the government within several weeks.

Bloomberg News reported Tuesday that Goldman was in talks with U.S. regulators to return the government's $10 billion by mid-April.

VOTE: Should Banks Repay TARP Money?

The Los Angeles Times reported yesterday that Bank of America CEO Ken Lewis wants to start repaying the government -- which provided Bank of America with $45 billion in aid -- next month and could complete its repayments as early as the end of the year.

The firms are reportedly waiting until the government completes its bank stress tests -- evaluations designed to determine whether banks would need additional capital to survive a deeper economic downturn -- before starting repayment.

Some, including bank executives, warn that moves by banks to pay back TARP early could hurt the banks that wait longer to repay the funds. That, in turn, they say, could prove damaging to the economy.

"If only a few do it, it's going to put an obvious spotlight on the banks that were too weak to do it. That's the real problem," said an executive at a financial institution that has received a large amount of TARP funding. The executive, who asked not to be identified so he could speak freely, said that that spotlight could "spook the market," leading to drops in stocks that would hurt more than just the "weak" banks.

Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., agreed.

"If another bank [stock] goes to zero, doesn't that contaminate the whole system? Yes, it does," he said.

Still, others argue that holding on to TARP money will cause only limited damage to banks.