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Geithner: If You Want to Cut the Strings, You Need to Cut All the Strings

Here’s some good news from the Treasury Department. I’ve been complaining for a while that a number of financial institutions seem inclined to repay their TARP money, and then proclaim themselves free from government meddling, all the while taking advantage of a plethora of other emergency support programs that the government has put into place. Now Tim Geithner is saying, rightly, that a bank that wants to repay its TARP money also needs to cut itself off from the “guarantee of debt issuance offered by the Federal Deposit Insurance Corp.”

That’s the right thing to do. Now the next question becomes one of credibility. The official thinking is that the explicit FDIC guarantee lets banks borrow much more cheaply than they otherwise might. A truly healthy bank can repay its TARP money and cut itself off from the guarantee while paying little price, because a healthy bank won’t need an explicit guarantee to borrow pretty cheaply. But under the current circumstances, is the idea that the government would let a non-guaranteed bank fail and default on its loans really credible?

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