Who Should Constrain Lloyd Blankfein?

Should we be worried that Goldman's repayment of TARP funds lets them off the hook, as far as restructuring and reregulation goes? John Gapper makes the case:

More fundamentally, we now know unambiguously that Goldman is a "systemically important financial firm". In other words, Goldman is too big to fail and would be bailed out by the US government if its balance sheet failed. That privilege should come with weighty conditions...

But there is no clarity yet that Goldman or other Wall Street banks will be forced to pay an appropriate levy for government backing. Unless it is high, they have no incentive to be truly independent.

There is no need to look back far to observe how pernicious a combination of private ownership, implicit public backing and inadequate regulation can be. This produced the Fannie Mae and Freddie Mac fiascos.

If Mr Geithner cannot think of a sound structural reform to limit the size of Wall Street banks, he must at least make regulatory restrictions bite. He has talked of capping their leverage and their latitude to indulge in proprietary trading but not defined what this means in practice.

He ought to keep Goldman on the leash until he has set out the price it must pay for its newfound privileges.

I think Gapper's initial points are correct. With or without the government's explicit guarantees, markets can rest assured knowing that Goldman will not be allowed to fail. That's a problem. The question is whether Treasury's leverage under TARP is the appropriate vehicle for reining in Goldman, and indeed, the banking system as a whole.

I actually think that's a pretty difficult case to make. For one thing, you want regulations to apply broadly, to firms which haven't received TARP money or which don't yet exist. It also seems to me that if the guarantee of Goldman doesn't rely on any specific program established by the government (and it doesn't; it's simply a product of the firm being too big to fail) then I don't see why repaying the TARP funds would imply a loss of leverage. I'd also think that we'd want to build a new regulatory framework on a sounder footing than, "what Geithner can shove down banks' throats while they're borrowing from the Treasury."

In a way, this line of argument is counter-productive, implying that the government has no authority to control the financial system unless it actually has money on the line. Once the TARP "leash" is cast aside, in Gapper's construction, Goldman has slipped away. That's just the opposite of what I'd expect us all to conclude from the experience of this crisis -- that Goldman can't escape from us or us from Goldman, such that the government has a responsibility to prevent the financial sector from harming the economy as a whole.

TARP means little from a regulatory standpoint, in that case. The only question for Geithner is whether repayment will undermine the broader bank rescue. The administration will have a mandate for regulatory reform whether Goldman pays off its loan or not.