Given the grim, apocalyptic visions that have been spun over the past few months, it is odd to see optimism creeping into the market, yet that is just what seems to be happening. Between the generally positive results of the stress tests and the slowly recovering stock market, it is beginning to look like the economic situation is not quite as hopeless as analysts once thought. Moreover, Prudential (PRU), Allstate (ALL), and Ameriprise's (AMP) decision to address their capital needs with stock offerings instead of federal funds is both economically significant and politically meaningful. Fundamentally, it suggests that the market has gained enough confidence and strength that it can again function as a tool for capital generation. In this context, it looks like the government is no longer the only game in town.
Geithner seemed eager to reduce government involvement in the financial markets. In addition to freeing up money, quick repayment of TARP funds indicates a vigorous economy, which increases confidence, laying the groundwork for a positive cycle that could provide real economic stimulus. Although Geithner didn't mention it, TARP repayment also helps resolve a thorny political issue: the bailout has been a controversial and divisive move, and getting out of the bailout business should quiet many rumblings about creeping socialism.
For banks, there is the far more significant benefit of increased freedom. Following the AIG and Merrill Lynch bonus scandals earlier this year, it is clear that many perceive federal involvement in their governance as onerous and invasive. Further, as Jamie Dimon and Michael Cavanaugh's conference call on June 1 indicated, bailout banks seem to view rapid repayment of TARP debt as not only the path to freedom, but also as a sign of fiscal superiority. Dimon, in fact, has gone so far as to refer to TARP as "a scarlet letter" and "the TARP baby," suggesting that he sees it as a mark of shame and a potentially destructive entanglement.
As Dimon's comments suggest, the greatest problem facing the government is, arguably, restraining banks from repaying their debts too quickly, undermining their profitability, and setting themselves up for another crisis. This concern underlies the government's decision to require the banks to tap equity markets. Presumably, if banks can raise a pre-determined amount of money, then both they and the markets are sufficiently vigorous to justify a payback of TARP funds. As JP Morgan and American Express go forth in their fundraising, it will be interesting to see if the financial crisis is, indeed, headed for resolution.