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Take The Money - And Give It Back?

So traders were again buzzing this morning over word that Ken Lewis, in an interview with the LA Times, said he wanted to repay the $45 billion Bank of America got in TARP money beginning next month.

Obviously, his bankers...and trading desk...are screaming that they do not want the government as partners.

Fair enough, but immediately trading desks were wondering...will Geithner let them give the money back?

Geithner has said nothing, but it's surprising how many traders think the answer is "No, not now." The basic thrust seems to be that Geithner will argue that:

1) Exiting TARP is not prudent now, that banks should be shoring up capital positions before returning money;

2) After shoring up capital, using extra cash to do loans is more politically acceptable, and

3) other banks would feel pressure to repay TARP, which would create a two-tier layer of banks that are "strong" because they could afford to give the money back, and those that are "weak" because they can't.

There are also concerns this might force ill-timed capital raises, which would be expensive, dilutive, and might be perceived to be failures if a lot of banks try to do it at once.

Some said Treasury was more likely to set up some kind of uniform exit strategy for all banks. Expect Geithner to comment on this soon.

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