Timothy Geithner May Not Let Banks Pay Back TARP funds! Here we go again. Treasury Secretary Geithner has acknowledged that there is no standard set of rules that the Treasury will apply when deciding whether to accept the return of TARP funds. Rather, he has argued that he may use his subjective judgment and accept the return of funds from some banks and reject it from others. Yesterday he even claimed that he may keep TARP-generated stock and warrants from very healthy banks, if he concluded that the system still needs liquidity. (Of course, since the "stress tests" that were applied to the banks were different for each bank, the "tester"--the FDCI--can pre-determine if a bank is healthy, by adjusting the test to cause passage or failure. If a public school teacher did that to students, litigation, and perhaps criminal charges, would soon follow.

The Treasury currently owns three classes of assets from hundreds of banks: (a) non-voting preferred stock, issued only to Treasury; (b) common stock, the same that any shareholder of the banks has, either publicly or privately traded; and (c) warrants to purchase more of (a) and (b) for stated prices and at stated times in the future. Under the agreement that Treasury has with the banks, it may keep (a) and (b), and exercise (c), or it may return them. But the TARP agreements are silent on the return, thus giving Treasury the power to exercise its judgment subjectively. But subjective judgment by government officials violates the Due Process Clause of the Fifth Amendment to the Constitution. That Clause requires that everyone involved with the government, whether a criminal defendant, taxpayer, vendor, or employee, know in advance what is expected of his or her behavior, know what powers the government has, and understand what he or she may and may not do in order to be free of the government's heavy hand. In short, subjectivity on the part of government is profoundly unconstitutional.

It is clear from all this that Treasury's principal goal is not liquidity, it is control. The legitimate fear on the part of TARP-seduced and TARP-coerced bankers is that the government will soon enact retroactive legislation giving itself control of management, no matter how little of the bank stock it owns. This--private ownership and government control--is the definition of fascism.

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