Goldman plan sign of strength and a worry: sources

WASHINGTON (Reuters) - The U.S. Treasury Department views Goldman Sachs Group Inc's plan to repay government bailout funds as a sign of strength, and welcomes private capital replacing taxpayer funds at healthy banks, according to a source familiar with the Obama administration's thinking.

But some officials are concerned that Goldman's plan could prompt other banks to want to repay government capital prematurely, thereby compromising the effort to boost banks' lending capacity, the source said.

Goldman Sachs said on Tuesday it has a "duty" to repay the government money it was given in October. The company sold $5 billion of common stock at $123 a share, and plans to use the proceeds and other resources to repay the taxpayer money received under the Treasury Department's Troubled Asset Relief Program (TARP).

Another source familiar with Treasury Department discussions said Goldman's plan to repay the money will be seen as a pocket of strength in the financial industry, but will in turn create pressure on other banks to prematurely return their bailout funds.

"We don't comment on specific institutions," Treasury spokesman Andrew Williams said. "As a general matter, Treasury views firms raising private capital as a positive step that contributes to the financial system's ability to continue lending through this downturn."

Williams also said Treasury is pleased to have banks continue in the government capital program because it has helped increase lending.

Representative Barney Frank, chairman of the House Financial Services Committee, told Reuters on Tuesday that he was happy to hear that Goldman Sachs planned to repay the TARP funds.

"To the extent that we have people pay it back, we should welcome that. It goes into the Treasury," Frank said.

Goldman's announcement goes counter to a meeting U.S. President Barack Obama had with a group of bank executives last month, said the source familiar with Treasury's discussions. At that meeting, the administration relayed the message that the large banks should keep the TARP funds for now.

Obama's concern was that it would be "very bad" if banks gave the funds back, only to have them subsequently seek more bailout funds if economic conditions deteriorated further, according to the source.

Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official, said Goldman's plan will be a test case to see if Treasury tries to hold up the repayment.

"We haven't had a big bank actually blaze that trail," Abernathy said. "I think we'll be looking to see to what extent Treasury facilitates the exit or inhibits it."

A number of small banks have returned TARP money, but none of the largest banks, instructed by the Treasury Department in October to take bailout funds in an attempt to de-stigmatize the program, have repayed the funds.

Abernathy said the government has two roadblocks it can put up. One is that the bank has to get the approval of its regulator to pay back the funds. The second is that Treasury has the opportunity to write regulations on how a bank can repay the money.

"Our reading is that Treasury doesn't intend to write those regulations," he said.

Abernathy said banks want to be liberated not only from the executive compensation and dividend restrictions that come from TARP, but also from its stigma.

"It's now been changed to become a sign that a bank needed a bailout," he said. "That's why banks all want out of it."

(Reporting by Karey Wutkowski; editing by Tim Dobbyn)