UPDATE 3-Goldman Sachs redeems TARP warrants for $1.1 bln

* Goldman joins 3 other banks in shedding warrants

* US Treasury and a top lawmaker welcome the payment

* MS still talking with govt on shedding warrants (Adds comments from U.S. Treasury, lawmaker)

By Steve Eder

NEW YORK, July 22 (Reuters) - Goldman Sachs Group Inc (GS.N) said it paid the U.S. Treasury Department $1.1 billion to redeem warrants, becoming the largest bank to fully escape the government's bank bailout program.

The government got the warrants last year when it injected $10 billion into Goldman from the Troubled Asset Relief Program, a sum that Goldman paid back last month.

Goldman joins U.S. Bancorp (USB.N), BB&T Corp (BBT.N) and State Street Corp (STT.N) among large financial companies to get out of TARP. JPMorgan Chase & Co (JPM.N) has said it will let Treasury auction its warrants rather than pay an inflated price to buy them back.

Many banks have faulted TARP for its stigma as a sign of weakness, and its restrictions, including curbs on executive pay. JPMorgan Chief Executive Jamie Dimon has said TARP participation is a "scarlet letter" for banks.

Morgan Stanley (MS.N), which also paid back $10 billion of TARP money last month, remains in talks with the government on shedding the warrants, Chief Financial Officer Colm Kelleher told Reuters Television.

In a statement, Goldman said the $1.1 billion payment is in addition to $318 million of dividends that it paid the government on the bailout money. It said this represents a 23 percent annualized return on the initial $10 billion investment, which took the form of preferred shares.

Goldman announced the purchase eight days after it posted an unexpectedly large 33 percent jump in quarterly profit. It also at the time set aside $6.65 billion for compensation, prompting questions about the government's perceived role in positioning Goldman to pay out huge bonuses while the rest of the economy remains under duress.

"The spotlight was on them because we just bailed out these companies, and now Goldman is making billions," said Ken Crawford, a portfolio manager with Argent Capital Management. "It doesn't look good."

Critics of TARP have questioned whether the government has been misusing taxpayer money in trying to prop up the banking sector, following hundreds of billions of dollars of credit losses and writedowns.

Crawford said that for Goldman, "to fully give back everything the federal government gave them, from a publicity standpoint, makes a lot of sense.

Earlier this month, a Congressional oversight panel estimated that Goldman's warrants were worth $940 million, but could be worth as much as $1.25 billion.

The U.S. Treasury is pleased with the $1.1 billion Goldman paid, the head of the Treasury's financial bailout fund said.

Herbert Allison, assistant secretary for financial stability, told a House Financial Services subcommittee that he he believes that the warrants were priced fairly under a process similar to those used for smaller banks.

In the case of Goldman, however, a liquidity discount was not applied by the Treasury as it was for smaller banks, whose warrants and options are not widely traded.

House Financial Services Committee Chairman Barney Frank, a Democrat from Massachusetts, welcomed Goldman's repurchase of the warrants.

"I appreciate that Goldman Sachs did the right thing today, and we urge all the others to follow this example," Frank said in a statement. "I hope that this will lead to greater cooperation by other firms that have outstanding warrants owed to the American taxpayer." (Additional reporting by David Lawder in Washington; editing by Jeffrey Benkoe and Tim Dobbyn)