Goldman seeks to repay Tarp funds after $5bn fundraising

US Treasury reluctant to accept return of $10bn

A reluctant US Treasury is under pressure to accept back the taxpayer money it handed to the nation's biggest banks during last year's financial panic, after Goldman Sachs said yesterday that it felt "a duty" to return the money.

The Treasury is concerned that allowing strong banks to return cash will stigmatise weaker ones that want to keep hold of the money, undermining confidence across the banking system.

The eight biggest Wall Street firms were all forced to accept billions of dollars in government aid last October and more than 400 other institutions have also now taken cash under the so-called Troubled Asset Relief Programme, known as Tarp. Yesterday, Goldman Sachs became the first bank to raise capital in the private markets since conditions stabilised, selling $5bn (£3.4bn) of new shares to investors enthused by its forecast-busting first-quarter results.

The share sale, which it had announced late on Monday, was completed before trading began yesterday morning and demand was strong enough that Goldman priced the new stock at just a 5.5 per cent discount to the previous night's closing price.

The funds raised will be put towards repayment of the $10bn in Tarp capital, as soon as the Treasury gives permission. The federal government is reluctant to accept money back, at least until it has completed its "stress tests" on the nation's largest banks to judge whether they are strong enough to withstand a long recession. The tests are due to be completed by the end of this month.

"We never believed the investment of taxpayer funds was intended to be permanent," Goldman's chief financial officer, David Viniar, said yesterday. "We view it as our duty to return the funds, as long as we can do it without negatively impacting our financial profile, or ability to act as a central liquidity provider to the global capital markets."

Goldman is keen to rid itself of the restrictions on executive pay and the scrutiny that has come with Tarp funds. Last week, an uncomfortable Lloyd Blankfein, the chief executive, was confronted by campaigners carrying a banner saying: "We want our $$$$ back!"

Barney Frank, chairman of the House Financial Services Committee, said the government should welcome the move, and dismissed arguments that to do so would stigmatise weaker banks. Analysts are well aware of the relative health of different banks, he said. "That is one of the dumbest things I've heard," he said. "Do you think that if you were analysing a bank, you would look primarily at the Tarp money?"

Isabel Schauerte, at the Boston-based consulting firm Celent, said Goldman would boost its reputation by returning the funds: "Goldman is making some progress in the quest to restore its pre-crisis image of exceptionalism. Better than expected earnings are obligatory in this regard, as is early repayment of Tarp money."

Not all analysts agreed that returning the money was the right thing, however, since Goldman is required to pay lower dividends on government funds than on other capital it raised last year and will cut dividends for all shareholders following yesterday's share sale.