Good News is Bad News

The Washington Post reported today:

Goldman Sachs announced first quarter earnings this afternoon that were far better than analysts expected and said it would raise $5 billion through a stock offering in order to repay taxpayer funds.

Goldman, which received $10 billion in federal rescue funds, said it would use the money from the stock sale "plus additional resources" to return the full amount of the government investment "after the completion of the stress assessment, if permitted by our supervisors and if supported by the results of the stress assessment."

The stress testing of 19 large banks by the government is to be completed later this month. Goldman is widely expected to pass.

Good news?

Not according to the Washington Post:

While six smaller banks have returned federal funds, analysts say Goldman's move to exit from the Troubled Assets Relief Program will put pressure on other large banks to follow suit, threatening to diminish the government's efforts to stabilize the financial system and support new lending to consumers and businesses.

"What is the rational move of every other CEO? They're going to say, 'I have to pay back my TARP money too'," said Brad Hintz, of Bernstein Research. "What is in the interest of Goldman and its shareholders and the best interest of the broader financial services world may not be the same thing."

The concern is that healthy banks, by returning government money, could put pressure on less healthy firms to do the same when they should be focused on conserving resources. Federal officials, including banking regulators, also worry that the market may lose confidence in those banks that are unable to repay the money, damaging their prospects further.

So it would have been good news if Goldman Sachs had been unable to repay the loan and reported as such? It seems to me that--just maybe--its good news that a leading financial institution is able to raise money on the open market. After all, the freezing up of the credit markets and decline in market confidence are major parts of the problem.