The Troubled Asset Relief Program keeps getting uglier. When former Treasury secretary Henry Paulson switched gears last fall and bought preferred shares in the banks, instead of troubled assets, we encouraged every bank that took the government’s money to have an exit strategy. Little did we know that Paulson’s successor would try to bar the door.

Several large banks, including J. P. Morgan and Goldman Sachs, have announced that they would like to repay the funds they took from the government under Paulson’s Capital Purchase Plan (CPP) last October, but the Obama administration is discouraging them from doing so. A senior administration official told the Financial Times that a bank would not be allowed to repay its TARP funds unless it was “good for the system” — never mind what’s best for that particular bank.

The current Treasury secretary, Timothy Geithner, echoed those comments Tuesday when pressed by Republican Rep. Jeb Hensarling to explain the repayment issue. “My basic obligation and our responsibility,” Geithner said, “is to make sure that the system as a whole, as a whole, has the ability to provide the credit that recovery requires.”

In the absence of a compelling explanation from Geithner & Co., the administration’s reluctance to let the banks pay back the money has generated several theories. One is that the administration doesn’t want some banks to appear stronger than others. Banks that chose not to pay back their TARP funds would be perceived as relatively weak, and this perception could lead investors and creditors to desert them. The administration either lacks the capability to deal with the collapse of another large bank or is afraid to do so, and so it is trying to fool the market.

If this is their strategy, it isn’t likely to work for long. Healthy banks will find other ways to telegraph their strength. In addition to broadcasting their desire to pay back their TARP funds, they will leak the results of their stress tests — something that the administration is also desperate to keep them from doing, but which it has no real power to stop.

Another explanation is that the banks that are trying to give back their TARP funds aren’t really healthy but are trying to create that perception. If successful, they could potentially gain a competitive advantage over their TARP’d competitors: in the form of lower borrowing costs, for one, and the ability to attract top talent by freeing themselves from TARP-related limitations on executive pay. They could use these advantages to try to dig themselves out, and, if that didn’t work, they could go back to Treasury for another loan. This would put the administration in a bind — it clearly doesn’t have the stomach to let these firms fail, but it couldn’t re-rescue them without paying a political price. The best solution, from that point of view, would be to refuse to accept repayment in the first place.

While that might be the politically expedient solution, it is not the right one. For one thing, the administration lacks the legal authority to refuse repayment of TARP funds. A provision of the stimulus bill gives banks the right to repay the money whenever they want, subject only to “consultation with the appropriate Federal banking agency.” Unfortunately for the larger banks, that means the Fed, which has acted during this crisis almost as an adjunct to the Treasury. If the Fed goes along with Geithner’s preference that TARP funds not be repaid, then that only underscores the need to disentangle these two agencies as quickly as possible.

More important, it is time to stop playing games with the markets and disguising the actual financial health of the banks. We are no longer dealing with the level of systemic risk we faced last fall. In fact, one could persuasively argue that, in the current environment, uncertainty stemming from government policy is doing more damage to the system than the orderly dissolution of insolvent banks would do.

If some banks want to pay back their TARP money, we should let them. If other banks are undercapitalized, we have a process to deal with that. The Federal Deposit Insurance Corporation is the one agency that has worked relatively well during this crisis. It has resolved 25 failed banks already this year. Instead of using it to subsidize Geithner’s misguided troubled-asset purchasing plan — a bad idea in any case — we should be strengthening FDIC for the task ahead, and doing whatever else is necessary to lay the groundwork for the orderly resolution of failed firms.