Nothing's official, but CNBC reports that JPMorgan Chase (NYSE:JPM) is looking into ways to repay the $25 billion in TARP funds it got last October. Sound familiar? Earlier this month, Goldman Sachs (NYSE:GS) hinted that it wanted to do the same with the $10 billion in TARP funds it received. 

This is certainly a step in the right direction, but repaying those funds is easier said than done -- not because either bank doesn't have the money to simply write a check, but because the Treasury imposed restrictions on how the money can be repaid.

Rather than just paying the money back with spare funds, banks are required to raise an equal amount of new common or preferred equity. The idea is that banks should be forced to remain adequately capitalized, and not be allowed to venture down the same leveraged ways that got us here in the first place.

Will this approach work? It's a stretch. As I write, JPMorgan Chase has a market cap of about $80 billion; Goldman's is about $40 billion. So raising enough common equity in public markets would be a tall order -- not to mention extremely dilutive to existing shareholders.

Even so, management could make a strong case to its shareholders for the virtues of being a TARP-free bank. From the tarring-and-feathering that Congress delivered to CEOs last week, to the impending "stress test," and the compensation restrictions implanted in the new stimulus package, life sans TARP would give banks the flexibility and freedom needed to move on and exploit the opportunities created by weaker peers such as Citigroup (NYSE:C) and Bank of America (NYSE:BAC). Not to mention that if you don't need taxpayer funds, then for goodness' sake, yes -- give the money back.

Besides, swapping out government preferred stock for an equal amount of fresh common stock would actually put these banks in a much stronger financial position.

Although they stemmed the threat of a systemic collapse last fall, preferred shares and their periodic dividend burden essentially function like debt that banks have to worry about repaying in the future. Common equity -- with the power to absorb impending credit losses -- is really what these banks need to get back on a sustainable track.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.