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Chalk up one small victory for Uncle Sam's bailout of large financial firms.

Monday's news out of State Street Corp. (STT) offered at least a modicum of proof that the U.S. Treasury could exit its rescue of the banking industry faster than many free-market purists feared. In one fell swoop, the Boston custodial bank said it would raise capital, clean up its messy finances and move quickly to repay the U.S. government's $2 billion investment. While the end of State Street's government investment isn't official yet, it and a number of firms are awaiting the final rules for repaying public support.

State Street's thrill ride through the financial crisis isn't as well known as those of Citigroup Inc. (C), Bank of America Corp. (BAC) and other commercial banks. But State Street has faced its own set of banking-crisis travails - and the government's just-completed stress tests, which cleared State Street of needing new capital, helped resolve the bulk of the firm's issues far quicker than most expected.

"I think the best thing the government did for (State Street) was the stress test," said Nancy Bush, an analyst at NAB Research.

Like rivals Northern Trust Corp. (NTRS) and Bank of New York Mellon Corp. (BK), State Street, which declined to comment, is considered a trust and processing bank - occupying a typically sleepy corner of the banking industry that holds and manages assets for institutions and wealthy investors.

But similar to its more aggressive commercial bank siblings, State Street expanded its business during the credit boom in unorthodox ways that would later come back to haunt the 217-year-old firm.

For starters, State Street ballooned its investment portfolio during the boom, leaving it vulnerable to cratering markets.

More crucially, State Street also operates a $22.7 billion set of complicated vehicles, known as "conduits," that issue commercial paper. The conduits were originally intended to generate profits while remaining separate from State Street's balance sheet - that is, until last year, when troubled credit markets forced State Street to step in and support the vehicles.

The fears that State Street would eventually have to take the conduits onto its balance sheet came to a head in mid-January. In one day, the firm's shares fell an eye-popping 60%; they remain more than 42% off their 52-week high.

To stem the ebbing tide of confidence, State Street said it would consolidate the conduits onto its balance sheet at the end of 2009 and, in the meantime, set aside earnings to make sure it had enough capital on hand come December.

On Monday, State Street essentially pressed the fast-forward button.

The firm raised $2 billion by selling new stock to private investors. It also sold debt not guaranteed by the federal government, an option not yet likely available for some other large firms. Investors even accepted without blinking the $3.7 billion in losses that State Street posted from consolidating the conduits; State Street's stock rose 8.5%. In late Tuesday trading, the stock was up 4.6%.

Those moves amount to a small victory for the Obama administration's efforts to prop up the nation's banking industry without owning firms outright.

It wasn't clear even a few weeks ago that State Street would soon be able to raise new private capital. The firm's timeline for repaying the government, moreover, was much less clear than that of its trust bank rivals, which have worked quickly to exit government ownership.

What's more, Obama and Treasury Secretary Geithner can cheer the free markets for likely abbreviating the government's involvement with State Street.

In the last 10 days, banks have raised billions by issuing new shares, due in part to heavy appetite from asset managers, who are worried about missing the rally in financial shares.

But another free-market dynamic - open competition from rivals - also likely pushed State Street to act quickly.

Rivals Northern Trust and Bank of New York Mellon have already raised the money they need to repay their government investments. They are situated to bid strongly for businesses and assets that could soon be for sale.

The threat of strengthening competition "pretty much put the competitive onus on State Street," said NAB's Bush.

The government would sure be glad to see it stay there.

-By Marshall Eckblad, Dow Jones Newswires; 201-938-4306; marshall.eckblad@dowjones.com