The Treasury Department cleared the way for 10 big banks on Tuesday to start repaying billions of dollars in taxpayer aid, a crucial step in easing the government’s grip after an unprecedented series of interventions.
The banks were deemed strong enough to leave the Troubled Asset Relief Program, or TARP, after months of lobbying and strong performances on recent stress tests. The banks are expected to return about $68.3 billion to the Treasury Department, more than double the administration’s initial estimate of about $25 billion in funds to be returned this year. The timetable is also earlier than government officials originally intended.
Although the Treasury did not identify the banks, people briefed on the situation said they include American Express, Bank of New York Mellon, the BB&T Corporation, Capital One Financial, Goldman Sachs, JPMorgan Chase, the State Street Corporation and US Bancorp. All passed the stress test and applied to return their TARP funds. Another bank, Morgan Stanley, which needed to raise $1.8 billion after the stress test, was also said to have received permission, as was Northern Trust, a large custodial bank that did not undergo the stress test.
The $68.3 billion represents about a quarter of the TARP money given to banks. So far, 22 small community banks have been allowed to return $1.9 billion in government money.
Within the next few days, the big banks will be able to wire the money back to the Treasury Department. Still, they will not fully get out from under the government’s thumb until they rid themselves of warrants giving taxpayers a share of the potential upside on their investments.
Analysts say warrants for the 10 big banks could be worth as much as $4.6 billion. Treasury officials have not disclosed how they plan to value and sell them.
“These repayments are an encouraging sign of financial repair, but we still have work to do,” the Treasury secretary, Timothy F. Geithner, said in a statement.
The Obama administration hopes the accelerated payback will show that its financial recovery programs are working, even if the economy remains fragile. The move will also free up billions of dollars that can be redistributed to other troubled banks and companies without Treasury officials returning to Congress for more money.
Still, the plan is not without risks. The government is giving up $1.8 billion in annual interest payments while leaving its support programs in place, even for banks that repay. That means that taxpayers are giving up part of their upside while continuing to be on the hook for losses. It could also cause a clear separation of the financial industry’s strongest and weakest players. Citigroup, which has accepted $45 billion in taxpayer aid, might not be able to exit the TARP program for years.
Still, banking executives have been lobbying to repay TARP money for months, hoping to free themselves from compensation and other restrictions as well as the additional scrutiny that came with accepting taxpayer money. They also hope the government’s seal of approval will give them a competitive edge and an added jolt to their share price, sustaining a recent rally.
“Everyone wants to get through this with enough capital, but there isn’t a bank C.E.O. or board member in the country that didn’t want to get out as fast as they can,” said Brian R. Sterling, an investment banker who specializes in financial institutions at Sandler O’Neill in New York. “It’s expensive. The rules change. And in some markets, the competitor down the street is putting up billboards saying ‘I’m not a bailout bank.’ ”
Yet even as they exit the program, banks remain tethered to the government by a series of programs that were rolled out as the credit crisis worsened. The administration, for example, plans to introduce new compensation guidelines within the next week that would apply to a range of financial companies — including those that returned taxpayer money. TARP recipients, meanwhile, are bound by certain restrictions, like limits on temporary work visas known as H1-B’s, until they expunge the taxpayer warrants.
The TARP program was intended last fall as a long-term investment by the government to get the financial industry through the worst crisis since the Depression. As the financial system teetered, Treasury Secretary Henry M. Paulson Jr. called the heads of the nation’s largest banks to Washington in October and pressed them to accept the money — regardless of whether they thought they needed it. But when compensation and other restrictions were attached to calm political furor over Wall Street bonuses, healthier banks pushed to leave the program.
The Federal Reserve announced last week that it planned to give the go-ahead to an “initial set” of banks that proved they were strong enough operate with less government support. Federal officials want to avoid the political embarrassment and financial risks of allowing a bank to exit the program only to see it return for more taxpayer aid if the economy worsens.
Banks had to show regulators their capital levels were high enough to withstand a severe recession, they could sell a sizable amount of common stock, and they could begin issuing billions of dollars of debt without the government’s backing.
Even after they repay the taxpayer money, the banks could face another showdown with federal officials over the value of warrants. To fully disentangle themselves from government, banks will have to either allow the Treasury to auction the warrants or buy them back. The government has nine years before it is required to sell them.
All told, buying back the warrants could cost the banks as much as $4.6 billion, according to an estimate by Linus Wilson, a finance professor at the University of Louisiana at Lafayette. Taxpayer warrants in JPMorgan Chase could be worth $1.7 billion, according to Professor Wilson’s estimates. Warrants in Goldman Sachs and Morgan Stanley be worth well over $600 million each.
Regulators at the Fed, meanwhile, began analyzing the fund-raising plans on Monday for 10 other banks, which required additional capital after the stress test. As part of that process, regulators are looking closely at the banks’ risk management practices and executive team. Those reviews are expected to be completed in a few weeks.
Jun 9, 2009
