TOPICS > Economy

Treasury Clears 10 Banks to Repay $68 Billion in Bailout Money

June 9, 2009 at 6:00 PM EDT
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Treasury Secretary Timothy Geithner faced lawmakers' questions after the announcement that ten large banks have been cleared to begin paying back billions of dollars in federal rescue money. Jeffrey Brown talks to Washington Post reporter Binyamin Appelbaum about the details.

JIM LEHRER: Several large banks will repay billions of dollars in federal rescue money. The U.S. Treasury announced that today, as it approved the repayments to the TARP, the Troubled Asset Relief Program.

Jeffrey Brown has our lead story report.

JEFFREY BROWN: The statement from Treasury said 10 banks will be allowed to pay back a total of $68 billion. They received the funds after Congress approved the TARP program last October.

Today’s approved repayment list included: JPMorgan, Morgan Stanley, Goldman Sachs, U.S. Bancorp, Capital One, American Express, BB&T, Bank of New York Mellon, Northern Trust, and State Street.

Bank officials have complained about federally imposed limits on executive pay and marketing and other curbs.

At a White House event, President Obama welcomed word of the repayments.

U.S. PRESIDENT BARACK OBAMA: Now, this is not a sign that our troubles are over. Far from it. The financial crisis this administration inherited is still creating painful challenges for businesses and families alike. And I think everybody sees it in their own individual districts.

But it is a positive sign. We’re seeing an initial return on a few of these investments. We’re restoring funds to the Treasury, where they will be available to safeguard against continuing risks to financial stability.

JEFFREY BROWN: So far, banks have paid the government about $4.5 billion in dividends on preferred stock they received under the TARP program. That’s in addition to the announced repayments of loans.

In all, more than 600 banks have received almost $200 billion in rescue money; 22 smaller banks have already repaid the loans, and many others are pushing to join them.

But at a Senate hearing today, Treasury Secretary Timothy Geithner was asked whether banks will make more loans once they are no longer tied to the TARP.

SEN. DICK DURBIN, D-Ill.: What kind of assurance do you have that these banks that return this money are going to be issuing credit, which was one of the original goals?

TIMOTHY GEITHNER, Treasury secretary: These banks are in a position now where they can make normal business judgments about lending.

It makes it very hard to judge, because you don’t know what would have happened in the absence of investments, what lending would have been produced. But I think you’re — you have a financial system today that is substantially stronger than it was two, three, six, nine months ago and is in a much better position to provide the credit necessary to help us get through this recession and get back on a growth path again.

Some skeptical of stress tests

Binyamin Appelbaum
Washington Post
The banks were concerned about what Congress might do next. They said it was really the uncertainty that was plaguing them, the possibility that Congress would come along and impose new restrictions.

JEFFREY BROWN: Still, there are continuing questions. For example, a month after the government completed stress testing of the nation's largest financial firms, Elizabeth Warren, the head of a congressional oversight panel, told lawmakers today that the tests may have been based on an overly optimistic scenario.

ELIZABETH WARREN, chair, Congressional Oversight Panel: What is it you need to worry about here? Well, the stress tests said for 2009 one of the key economic assumptions under the worst-case scenario would be an 8.9 percent unemployment rate. We're now at 9.4 percent.

We recommend that the stress tests should be repeated under more difficult economic circumstances and over a longer time period for obvious reasons. It's way to test it to see how it works. We recommend that the tests should continue as long as the banks continue to hold large amounts of toxic assets.

JEFFREY BROWN: Even banks that repay the rescue loans still have debt guarantees from the Federal Deposit Insurance Corporation and credit lines from the Federal Reserve. And several major banks -- Citigroup, Wells Fargo, and Bank of America -- are not yet on the list of those eligible to repay TARP funds.

And joining us once again for more on all this is Binyamin Appelbaum of the Washington Post.

Binyamin, first, what were the criteria for deciding whether these banks were strong enough to get out of the TARP program?

BINYAMIN APPELBAUM, Washington Post: There were basically three criteria. The first is, based on the government's stress test, was a determination that the bank had enough money to absorb its likely losses during the rest of this recession.

The second was that, if it repaid the government's money, it would still have enough money to increase lending.

And the third was that it was able to raise money from private investors so that if it...

JEFFREY BROWN: On its own?

BINYAMIN APPELBAUM: On its own, so that if turned out that it didn't have enough money in its reserves, it could go out and replenish those reserves without government assistance.

JEFFREY BROWN: All right, now, I mentioned that the banks' discontent with some of the curbs -- notably, the executive pay was a big part of this. Let's flesh that out a bit more for us. How upset were they?

BINYAMIN APPELBAUM: There was a real concern in the industry that the congressional curb on executive pay, which basically said your top 25 earners are going to be restricted in terms of how much money they could make, that that would affect not just the executives, but the top traders, the top salespeople, the people who really bring the money into the firms, and that those people would be pushed out to other firms that weren't subject to the restrictions, and you'd really see a decline in the profitability of these institutions.

But even more than that, the banks were concerned about what Congress might do next. They said it was really the uncertainty that was plaguing them, the possibility that Congress would come along and impose new restrictions.

Executive pay restrictions

JEFFREY BROWN: You mean on executive pay or all kinds of things?

BINYAMIN APPELBAUM: Executive pay, hiring of foreign workers, perhaps which loans they could make. There have been instances of pressure over particular loans, the foreclosure of a factory that made clothing in the Chicago area. Wells Fargo was placed under pressure by some members of Congress to, you know, go easy on that borrower. There's been a real concern that the government would flex its muscles.

JEFFREY BROWN: To what extent did this become a competitive thing for some of these banks, that is, they want to show that they're in better shape than people think?

BINYAMIN APPELBAUM: There's no questions that for these banks -- and you could hear it today in their statements about this -- they want the world to know that they are strong, that they don't need the government's crutches, that they are able to stand on their own. They really see this as a differentiator, that they can say, "We gave back the money. Our rivals have not been able to do that yet."

JEFFREY BROWN: Of course, that goes to one of the arguments that a lot of people had against letting them do this, right, that it would split the banks into strong and weak?

BINYAMIN APPELBAUM: And that prevailed for a long time. Regulators were extremely concerned about that. The administration was concerned about that.

There was a feeling that, during the worst hours of the crisis, you really wanted to treat the industry as a single unitary block and discourage distinctions among banks.

But we've progressed past that. And there's a feeling now that there's really a benefit to the system to start saying, "These banks are OK. You can have confidence in these institutions, in putting them back up on their feet again."

Some large banks remain weak

Binyamin Appelbaum
Washington Post
The government has literally said, "We will not allow our largest banks to fail."... And there's a lot of concern that it enables risk-taking in a way that may not be ultimately productive either for these institutions or for the broader economy.

JEFFREY BROWN: And that's even though there's -- as I said, there's three big ones, well-known names -- Citigroup, Bank of America, and Wells Fargo -- that are not strong enough yet, right?

BINYAMIN APPELBAUM: That's right, yes. And they may suffer as a result of this. So it's not just going to be a sense of making the strong ones stronger, but as a consequence we may be making the weaker ones weaker.

JEFFREY BROWN: Now, another argument that's been out there over the last few months as we've been having this conversation and as it's been debated in the White House and Congress is that this allows some of these banks to go back to business as usual while they still have protection on the downside, right? If things go bad, there are still various programs in place that they know they'll be protected.

BINYAMIN APPELBAUM: That's right. It invokes in some minds a comparison with the way that Fannie Mae and Freddie Mac used to operate. The government has basically said, "Your profits belong to you, but your risks, should things go horribly wrong, belong to us. We'll be there. We're beneath you."

The government has literally said, "We will not allow our largest banks to fail." That's quite a guarantee. And there's a lot of concern that it enables risk-taking in a way that may not be ultimately productive either for these institutions or for the broader economy.

JEFFREY BROWN: And, as we heard from Elizabeth Warren, still concerns that they have not dealt with the so-called toxic assets, right?

BINYAMIN APPELBAUM: Yes, that's one of the most fascinating things about this is, after months of hearing from administration officials that the key to resolving this crisis was stripping away the toxic assets, the unpaid loans that sit on banks' books, so that they could start new lending again, we're not hearing as much about that anymore.

The government has shelved one plan to help private investors purchase those toxic assets. Another plan has been delayed. There's really much less emphasis on it.

Part of the reason is that the banks hate the idea. They see it as a way to transfer profits from them to those private investors. They've pushed back against it. And as they get stronger, they've really prevailed in that argument against the experts and even the government officials who think this still needs to happen before the banking system will really return to health.

Concerns over toxic assets

JEFFREY BROWN: But this is what the administration officials say to you when you ask about this? Because you're right. For a long time, this is what they told everybody, that we must deal with the toxic assets.

BINYAMIN APPELBAUM: They say in part that the need for it has diminished somewhat, that the ability of the banks to raise capital from private investors means that they can build the resources to sort of ride this out and to absorb a higher amount of losses.

But, in part, they acknowledge -- at least some of them -- that if they had their druthers, they would force the banks to sell these assets, but they simply don't have the mechanism to do that.

JEFFREY BROWN: Now, how soon would these banks start repaying the money? And what happens to the money? I think we heard President Obama say that it would be available, I guess, what, for other banks that are in trouble?

BINYAMIN APPELBAUM: For other banks or potentially for other programs. One thing we've seen -- so the payments first will come potentially this week, certainly by next week, and will continue to flow in. Some banks have said they'll get the money back to the government really as soon as possible. Others have said they'll take a couple weeks to set things up, figure out which money exactly they want to use to repay the government.

But once that money is back in the government's hands, it will really replenish a rescue program that had been, if not running on fumes, then running low on money. And all of a sudden, that $700 billion that Congress initially allocated to the Treasury Department, that amount of money is going to be -- about a third of it will still be there.

And we've already seen, you know, new programs stretching out into cars, stretching out into, you know, other areas, insurance companies now. It really opens up a lot of horizons for the government. It lets them think about, "Well, do we help state governments, like California? Do we help the municipal bond market? Do we perhaps, you know, work on reviving the economy in troubled areas?"

All of a sudden you've got a lot of money. And when the government has money, it usually finds a way to spend it.

JEFFREY BROWN: And as they were saying today, they're still warning that, while this is good news, still a long way to go?

BINYAMIN APPELBAUM: Yes, they're really underscoring that this is not a sign of economic recovery, that this is something else.

JEFFREY BROWN: All right, Binyamin Appelbaum, Washington Post, thanks again.