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Ten Banks Allowed to Repay $68B in Bailout Funds

BY Admin  June 9, 2009 at 11:20 AM EST

Morgan Stanley; file photo

The banks, which were not immediately named, will be allowed to repay the money they received from the $700 billion Troubled Asset Relief Program created by Congress last October at the height of the financial emergency.

As the worldwide financial situation shows signs of stabilizing, the U.S. banks have been eager leave the TARP program to escape strict government restrictions such as limits on executive compensation.

“The less government involvement in business, the better business does,” Tom Alexander, head of Alexander Trading in Savannah, Ga., told Reuters. “Markets are very happy to see the government getting out (of banks).”

Among the banks that passed government “stress tests” last month and likely were approved to repay the bailout funds are: Goldman Sachs Group, JPMorgan Chase and American Express, according to the Associated Press.

In addition to those banks, people briefed on the situation told the New York Times that Bank of New York Mellon, BB&T Corporation, Capital One Financial, State Street Corporation and US Bancorp were among the 10. All of those banks passed the stress test and applied to return TARP funds. 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.

Experts say allowing the 10 banks to return bailout money illustrates some stability has returned to the system but caution that the crisis isn’t over. Some worry the repayments could widen the gap between healthy and weak banks.

The banks are expected to pay back about $68.3 billion to the Treasury Department — more than twice the Obama administration’s previous repayment estimate of about $25 billion, the New York Times reported. The timetable is also earlier than originally intended.

The Obama administration hopes the quicker repayments will prove that its financial recovery programs are working, even if the economy remains fragile. The payback 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.

“Everyone wants to get through this with enough capital, but there isn’t a bank CEO or board member in the country that didn’t want to get out as fast as they can,” Brian Sterling, an investment banker who specializes in financial institutions at Sandler O’Neill in New York, told the Times. “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.’ ”

More than 600 U.S. banks have received nearly $200 billion in TARP funds and 22 smaller banks already have repaid it.

“These repayments are an encouraging sign of financial repair, but we still have work to do,” Treasury Secretary Tim Geithner said in a statement.

The 10 banks will not fully escape tough government regulations until they rid themselves of warrants giving taxpayers a share of the potential upside on their investments. The firms can now purchase the warrants Treasury holds on them “at fair market value.” Besides Treasury’s potential income from the sale of the warrants, the 10 banks already have paid dividends on the preferred stock totaling about $1.8 billion over the last seven months.

Dividend payments received for all participants are about $4.5 billion to date, according to Treasury.

The push to repay the funds comes a month after “stress tests” of the nation’s 19 largest financial firms found that 10 needed to raise $75 billion more to protect against future losses. All of those banks, including Citigroup and Bank of America, had submitted plans by late Monday to bolster their capital cushions that were enough to help them survive a deeper recession, the Federal Reserve said.

The other nine institutions had to prove they could raise enough private capital without federal guarantees before they could return the money.

So far, 16 of the 19 banks have raised $75.2 billion, mostly by selling common stock, according to news services.

Regulators want to avoid letting a bank repay its TARP money only to have it return months later in worse shape, seeking another round of aid.