Green Light to Repay Bailout Funds

The Treasury on Tuesday gave the go ahead for ten of the largest US banks to repay $68 billion collectively in federal bailout money. The move also loosens restrictions on executive compensation which the banks claim are causing them to lose top executives. The banks received the aid at the height of the financial crisis under the Troubled Asset Relief Program (TARP).

Experts say that the green light given to the banks to repay the money is an indicator that some stability is returning to the financial system, though we have yet to reach the end of the crisis. Some analysts also fear that the repayments could make the gap between healthy and struggling banks larger.

All eight banks which received money under the TARP and passed government-conducted stress tests last month have confirmed they’ve been given the green light to repay the funds. Those eight are : Chase, American Express, JP Morgan, US Bancorp, Capital One, Goldman Sachs, State Street, BB & T Corp., and Bank of New York Mellon Corp.

Morgan Stanley failed the stress test, but was able to raise sufficient capital and was also approved to repay its bailout money. Northern Trust Corp. was not put through the stress test, but they were also allowed to repay their bailout funds.

Addressing reporters at the White House, the President said the news is certainly welcome but “this is not a sign that our troubles are over – far from it.”

The stock market was up and down in response to the news. The Dow Jones gained around 20 points in the afternoon. Other indexes also made moderate gains. Some experts fear that the banks repaying TARP money may hide problems within the broader banking sector, such as the billions in risky real estate loans that smaller banks are struggling with. In addition, larger banks are still suffering from mortgage backed assets which are at the core of the financial crisis.

600-plus banks have received almost $200 billion in aid under TARP, a part of the broader $700 billion financial rescue plan. 22 smaller banks have already repaid their bailout money.

Initially the aid was utilized to purchase preferred shares of the banks’ stock, which serve as investments that go to pay regular dividends.

Officials say that the funds were an important investment in the banks. The government would get warrants and dividends, slowing it to purchase shares of the banks over the next ten years at a set price.

Critics complain that taxpayers will never see a significant portion of the aid. But the news released Tuesday indicates that taxpayers could profit from repayments, at least for this program.

The President expressed his approval that people are starting to receive “an initial return on a few of these investments.”

Other funds from the broader $700 billion bailout package will be more difficult to recover. And at least some of it, like the $70 billion given to failed insurance company AIG eventually landed among the assets of relatively healthy banks like Goldman Sachs. As a result, taxpayers are extremely unlikely to get back the entire $700 billion, despite profits from the banks.

One analyst, while agreeing that the repayments are a positive indicator, noted that three of the largest banks in the country, Citigroup, Wells Fargo, and Bank of America are still a factor in the bailout.

Even those banks which have been allowed to begin repaying funds are dependent on support from the government, such as guarantees on their debt and Federal Reserve credit lines.

AMEX and US Bancorp expect the repayments to lower earnings for the quarter. Banks have been under restrictions on executive compensation and claim they have lost key employees to small firms and foreign banks. It is expected that the Administration will announce new rules governing executive compensation which would apply to banks that have received TARP funds.

When the aid was first awarded, Treasury received warrants from the banks which it could use at a later date to purchase stock at a fixed price. Stock values are expected to rise, of course, as the economy experiences a recovery. Hence the warrants could represent nice profits for taxpayers.

The banks are now allowed to buy back the warrants from Treasury at fair market value. Secretary of the Treasury Timothy Geithner testified before a Senate panel that the value of these warrants is several billion dollars.

Besides the possible profits for taxpayers from Treasury’s future sale of the warrants, all ten of the banks have paid, collectively, almost $2 billion over the last 7 months in dividends on the preferred stock.

The total of dividend payouts from all TARP recipients is about $4.5 billion so far, Treasury officials report.
The totals each bank could repay are:
JPMorgan: $24.8 billion
Morgan Stanley: $10.1 billion
Goldman Sachs: $10.3 billion
U.S. Bancorp: $6.5 billion
Capital One: $3.7 billion
American Express: $3.3 billion
BB&T: $3.2 billion
Bank of New York Mellon: $3.1 billion
Northern Trust: $1.7 billion
State Street: $2.1 billion