Published June 10, 2009

10 big US banks cleared to make payback

JP Morgan, Goldman Sachs, American Express believed to be among them

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(WASHINGTON) The Treasury Department cleared the way for 10 big banks yesterday 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 US$68.3 billion to the Treasury Department, more than double the administration's initial estimate of about US$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 Corp, 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 US$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 US$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 US$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 US$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,' Treasury Secretary Timothy Geithner, said in a statement. The Obama administration hopes that the accelerated payback will show that its financial recovery programmes 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 US$1.8 billion in annual interest payments while leaving its support programmes 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.

Among the big banks not included in yesterday's action are Citigroup, Bank of America and Wells Fargo. Citigroup, which has accepted US$45 billion in taxpayer aid, might not be able to exit the TARP programme 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 that 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 CEO 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 specialises 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 programme, banks remain tethered to the government by a series of programmes 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 programme 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, then 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 programme.

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 to operate with less government support. Federal officials want to avoid the political embarrassment and financial risks of allowing a bank to exit the programme only to see it return for more taxpayer aid if the economy worsens. -- NYT