JPMorgan, Goldman Sachs and eight other top US banks won clearance to repay $68 billion in taxpayer money given to them during the credit crisis, a step that may help them escape government curbs on executive pay.
Many banks had chafed at restrictions on pay that accompanied the capital injections. The US Treasury Department's announcement that some will be permitted to repay funds from the Troubled Asset Relief Program, or TARP, begins to separate the stronger banks from weaker ones as the financial sector heals.
Treasury didn't name the banks, but all quickly stepped forward to say they were cleared to return money the government had pumped into them to try to ensure the banking system was well capitalized
Stock prices gained initially after the Treasury announcement but later shed most of the gains on concern the money could be better used for lending to boost the economy rather than paying it back to Treasury.
“If they were more concerned about the public, they would keep the cash and start loaning out money,” said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago.
Treasury Secretary Timothy Geithner told reporters the repayments were an encouraging sign of financial repair but said the United States and other key Group of Eight economies had to stay focused on instituting measures to boost recovery.
Earlier this year US regulators put the 19 largest US banks through “stress tests” to determine how much capital they might need to withstand a worsening recession. Ten of those banks were told to raise more capital, and regulators waited for their plans to do so before approving any bailout repayments.
As a condition of being allowed to repay, banks had to show they could raise money on their own from the private sector both by selling stock and by issuing debt without the help of Federal Deposit Insurance Corp guarantees. The Federal Reserve also had to agree that their capital levels were adequate to support continued lending.
American Express Co, Bank of New York Mellon Corp, BB&T Corp, Capital One Financial Corp, Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley, Northern Trust Corp, State Street Corp and US Bancorp all said they had won approval to repay the bailout funds.
In contrast, neither Bank of America Corp or Citigroup Inc, which each took $45 billion from the government, received a green light to pay back bailout money.
The government is in the process of taking as much as a 34% equity stake in Citigroup, while Bank of America has indicated it would like to begin repayment later this year.
Treasury said banks repaying bailout funds also can repurchase warrants that the government holds in their firms “at fair market value,” and many of the approved banks said they intended to do so.
The warrants give the government the right to buy common stock at a predetermined price for up to 10 years and were intended to give taxpayers a chance to share in the profits of healthy banks. Geithner said some of the warrants were now valued in “the several billion dollar range.”
On Tuesday, the head of a US financial bailout oversight panel, Elizabeth Warren, indicated she planned to ensure taxpayers were getting a fair deal.
Geithner, in congressional testimony, said lawmakers could take “some modest encouragement” from the fact that repayment of $68 billion raised the chances that Treasury will not have to ask for more taxpayer money to get through the current crisis.
After doling out an additional $30 billion for General Motors Corp, the Treasury's unallocated financial rescue funds had dwindled to about $54 billion, assuming other programs get fully funded.
Many banks remain on government life support, leaving them still subject to restrictions not only on executive pay but also on dividend payments and share repurchases as well.
Treasury is expected to outline new rules on Wednesday for compensation for top earners at firms still supported by taxpayer funds, sources have said. Those rules will detail how restrictions Congress has put in place will be applied. In addition, US officials are eyeing ways to influence compensation practices across the entire financial industry.
US banks are eager to escape Treasury's influence, and Geithner acknowledged on Tuesday that some were reluctant to join in a program to unload toxic assets from their books by selling them off to public-private funds if it meant giving the government a say in their hiring and pay strategies.
“In my judgment ... these funds still are an important part of the necessary framework of tools to help get our country through this crisis, and I believe it is important that we go ahead and put them in place, even if participation is somewhat more limited than we would have expected,” he said.
Geithner heads for Italy later this week to join fellow finance chiefs from the Group of Eight -- the United States, Britain, Canada, France, Germany, Italy, Japan and Russia -- and the Wall Street Journal reported he will use the occasion to urge Europe to “stress test” its own banks.
At a briefing ahead of the June 12-13 meeting of G8 finance ministers, Geithner refused to judge other countries' standards for stress-testing.
The Obama administration moved quickly to apply tests to measure how US banks might fare if an economic downturn deepens, in contrast to Europe's slower approach. (Reuters)