Ten of the nation’s largest banks were given the green light Tuesday to repay $68 billion in government bailout money, freeing them from restrictions on executive compensation that they say are making it hard to keep their top-performing executives.
The Treasury Department said the banks had been approved to repay the money they received from the Troubled Asset Relief Program created by Congress in October at the height of the financial crisis.
Experts say allowing 10 banks to return $68 billion in bailout money shows some stability has returned to the system but caution that the crisis isn’t over. And some fear the repayments could widen the gap between healthy and weak banks.
All eight banks that took TARP money and last month passed government “stress tests” confirmed they received permission to repay the bailout funds. They are: JPMorgan Chase & Co., American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp. and BB&T Corp.
Morgan Stanley did not pass the government test, but on Tuesday said it had raised enough capital quickly and was approved to repay its TARP money.
Northern Trust Corp. was not among the 19 banks subjected to stress tests, but the company said it also had received permission to repay the bailout funds.
Speaking at the White House, President Barack Obama welcomed the news but said “this is not a sign that our troubles are over — far from it.”
Stocks zigzagged after the Treasury’s widely expected announcement. In afternoon trading, the Dow Jones gained about 20 points. Broader stock averages also edged up.
Some analysts questioned whether the repayment of TARP money obscures dangers in the broader banking industry. Smaller banks are still saddled with billions of dollars in risky commercial real estate loans. And large banks continue to hold the toxic mortgage-backed assets at the heart of the financial crisis.
More than 600 banks have received nearly $200 billion in TARP money, and 22 smaller banks already have repaid their funds.
The 10 banks are set to return money from a $200 billion program the government created as part of the $700 billion financial rescue package. The money initially was used to buy preferred shares in the banks — which are investments that pay regular dividends.
Officials insisted the money was an investment in the companies. The government would receive dividends and warrants, which allow it to buy shares of the banks at a set price over the next 10 years.
Critics have fretted that taxpayers may never see much of the money. But Tuesday’s news makes clear that at least for this program, repayments could yield some profits for taxpayers.
Obama said he’s happy that people are beginning to see “an initial return on a few of these investments.”
Money from the $700 billion fund used for other programs will be harder to recover. And some of it, such as the $70 billion used to wind down failed insurance giant American International Group Inc., ended up in the pockets of relatively healthy banks including Goldman Sachs. That means taxpayers are unlikely to recoup the entire $700 billion, even with profits from the banks.
Bank analyst Bert Ely called the repayments a positive sign for the banking sector but not a reason to celebrate. He noted that three of the nation’s biggest banks — Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. — are still tied to the bailout.
Even the banks permitted to repay the bailout funds are still dependent on government support, including debt guarantees from the Federal Deposit Insurance Corp. and credit lines from the Federal Reserve.
American Express and U.S. Bancorp said the repayments would reduce earnings for the quarter.
Other observers worried the repayments are a better deal for the banks than they are for the taxpayer.
“We all know why the senior executives want to repay this money: It’s a burden to manage the TARP politics,” said Mark Williams, a finance professor at Boston University and former Fed examiner.
Williams argued that it would be best for the banks to keep as much capital as possible until the economy turns around. Unemployment continues to rise, he said, and that could mean more losses on loans and new bank failures.
“We’re not at the bottom of the banking crisis, so why is it, then, that the regulators are letting these banks reduce their capital cushion?” Williams said. “Should they stumble again, taxpayers will have to come to rescue.”
Banks have been chafing under limits on executive compensation and say key employees have been leaving for small private firms and foreign banks. JPMorgan Chief Executive Jamie Dimon has railed against government restrictions on hiring foreign employees.
The administration is expected to roll out new executive compensation rules Wednesday that would apply to banks that still have TARP funds.
When Treasury first doled out the money, it received warrants from the banks allowing it to buy stock at a fixed price at some future date. The stock prices are expected to rise as the economy recovers. As a result, the warrants could provide substantial profits for taxpayers.
The firms now have the right to purchase the warrants Treasury holds in their firm “at fair market value,” Treasury said Tuesday.
Testifying before a Senate panel, Treasury Secretary Timothy Geithner said the value of the warrants for banks permitted to repay TARP funds are in the “several billion dollar range.”
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 TARP participants are about $4.5 billion to date, according to Treasury.
The amounts the banks could repay are:
– JPMorgan: $25 billion
– Morgan Stanley: $10 billion
– Goldman Sachs: $10 billion
– U.S. Bancorp: $6.6 billion
– Capital One: $3.6 billion
– American Express: $3.4 billion
– BB&T: $3.1 billion
– Bank of New York Mellon: $3 billion
– Northern Trust: $1.6 billion
– State Street: $2 billion
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, Wells Fargo 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 Fed 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.
Geithner cautioned senators Tuesday that Treasury still needs flexibility to inject money into the financial sector and did not guarantee that the paybacks would be used to reduce government debt.
Lawmakers, particularly Republicans, have been insisting that any repaid bailout money be used to reduce the deficit.
But Geithner did say that the repayments made it less likely that the administration would need to seek additional money from Congress. The administration had included up to $750 billion in additional bailout funds in its budget proposal.
Associated Press writer Jim Kuhnhenn and AP Economics Writer Martin Crutsinger in Washington, and AP Business Writers Madlen Read, Stevenson Jacobs and Sara Lepro in New York contributed to this report.
California’s government is 50 days away from a financial “meltdown” if Governor Arnold Schwarzenegger and lawmakers fail to close the $24.3 billion budget gap. But Schwarzenegger would rather see the government screech to halt than agree to a high-interest loan.
Controller John Chiang warned of the coming crisis Wednesday:
Underscoring the severity of California’s cash crisis, Controller John Chiang, who has previously warned the state’s government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 percent, from a year earlier.
Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger’s budget plan by $827 million, Chiang said.
He warned California’s state government is speeding toward a financial disaster unless officials act urgently to balance its books.
“Without immediate solutions from the governor and legislature, we are less than 50 days away from a meltdown of state government,” Chiang said in a statement.
Schwarzenegger told the L.A. Times that a government shutdown might encourage legislators to get make deep cuts they have resisted.
State finance officials say California coffers will be empty in late July unless the projected $24-billion budget shortfall is resolved quickly. Schwarzenegger said that emergency borrowing would be too expensive and that his threat to block it was necessary to prod lawmakers into swift action.
A loan would only “give them another reason why we don’t have to do it now,” the governor said. “What we need to do is just to basically cut off all the funding and just let them have a taste of what it is like when the state comes to a shutdown — grinding halt.”
“Do they want to protect the workers that provide the services, or do they want to protect the people that get those services?” Schwarzenegger said. “The choice is up to them.”
Russia plans to buy $10 billion of International Monetary Fund bonds to help fellow member states weather the global financial crisis, a decade after the country defaulted on its own ruble debt.
The government “will soon allocate” the money from its foreign reserves, Finance Minister Alexei Kudrin said at a meeting late Tuesday with President Dmitry Medvedev, according to a statement posted on the Kremlin’s Web site yesterday.
The 185-member IMF is seeking more cash to finance loans and aid to member countries during the worst economic slump in the fund’s 64-year history. Russia made a commitment in principle to invest in the IMF’s first bond sale at the Group of 20 meeting in London last month, according to the Kremlin.
Russia, the world’s largest energy supplier, is suffering its first recession since 1998, when oil prices dropped below $10 a barrel and President Boris Yeltsin turned to the IMF and World Bank for cash as it defaulted on $40 billion of domestic debt. The economy may shrink as much as 8 percent this year, after annual growth of about 7 percent since 1999, Economy Minister Elvira Nabiullina said in an interview last week.
Russia joins the other so-called BRIC countries — Brazil, India and China — in expressing interest in purchasing the IMF bonds as an alternative way to contribute to the Washington-based fund. At the same time, Russia plans to borrow billions of dollars from the World Bank next year to cover a budget shortfall caused by lower oil prices and collapsing tax revenue.
