With strings attached, banks can return taxpayer money

McClatchy NewspapersMay 5, 2009 

WASHINGTON — Federal regulators are preparing to release new rules governing how banks can return billions in taxpayer bailout money, but the guidelines may actually make it harder for financial institutions to shed the government as their business partner.

Several large banks, such as Wells Fargo, J.P. Morgan Chase and Goldman Sachs, have said recently that they hope to swiftly return their taxpayer bailout money. Regulators worry, however, that the global banking system remains fragile. They prefer that the banks hold on to bailout money for longer, at least until recovery is more certain.

The new rules, coming as early as Wednesday, allow for the return of the bailout funds under conditions that most banks aren't likely to accept. A senior government official, speaking on the condition of anonymity because the program wasn't yet public, said banks would have to give up a special loan guarantee program in the process.

In an effort to restore stability to the banking sector, the Federal Deposit Insurance Corp. has been providing a guarantee to bonds and other debt issued by the banks. This guarantee has allowed banks to issue, as of May 4, more than $332 billion in new debt since last fall, when the global financial system was on the verge of collapse.

Few banks are thought to be strong enough to both give up the money they received from the Troubled Asset Relief Program, and walk away from the loan guarantees. The guarantees give investors a much greater degree of comfort in buying bonds issued by the still-troubled banks.

The conditions for returning bank bailout money mean those with the highest degree of government intervention to date — Bank of America and Citigroup — are unlikely to be able to return their taxpayer funds anytime soon, because investors want the loan guarantees as a seal of approval.

The new conditions, which began to emerge late Tuesday, are unpopular.

"Banks were forced to take TARP money and now they move the goal post, making it hard to get out," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a trade group for large financial institutions.

For months, banks have been the focus of public anger for taking billions of dollars in TARP money. To get the TARP money, the government required the banks to agree to tough executive compensation rules and to swear off bonuses, travel on company jets and other perks reserved for top officials.

The Treasury Department and Federal Reserve are poised to release results Thursday of stress tests conducted on the 19 largest U.S. banks — those with assets above $100 billion.

The stress tests gauge how well a bank's loans and investments might fare under a steeper economic decline than the one happening now. Several banks, including Bank of America and Citigroup, are expected to receive government orders to raise more capital to build a larger protective buffer.

The stress tests are already causing investors to differentiate between banks, with the perceived weaker ones seeing their share prices decline. That's another reason why regulators hope to discourage a return of TARP money right now. The more taxpayer bailout money banks carry on their balance sheets, the harder it is for investors to differentiate between the strong and the weak.

Regulators hope that over time, as the economy rebounds, that gap between strong and weak banks will narrow, and a stronger banking sector will result.

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