Banks to repay bailout money — and U.S. gets a profit

McClatchy NewspapersJune 9, 2009 

WASHINGTON — Ten of the nation's largest bank-holding companies have gotten the OK to repay the federal government a combined $68 billion in taxpayer bailout money, the Treasury Department said Tuesday.

"These repayments are an encouraging sign of financial repair, but we still have work to do," Secretary Timothy Geithner said in a statement announcing the repayment.

More than 600 financial institutions have received taxpayer bailout money worth a total of $199 billion under the Capital Purchase Program. Ten of the biggest banking companies now will begin to repay the Treasury, an encouraging sign since critics were calling for bank nationalization months ago and bank share prices were in the dumps.

The companies that got the OK to start repaying their bailout money are American Express, Bank of New York Mellon, BB&T, Capital One, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Northern Trust, State Street and U.S. Bancorp.

Not on the list were three troubled institutions — Charlotte, N.C.-based Bank of America, Citigroup and Wells Fargo — that have received a total of $115 billion in bailout money.

Most of the other companies that weren't among those authorized to return bailout money were big regional banks, many of which are vulnerable to a sharp downturn in commercial real estate. They include Fifth Third Bancorp, KeyCorp, PNC Financial Services Group, Regions Financial Corp. and SunTrust.

Auto finance giant GMAC received taxpayer money that it isn't able to repay now.

President Barack Obama welcomed the announcement.

"I've said repeatedly that I have no interest in managing these banks — or running auto companies or other private institutions, for that matter. So today's announcement is welcome news," Obama said, noting a small profit for taxpayers.

"But I also want to say: The return of these funds does not provide forgiveness for past excesses or permission for future misdeeds. It is critical that as our country emerges from this period of crisis, that we learn its lessons; that those who seek reward do not take reckless risk; that short-term gains are not pursued without regard for long-term consequences."

The 10 banks that will start repaying the Treasury already have paid the U.S. government $1.8 billion in dividends since the government became a preferred shareholder under the Bush administration's bank rescue program. Additionally, the government received stock warrants in exchange for the bailout money, and some analysts think that the government could reap another $5 billion in profits once negotiations over all the warrants conclude.

Under the bank rescue plan, Congress authorized the Treasury, through the Troubled Asset Relief Program, to buy so-called toxic assets from banks. Instead, however, the Bush administration pumped capital into the banks to bolster their balance sheets, and the Obama administration has continued the practice.

The repayment was expected, since government-mandated stress tests last month found that 10 of the 19 largest bank-holding companies — those with assets greater than $100 billion — could withstand an even deeper downturn in the economy. These companies also had to prove that they could raise capital without government support.

Soon after the results of the stress tests were made public, banks began lobbying publicly and privately to return the bailout money, and they vowed Tuesday that they'd do so soon.

"Morgan Stanley is pleased to be repaying its $10 billion in TARP capital with an attractive return for taxpayers," the Wall Street bank said in a statement. "We believe this positive development reflects both Morgan Stanley's strong capital position, as well as the important systemic role the TARP program played in helping stabilize the U.S. banking system since the height of the financial crisis."

JPMorgan Chase said it would retain a strong balance sheet even after it repaid the government $25 billion.

"Paying back TARP at this time is the right thing for JPMorgan Chase, and it's the right thing for our country," Jamie Dimon, the bank's chairman and chief executive officer, said in a statement. "We feel it's best for our government to be able to use these funds for other critical purposes."

Many of the banks that now are authorized to return bailout money didn't want to take the government injections last year, but they were told they had to in order to strengthen the entire banking sector. They also objected to numerous restrictions attached to the money, including limits on executive bonuses and the use of corporate jets and even the inability to hire foreign nationals.

The stress tests were roundly criticized when they began in February, but the economy has improved since then, Wall Street is witnessing less volatility and the banks themselves — while not increasing their lending — seem to be on more solid footing.

"It provides Treasury with more financial resources for other purposes, it frees the 10 banks from fetters of government oversight and it sends a strong signal that the financial system is on the mend," said Mark Zandi, the chief economist for forecaster Moody's Economy.com. "It does highlight that there are still many institutions that are not healthy enough to repay their TARP money, but that's not a surprise."

The Congressional Oversight Panel, which was created to oversee the spending of bailout money, gave a thumbs-up to the stress testing Tuesday.

"The panel finds that, on the whole, the stress tests were based on a solidly designed working model and have helped to restore confidence in the financial system," panel members, who've been critical, said in a statement.

The oversight panel recommended that the stress tests continue periodically for banks that have large amounts of "toxic assets" on their books.

The Treasury Department and the Federal Deposit Insurance Corp. had planned to launch a public-private partnership this month to help auction off the mortgage debts and other bad assets held by banks. That now seems unlikely amid lukewarm support from the financial sector.

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