Not so fast: Big banks can do U.S. one more favor

WASHINGTON (Reuters) - The Obama administration is using its waning days as a shareholder in some of the biggest U.S. banks to boost public confidence in the financial sector by nudging the firms to embark on a blast of private capital raising.

Financial industry officials said it is no coincidence that a number of big banks that received a relatively clean bill of health in government "stress tests" announced stock offerings this week.

Bank regulators and U.S. Treasury Department officials have repeatedly hammered home the message the financial sector will be perceived as stable only when private capital flows back into the banks, unassisted by federal funds.

The window for government influence is closing for several big banks that are preparing to repay billions of dollars in federal funds in the coming weeks.

"Banks are being encouraged, if not urged" by regulators to raise extra capital even if they do not have a capital hole, said a financial industry official familiar with Treasury thinking. "When private investors are willing to put their money at risk in the financial sector, that's a major turning- the-corner moment."

A Treasury spokesman did not immediately respond to a request for comment.

JPMorgan Chase & Co and American Express Co announced plans on Monday to sell $5.5 billion of common stock. The unexpected news came within minutes of the Federal Reserve saying the big banks must show they could access the public equity markets before they can exit the government's bank bailout plan.

Tapping private capital had not previously been an explicit requirement, especially for banks that were told they had enough capital after government stress tests last month.

Other capital announcements quickly followed. Bank of America Corp said it raised $7 billion over six days, Morgan Stanley sold $2.2 billion of stock and Goldman Sachs Group Inc sold $1.9 billion of its stake in Industrial and Commercial Bank of China Ltd.

TARP - A FOUR-LETTER WORD

Big U.S. banks have been champing at the bit to get free of restrictions attached to Treasury Department bailout money.

But the government's demand that even healthy banks show they can raise more private equity comes at a price.

"The near-term consequences is that these banks are going to dilute their shareholders, maybe more than necessary," said Andrew Kuritzkes, a partner at consulting firm Oliver Wyman.

The Treasury Department has had a history of using the biggest banks as a conduit for larger efforts to rescue the financial sector from the brink over the last 18 months, even if the banks are not the most eager participants.

Some of the big banks rankling under the government's grip say they were forced by former Treasury Secretary Henry Paulson last October to take funds from the $700 billion Troubled Asset Relief Program (TARP). They demanded an easy escape route from TARP after Congress attached a slew of restrictions on executive compensation, dividend payments and share repurchases on TARP recipients.

JPMorgan Chief Executive Jamie Dimon has been clear about his distaste for the program, calling the TARP money a "scarlet letter" that unfairly brands all participating banks as weak.

On Monday, Dimon read a mock letter to Treasury Secretary Timothy Geithner at a New York University hospitality industry conference: "Dear Timmy, we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did."

Geithner told CNBC on Tuesday that Treasury will "see substantial repayments from some institutions starting relatively quickly." His comments followed the Fed's announcement on Monday that it will announce next week which of the 19 largest banks will get the green light to repay TARP funds.

The financial industry official said the government is encouraging capital raising by healthy banks not only because it looks good for the financial system, but also because it is a good deal for banks right now, even if there is some dilution for current stockholders.

"These stock prices have come way, way back," the official said, speaking anonymously because talks with Treasury have been private.

JPMorgan's stock has more than doubled in the last 15 weeks to $36. Goldman's shares have almost doubled to $144 and Morgan Stanley's shares have surged more than 80 percent to $30.

"The message is to take advantage of these favorable prices," the financial industry official said.

(Reporting by Karey Wutkowski; Editing by Andre Grenon)