May 19, 2009 / 7:13 PM / 11 years ago

U.S. banks are kept guessing on TARP repayment

WASHINGTON/NEW YORK (Reuters) - The U.S. government is slowly opening the gates as the nation’s biggest banks rush to repay federal bailout money, but has not yet made clear how it will decide who gets in first.

The government has kept banks guessing on what exactly it will require before allowing repayment of tens of billions of dollars received by banks under the Troubled Asset Relief Program (TARP).

Several major banks that underwent government “stress tests” of their ability to withstand a severe economic downturn have asked to repay TARP, a Federal Reserve official said on Tuesday.

No government approvals will be announced until around the second week of June, and recommendations will likely come in batches rather than one bank at a time, the official said.

But regulators worry that banks trying to get out of TARP are overestimating their prospects and could be forced to return for more money if the economy falls off a cliff.

Gerard Cassidy, an analyst at RBC Capital Markets, expects the government will allow TARP recipients to repay funds only over time, perhaps 12 months, rather than all at once.

“If you’re Treasury, you want to make sure that, God forbid we take an unforeseen plunge in the economy, the capital will be there,” he said.

RUSH TO REPAY

Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N) and Morgan Stanley (MS.N) have applied to repay TARP funds, according to people familiar with the matter, who declined to be named because the repayment talks are private.

JPMorgan Chief Executive Jamie Dimon on Tuesday said “we can and should be able to repay TARP,” adding: “We believe the government will allow a few well-capitalized banks to repay TARP in the next couple of weeks.

Earlier this month, regulators told nine of the 19 big stress-tested banks that they did not need more capital.

Eight of the nine received TARP money, and all want to repay it soon: Goldman, JPMorgan, American Express Co (AXP.N), Bank of New York Mellon Corp (BK.N), BB&T Corp BBT.N, Capital One Financial Corp (COF.N), State Street Corp (STT.N) and U.S. Bancorp (USB.N).

Two others found to have fairly modest capital shortfalls, Morgan Stanley and PNC Financial Services Group Inc (PNC.N), quickly took steps to raise the sums needed.

Murali Gopal, a Keefe, Bruyette & Woods Inc analyst who covers custodial banks Bank of New York, State Street and Northern Trust Corp (NTRS.O), said regulators might distinguish among banks by how far they exceed minimum capital levels.

“If capital is still not very strong, the government may be hesitant to let that bank repay TARP,” he said. “Northern Trust and Bank of New York are in good positions to repay TARP, but State Street’s capital ratio is still not where you want it to be. Tangible common equity may not be ‘comfortably strong.’”

The government created TARP last fall to unlock the flow of credit after credit markets were brought to a near halt by shocks such as Lehman Brothers Holdings Inc’s LEHMQ.PK bankruptcy.

At first, banks viewed TARP money as a positive, signaling government confidence. But TARP also allows the government to unilaterally impose restrictions, including on pay, and many investors now believe holding bailout money signals weakness.

“CAREFULLY INDEFINITE”

Many banks have met major requirements to repay funds, including sales of debt not backed by the government.

But regulators have not made clear what other factors they are considering, such as how much can be repaid at once and on what terms, or what they will charge banks to buy back warrants giving the government a right to buy stock over time.

“They were carefully indefinite,” said Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official. “(Regulators) left themselves a door open to add more conditions or ... insert subjective views.”

Policymakers are causing confusion among large banks about what the Treasury Department must see before deeming a bank “safe and sound” outside TARP, said a financial industry source familiar with the talks about repayment. The source sought anonymity because the talks are private.

The Treasury Department is also concerned that if it lets some banks repay TARP but not others, investors will punish those banks deemed to be falling behind.

Several analysts said many members of Congress are tired of throwing taxpayer money at the banking system. Lawmakers are eager for repayments but do not want the funds to go back into TARP, where the money could be available for future rescues.

“Congress is not likely to reauthorize TARP funds,” Cassidy said.

Reporting by Karey Wutkowski and Jonathan Stempel; Additional reporting by Mark Felsenthal and Joseph A. Giannone; editing by John Wallace

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