U.S. weighs how banks to give money back

May 20, 2009
U.S. Weighs How to Let Banks Give Money Back
By LOUISE STORY and ERIC DASH

It began on Oct. 13, in an atmosphere of panic, with an ultimatum from Washington. Now, the nation’s largest banks see a chance to bring an end to the bailout era.

After so much bad news, it scarcely seems possible. But having regained a financial footing as well as a bit of their old swagger, major banks are racing to pay back billions of taxpayer dollars. Many insist they will do so by year-end.

Few in Washington or on Wall Street expected such a quick reversal. Many said they believed banks would rely on the government for years. Banks, the thinking went, would need help coping with bad subprime mortgages and other troublesome assets that led to the financial crisis.

But now that big banks seem to have stabilized, regulators are trying to determine how and when these institutions should be allowed to return their bailout money — and whether such a step might leave banks vulnerable to another crisis should the economy turn for the worse.

Two weeks after the results of the federal stress tests, several banks, among them Bank of New York Mellon, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and U.S. Bancorp, have begun formal discussions with regulators about repaying their portion of the $700 billion rescue, said banking executives and a federal official.

New details emerged Tuesday about the repayment plans, including word that regulators would refuse to let a single major bank exit first, which might have given that institution considerable bragging rights. Instead, around June 8, the Federal Reserve expects to identify a group of banks that are ready to leave the bailout program, according to a Federal Reserve official, who was granted anonymity because of the Fed’s policy against speaking publicly on such matters. The Treasury Department will handle the timing of the payments, this person said.

Many ordinary Americans, angered by multibillion-dollar bailouts and what they see as excessive pay in the financial industry, might welcome news that taxpayers will get their money back sooner rather than later. But repaying the bailouts is not without risk.

While many big banks have, for the moment, stanched crippling losses, the banking industry still faces significant challenges. New troubles loom in commercial real estate and credit cards. By letting banks return bailout money, the government would cede some power over institutions that were at the center of the financial crisis. Banks, for their part, are eager to extricate themselves from heightened government oversight, including restrictions on their employees’ compensation.

“If a given bank repays the money and then in October, it needs the money again, that is going to be very scary,” said Douglas J. Elliott, a fellow at the Brookings Institution and a former banker at JPMorgan Chase.

Bank chiefs have said for months that they would like to repay the money, provided through the Troubled Asset Relief Program, or TARP. But it is only recently that several large banks entered into formal conversations with regulators. Executives at five banks discussed the issue for this article, but they were granted anonymity because they were not allowed to share their conversations with regulators.

Rumors and leaks about prospective repayment plans seem to emerge almost daily. Some observers say banks may be trying to force the government’s hand into allowing the repayments.

“You’re seeing more public tension between them,” said Andrew Goldberg, the chairman of the corporate and financial practice at Burson-Marsteller, a public relations firm. “This is a dialogue between two very different constituencies that operate with two different mind-sets — the banks and the government — and they intersect in the zone that we call TARP.”

The tension also reflects old Wall Street rivalries that are once again coming to the fore — if they receded at all. Goldman, for instance, has long been viewed as the most likely to pay off the money first. But rivals insist such a decision might be viewed as favoritism, given Goldman’s ties to important federal officials, including the head of the Federal Reserve Bank of New York, William C. Dudley, who once worked at Goldman. While several small banks have repaid their bailout money, no large bank has done so. Citigroup is the only large bank so far that has decided to make the government a long-term shareholder.

In deciding which banks can repay bailout money, the government will potentially draw a line between winners and losers.

One sticking point is whether to allow banks that return bailout money to continue using a government program that guarantees bank debt. Some banks might not be able to operate without that program.

Regulators said recently that that before companies could return the money, they must demonstrate that they could issue debt without the government program. A person briefed on regulators’ thinking said they were leaning toward allowing banks to continue using the debt program through October.

Another issue is taxpayers’ investment in the banks. The government owns warrants that give it the right to buy shares in the banks, and must now decide how much banks will have to pay to buy those warrants back. Stronger banks like Goldman favor a hefty price. Banks with less cash on hand want to expunge the warrants cheaply.

Strong or weak, most big banks want to repay the money before the end of this year, so that they can pay out bonuses as they see fit.