Third in a series

Banks, like troubled consumers and borrowers, want the option to repay their crisis-related debt in installments.

Sounds logical, and the government doesn't seem to mind, but not everyone's a fan of that idea.

While the concept of returning Troubled Asset Relief Program funds to the Treasury Department in installments has its attractions, some observers are second-guessing that safety-first strategy, given the complexity of the federal aid program and doubts about the banking industry's near-term prospects.

Two companies — Bank of America Corp. and SunTrust Banks Inc. — have indicated in recent weeks that they are seeking to return in bits their take from Tarp. Other large companies are likely to pursue this tack, industry watchers said, because even partial repayments have clear economic and political benefits. The Treasury has shown that is open to the option, allowing regional Valley National Bancorp, for example, to return 25% of its Tarp funds this summer.

The banks are right to want to do so, said Kevin Petrasic, counsel in the banking and financial institutions practice of Paul, Hastings, Janofsky & Walker LLP. "It is beneficial for institutions to get out of the Tarp and sort of be able to stand on their own footing."

Paul J. Miller, managing director and head of financial institutions research with FBR Capital Markets, commended installment plans. He noted that banks that had the strength to pay the government back in full have already done so, and he said installment plans could help weaker banks raise cheaper capital by heartening investors.

"I think there is a lot of capital floating out there and people should take advantage of it," Miller said. "If you can't pay it all back — why don't you pay a little bit back. Hopefully, you'll get a boost in the stock market. None of these guys can pay it back in one fell swoop."

But even piecemeal repayments have risks and complications.

Loan losses are expected to deepen through 2010, so money-losing banks could make themselves more vulnerable to future losses by cutting into their capital; the Treasury has made it clear there will be no more bailouts. There are also a slew of questions surrounding the mechanics of partial repayments. Will banks have to issue more common stock as part of a repayment? How would the warrants held by the Treasury be resolved in a partial payment?

James Wells, the chief executive of SunTrust, illustrated the confusion during a presentation in New York on Tuesday during which he expressed his interest in repaying his company's $4.9 billion in Tarp funds "the minute it's possible."

"We do intend to repay the government as soon as we are permitted to do so," Wells said during the Barclays Global Financial Services Conference. "The reality is the rules about repaying Tarp are mysterious and changing all the time."

Wells didn't answer when an attendee asked him if he were considering a partial repayment. But Nancy Bush, who runs NAB Research LLC, said Wells told her in an interview this month that the Atlanta company was seeking a "dialogue" with the government that would lead to at least a partial repayment.

She was ambivalent about the prospect. She said SunTrust might have the capital to make a full or partial repayment, having raised $2.3 billion after failing the government's stress test of the largest banks. But the company's profitability outlook is sketchy.

"I don't think it's a capital issue at this point," Bush said. "It's more of a you're-not-able-to-come-back-to-the-till issue — what is your capital burn going to be between now and 2010?"

Wells declined to say when he expects SunTrust to return to profitability, though he said its credit issues are starting to stabilize. He said regulators will probably allow it to repay Tarp after it shows that its losses will be under the $11.8 billion it was projected to lose under the most adverse conditions in the stress test.

At the same conference, Bank America's chief financial officer, Joe Price, confirmed a media report from earlier this month that the Charlotte company was considering repaying part of its $45 billion in Tarp money.

Price said Bank of America was thinking about repaying its aid in "installments rather than all at once."

"We are doing everything we can to put ourselves in the position to repay Tarp in the appropriate period of time," he said.

B of A would "love" to get the $20 billion in extra aid it received in January to acquire Merrill Lynch "behind us," Price said.

The Wall Street Journal reported two weeks ago that Bank of America was seeking to repay that portion of its bailout aid, as it carries a higher dividend rate and tighter restrictions on executive compensation than the $25 billion it initially took.

David A. George, an analyst with Robert W. Baird & Co., wrote in a report earlier this month that repayment of the Merrill Lynch-related funds would be "positive" for Bank of America.

For one thing, it would eliminate a costly $400 million quarterly dividend payment to the government, which could boost B of A's earnings per share by 18 cents in 2010, he wrote.

It might also make it easier for the company to recruit and retain top talent by easing the tougher compensation rules.

Some critics say Bank of America should not be allowed to repay Tarp right away, since it likely will have to keep adding to reserves through next year to stem loan losses.

Miller questioned whether B of A should first have to show it has sufficient earnings power to repay Tarp.

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