The U.S. Treasury this morning said yes to 10 institutions seeking to repay $68 billion in capital infusions received under TARP’s Capital Purchase Program. While Treasury was coy about who got the nod, most of the approved immediately issued statements spreading the news. JPMorgan Chase will repay all of its $25-billion infusion; Morgan Stanley is returning it’s $10 billion “with an attractive return for taxpayers,” according to its statement; U.S. Bancorp is returning its $6.6 billion; Capital One expects to repurchase the $3.55 billion in preferred shares it sold to the government; BB&T says it will pay back $3.134 billion, along with accrued and unpaid dividends; and Bank of NY Mellon “has raised $2.9 billion toward the repurchase of the $3 billion TARP capital,” according to its press statement; State Street Corp. is returning $2 billion; and Northern Trust is sending $1.576 billion back to Treasury.
In related news, the Fed late yesterday okayed capital raising plans submitted by Bank of America, Citicorp, and the rest of the stress-tested institutions required to augment Tier 1 capital.
While there were no great surprises in the Federal Reserve’s list of must-dos for returning the CPP infusions, the decisions may have been tougher than expected, some observers say, because the government had to be sure that those so eager to return taxpayer money wouldn’t need additional help down the road. Future reviews may not go quite as smoothly.
“One of key goals of TARP was to give confidence to the market,” says Laurence Kaplan, former special counsel at the Office of Thrift Supervision and now of counsel in the banking and financial institutions practice at Paul Hastings. “That worked, but what’s the exit strategy; originally they couldn’t redeem for three years; now just months after they received the infusions, banks want to give it back. That’s not really capital.”
Another issue: what happens to the billions of dollars that are being returned? “Can Treasury re-lend?” Kaplan asks. “That’s Geithner’s line. And there are plenty of banks where TARP would make a difference, in the community space.”
Sherry Cooper, executive vice president/global economic strategist and BMO Financial Group applauds the banks’ efforts to return TARP money. “As financial markets heal, banks are shying away from government assistance, betting that they can rely fully on the market to build capital positions,” she writes in a note.
The Federal Deposit Insurance Corp.’s postponement until sometime this summer of the test run of its Legacy Loans Program is another encouraging sign, Cooper says. Banks would prefer to hold on to toxic assets “if they can raise capital elsewhere, rather than sell at very depressed market prices, thereby realizing their losses.” Since investor appetite has returned for bank issues, institutions are “no longer compelled to sell at a price that would incentivize an investor to purchase,” she explains. Cooper is all for it: “The sooner the [financial institutions] can disentangle themselves from Uncle Sam the better.”