Ten Banks Set to Repay TARP Funds

WASHINGTON (AP) - Ten of the nation's biggest financial
companies got a green light Tuesday to return $68 billion in
federal bailout money - freeing the banks from limits on executive
pay and leaving the government with a small gain on the rescue

While the paybacks could be a signal that the banking industry
is stabilizing, analysts say it is far from a clean bill of health,
and some said it was too soon to let the banks give back the money.

Presidential spokesman Robert Gibbs said the returned money
would go "back into general revenue" and could even be used to
bail out banks again.

Still, the government has collected $1.8 billion from dividends
on shares of preferred stock it received in exchange for bailout
money, he said. And the government still holds warrants to buy
shares of bank stock at cut-rate prices in the future.

The $68 billion in paybacks would be the largest since the $700
billion Troubled Asset Relief Program took effect eight months ago
at the peak of the financial crisis. Specifically, the money comes
from a $250 billion slice of the $700 billion bailout package.

Other chunks of the $700 billion will be harder, if not
impossible, to recover. Some of it, such as $70 billion funneled to
failed insurer American International Group Inc., ended up in the
pockets of healthier banks that did deals with AIG.

And even the banks getting out from under the TARP still rely on
government support, including debt guarantees from the Federal
Deposit Insurance Corp. and credit lines from the Federal Reserve.

The banks chafed under restrictions on executive pay imposed by
the government for banks that took bailout cash, arguing they were
losing top talent to other firms. The administration is expected to
roll out new executive pay rules Wednesday that would apply to
banks that still have TARP money.

"It's our obvious hope that additional money is not going to
have to be used to stabilize banks," Gibbs said. "I certainly
wouldn't rule it out."

Indeed, banking experts stressed that the payments do not signal
an end to the financial crisis. In fact, they say, most banks
approved to pay the money back never needed it in the first place.

And three major banks that have not been approved by the
government to pay the money back - Citigroup Inc., Bank of America
Corp. and Wells Fargo & Co. - could need federal help for years to

"When a troubled bank is capable of repaying, that would be
significant," said Barry Ritholtz, head of the financial research
firm FusionIQ. "But we're not going to see that anytime soon
because they can't afford it."

Among the banks approved to pay back their bailout cash are
eight that passed the government "stress test" earlier this year:
JPMorgan Chase & Co., American Express Co., Goldman Sachs Group
Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York
Mellon Corp., State Street Corp. and BB&T Corp.

Those banks had to show they could raise private capital without
federal guarantees before getting permission to pay back TARP

Morgan Stanley did not pass the test, but got approval to return
its bailout money after quickly raising enough capital. And
Northern Trust Corp. did not undergo the "stress test" but said
it also had received permission to repay its bailout money.

President Barack Obama welcomed the news but said: "This is not
a sign that our troubles are over - far from it."

Indeed, the repayments carry risk. Some say it could create a
banking system of winners and losers, with weaker banks stuck with
federal restrictions and finding it harder to compete for customers
and talent against rivals that operate more freely.

Others say the repayments could conceal problems in the banking
industry. Smaller banks are still saddled with billions in risky
commercial real estate loans. And large banks still hold the toxic
mortgage-backed assets at the heart of the financial crisis.

Paying the government back leaves banks with less protection
against future losses, said Christopher Whalen, managing director
of the consulting firm Institutional Risk Analytics. And with less
capital on hand, they may have to scale back lending.

Other critics said it was dangerous to allow the money to be
paid back before the administration overhauls the regulatory
framework that governs banks.

"The credit crisis made it clear that the banks acted in
irrational and greedy ways. I don't believe that enough changes
have really happened yet," said Donald Thomas, an independent
research analyst.

Adding to the concerns, a report released Tuesday by the
congressional panel overseeing the bailout said the hypothetical
scenarios used in the "stress tests" might have been too rosy.

That raises the troubling possibility that even raising enough
capital to satisfy the government won't guarantee banks can
withstand a deeper recession. And that means the banks might have
to seek more federal aid.

Citi and Bank of America, two of the most troubled financial
institutions, have taken $45 billion each in bailout money. Wells
Fargo said it has not asked for permission to pay back $25 billion
in TARP money.

Banking analyst Bert Ely said it could be years before those
banks disentangle themselves from the government.

More than 600 banks have received a total of almost $200 billion
from the TARP, and 22 smaller banks have already paid the money
back. The $1.8 billion in dividend money includes stock the
government owned in these smaller banks.

Besides the preferred-stock dividends, the banks that took
bailout money issued warrants that give the government the right to
buy bank stock at a fixed price later. Bank stocks have been
battered but are expected to rise as the economy recovers, so the
warrants could deliver substantial profits to taxpayers.

Or the government could sell the warrants back to the banks "at
fair market value," the Treasury Department said - presumably also
locking in profits for the taxpayers.

Testifying before a Senate panel, Treasury Secretary Timothy
Geithner said the value of the warrants for banks permitted to
repay TARP funds are in the "several billion dollar range."

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