Financial Regulatory Forum

U.S. rebuffing big banks’ push to exit bailout early

By Reuters Staff
September 15, 2009

By Karey Wutkowski and Steve Eder
WASHINGTON/NEW YORK, Sept 15 (Reuters) – Some of the largest U.S. banks will remain in the government’s financial bailout program for months, as officials do not expect to grant the next wave of exit approvals until near the end of the year, according to a source familiar with the matter.

Banks such as Citigroup Inc and Bank of America Corp have been chafing under the government’s reins and want to exit the Troubled Asset Relief Program (TARP), which delivered capital infusions to banks along with limits on pay, share repurchases and dividends.

Citigroup has been in preliminary talks with U.S. officials on how to repay part of government funds, but the process could take at least a couple quarters, according to sources familiar with the situation.

Regulators want to see that firms have fully taken advantage of the more open credit markets to raise significant capital buffers before they remove the government leash from more of the largest banks.

The U.S. Treasury Department first started releasing the big banks from the financial bailout after the government conducted an intensive “stress test” earlier this year of the firms’ loan portfolios, earnings prospects and capital positions.

Ten banks received approvals in June to repay $68 billion in federal bailout funds. Since then, there have been few clues about when the other large banks would be allowed to exit the program and if those approvals would come piecemeal or as another group.

“We will see another wave of repayments,” the source said, speaking anonymously because the approach has not been announced publicly.

A Treasury spokesman declined to comment.

There is intense investor interest in which banks will be released and the government is aware that granting individual approvals for the biggest banks to repay TARP could put immense pressure on the other institutions, the source said.

The large banks still locked in TARP include: Wells Fargo & Co, Fifth Third Bancorp, GMAC, KeyCorp, Bank of America, PNC Financial Services Group Inc, Regions Financial Corp, SunTrust Banks Inc and Citigroup.

Some of these institutions demonstrated on Tuesday just how eager they are to exit TARP. Appearing at the Barclays Global Financial Services Conference in New York, leaders at SunTrust, Regions Financial and Bank of America all spoke about how they want to repay and do it as soon as possible.

“It is very desirable to get out from under this,” said Michael Holland, president of money manager Holland & Co in New York. “This is a crisis situation that one would hope is now behind us. The longer they are in it, the more we are being told by the feds that this isn’t behind us.”

RUNNING FOR THE EXITS
Some firms, such as Citigroup and GMAC, will likely be on the government’s dime for a number of months if not years.

Citi, which has received $45 billion in TARP funds and is 34 percent owned by the government, is exploring whether to sell about $5 billion of new stock to partially repay the government, but the timing is uncertain, sources said.

Bank of America, which also received $45 billion, plus a guarantee on $118 billion of its assets, is very anxious to be released from TARP, according to one source familiar with the bank’s thinking. But the nation’s largest bank is still facing soaring credit losses, indicating it could still need significant capital raises.

Other banks are better positioned to be in the next wave of approvals.

Wells Fargo said earlier this month it will repay its $25 billion in bailout funds “shortly” without selling equity, to protect its current shareholders. But the company said timing is dependent upon the Federal Reserve’s approval.

Paul Miller, an analyst at FBR Capital Markets, said the government is giving the large banks “mixed signals” about how they will be allowed to repay TARP. He said some of the smaller of the large banks, such as PNC Financial, are more likely to be on the second approval list than Bank of America.

“Some of the regionals are in better shape than the bigger boys,” he said.

Marshall Front, chairman of Chicago-based Front Barnett Associates, said the banks are all trying to position themselves to repay because of the onerous restrictions on compensation.

“If I were the CEO of a bank, I would run as fast as I could away from the TARP and any other government involvement,” Front said.

But Miller said he is not confident some of the big banks are ready to repay, despite their eagerness to do so.

“I still think a lot of these capital levels are still weak despite the capital raises,” Miller said. “Paying back TARP could weaken the banks.”

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