Repaying TARP on a high

June 2, 2009

As several large banks rush to the market to raise capital, one question remains: What’s the correlation between their ability to raise equity now and their strength in the face of a deeper recession if the early signs of a possible recovery prove false?

This morning Morgan Stanley joined the bandwagon of banks raising capital to pay back TARP. The Wall Street bank said it intends to raise $2.2 billion in common equity to satisfy a supervisory condition to enable it to redeem TARP preferred capital. It follows JPMorgan Chase and American Express, which announced their plans Monday.

The offerings come after the Fed said Monday the government will announce next week which of the 19 stress tested banks will be allowed to repay the funds. One condition for repayment is that they are able to raise money in the public equity markets.

But these banks are raising money at a time when investors are betting on a recovery. The S&P 500 posted its highest close in seven months on Monday, as reassuring economic data reinforced hopes that demand will stabilize. The Dow climbed to its highest finish since January.

The stress-tested banks have already been tested for their ability to deal with a steeper downturn. So what does their ability to raise capital in this market really prove?

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