10 Banks to Repay TARP
by Hiland Doolittle
Following the stress test results, the Federal Reserve ordered 10 of the nation’s largest 19 banks to raise capital to protect against an economic downturn. All 10 banks have now submitted their plans.
Upon a successful review, the Federal Reserve will begin to implement the plans with the understanding that time is of the essence. Banks have until November 9, 2009, to submit final plans to raise the capital that will enable them to withstand worst-case scenarios proposed by the Fed.
Restoring the financial integrity of the U.S. banking industry has been at the center of the Obama Administration’s recession bailout plan. After the stress tests results were released in May, nine banks were deemed healthy enough that additional capital was not needed. The remaining ten banks were instructed to raise $74.6 billion in additional capital as a cushion against their toxic assets.
Banks have had success raising capital. In fact, stock value in banks that were required to raise additional capital has averaged a net gain of 32% since the test results were issued. Stock value in banks that were not required to raise additional capital has gained an average of 20%.
Several Banks Set to Repay TARP
The Treasury appears ready to accept repayment from nine and possibly ten of the biggest banks. Goldman Sachs, American Express and JPMorgan Chase head the list of banks ready to repay their TARP funds.
Treasury appears ready to accept nearly $70 billion in repayments, which repayments come with a list of conditions including full retirement of the principal and the dividends. All warrants must also be retired. After repaying banks meet all conditions, they are released from employee compensation limitations and other restrictions.
SunTrust Banks is a large Southeast regional bank for which stress test results indicated a need to raise $2.16 billion. SunTrust has reported that they have raised $1.82 billion through a stock offering and that combined with the bank’s $70 million gain from the selling of shares in its credit card network and with the anticipated $190 million savings through realization of its deferred tax status will have accounted for 96% of the required amount. This formula is a prototype for banks meeting stress test capital requirements.
SunTrust accepted $4.9 billion in funds from Treasury’s Troubled Asset Relief Program. Like other TARP banks, SunTrust has until Monday June 15, 2009, to raise the capital necessary to win regulatory approval. At that time, a final decision will be made by the Treasury Department as to whether or not to accept all or partial repayment from the TARP fund recipient.
James Wells CEO of SunTrust clarified the bank’s position; “We are carefully evaluating our remaining initiatives to determine the most advantageous course of action to quickly put the stress test mandates behind us.”
Banks receiving TARP funds are anxious to get out from under the Fed’s guiding hand. However, the Fed wants to see credit returning to the marketplace and wants to know that the lending institutions can cover the exposure to toxic assets and continue to lend.
Repayment Dilemma
Where there is money, there is politics. Members of Congress have entered the repayment fray by insisting that repayment of TARP funds should be used to lower the taxpayer’s exposure. Treasury reads the ambiguous TARP legislation differently.
Secretary Geithner claims that Treasury has the right to recycle TARP repayments. At a time when TARP funds have diminished to the $70 billion range, another $70 billion would provide Treasury a substantial buffer. In light of the ongoing demands from the auto industry and from the AIG fiasco, Geithner may be feeling like many of the nation’s homeowners.
Of late, the pressured Secretary’s tone has mellowed a bit. As a homeowner who cannot sell his own residence, he is now fully aware of what is happening on Main Street.
The delicate Chrysler and GM bankruptcies are fragile plans that may require more TARP funding than anticipated. Adding AIG to the mix only increases the lack of clarity. Treasury could well end up with a classic case of Main Street “shorts,” not enough cash to meet the bills.
New Stress Tests
To complicate the issue further, Harvard Law Professor and Congressional Oversight Panel leader Elizabeth Warren is pushing for new stress tests. Citing the irrelevance of the outdated criteria used in the initial stress tests, Warren has built a case for updating the criteria and redoing the stress tests.
The original stress tests used a 2009 unemployment level of 8.9%. The most recent unemployment figures indicate an annual unemployment average of 8.5% with the situation expected to worsen substantially.
Most economists expect unemployment to soon fly by the 10% level. Warren concluded; “We recommend that Treasury publicly track the status of its stress test macro-economic assumptions (unemployment, GDP, and housing prices) and repeat the stress test if the adverse scenario assumptions have been exceeded.”
While the original tests sparked enthusiasm for bank support, new results may not fare as well. Warren is concerned that accepting repayment without new results will put taxpayers at risk of a substantial need as the critical conditions of the essential criteria worsen.
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
June 16th, 2009 at 10:26 am
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