Banks Are Facing Restrictions On Repaying TARP: Sources

By Steve Liesman
|  Tuesday, May 19, 2009  |  Updated 11:15 AM PDT
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Banks that want to repay the billions of dollars of government bailout funds they received from the TARP are facing several restrictions, including how soon and under what conditions the money can be returned, sources told CNBC.

Among the conditions: no bank will be allowed to repay the TARP until after June 8, when 10 of the 19 biggest banks must present plans to boost their capital under the government's stress tests. The other nine banks were told they had adequate capital to survive a worsening of the recession.

The government also won't allow any one bank to repay the TARP first but will approve them in batches.

The banks face other restrictions: they still have to pass another stress test, issue debt that isn't government guaranteed, demonstrate the ability to self-fund in the market and win the approval of their banking supervisor.

Several big banks have announced plans to repay the TARP as soon as possible, including Goldman Sachs, JP Morgan Chase, Morgan Stanley and American Express. None of them were told to come up with more capital under the stress tests conducted earlier this month.

Banks are scrambling to repay TARP money as soon as possible to signal their strength to the market and to avoid the tighter regulation that comes with government funds, particularly limitations on compensation.

The Treasury will also announce a process for auctioning TARP warrants, which the government received when it provided the TARP funds. The banks have the right to buy back those warrants from the Treasury or go through an auction process, which is generally faster. The Treasury will spread the auction over several months because of worries about flooding the market with the warrants.

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Treasury Secretary Timothy Geithner has said that if regulators certify that a bank would be sound without government help, the Treasury would gladly take the money back. But he also told lawmakers last month that his role was to ensure the soundness of the entire financial sector.

Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official, told Reuters earlier on Monday that he expected the Treasury would act soon to let large banks repay TARP.

"I would think we're talking a matter of weeks, and probably just a few weeks, because I think Treasury wants the money, or at least some of it," he said.

The amount of money the government could get back could be substantial. Morgan Stanley and Goldman borrowed $10 billion under TARP in October, while JPMorgan took $25 billion. American Express received $3.4 billion in January.

Morgan Stanley, JPMorgan, and Goldman Sachs declined to comment. All three banks have previously expressed interest in repaying TARP.

American Express said last week it had filed a request with the Federal Reserve and U.S. Treasury to repay its TARP funds.

After the government disclosed stress test results publicly earlier this month, banks began a flurry of stock and bond offers.

Morgan Stanley, which was required by regulators to raise $1.8 billion, issued more than $4 billion of stock after the test results were announced, and sold $4 billion of non-government guaranteed debt. Morgan Stanley also announced on Monday that it was selling its remaining stake in MSCI, an investment analysis and market index company, in a deal that should help it
raise about $650 million.

JPMorgan Chase sold $2.5 billion of nonguaranteed debt.

U.S. Bancorp sold $2.5 billion of shares, while Capital One Financial sold $1.55 billion. Other banks have sold shares as well, or announced plans to.

Some banks did not even wait for the results of the stress test. Goldman Sachs sold more than $5 billion of shares last month, and $2 billion of non-guaranteed debt.

—Reuters contributed to this report.

For more stories from CNBC, go to cnbc.com.

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