Bank bailout repayments could begin in June

May 19, 2009 1:10:34 PM PDT
The Federal Reserve said Tuesday that approval for big banks seeking to repay bailout money could start in early June. A Fed official said several of the country's 19 largest banks that participated in the recent stress tests are interested in repaying the money they received from the government's $700 billion bailout fund.

The official said the Fed, which supervises the largest banks, had requested additional information from the banks needed to support the repayment requests. This official, who spoke on condition of anonymity because the applications are still being reviewed, said the earliest that announcements could be made would be the week of June 8.

Under the rules governing the operation of the bailout fund, banks that receive assistance can make repayments as long as they prove to their primary regulator that repaying the capital injections will not jeopardize their safety and soundness. The banks also must show that they can replace the funds by raising capital without guarantees from the Federal Deposit Insurance Corp.

The Fed's decision would go to the Treasury Department for final approval to return the money. Treasury supervises the bailout fund.

The official did not name any of the institutions that have made requests to repay their rescue funds. However, other people familiar with the situation said that Goldman Sachs Group Inc. and Morgan Stanley have formally asked the Fed for permission to repay a combined $20 billion in federal bailout money.

The 10 banks that were found to need more capital after the stress tests, including Citigroup Inc. and Bank of America Corp., have until June 8 to develop such a plan and have it approved by regulators.

A major issue that needs to be resolved along with the repayments is paying the government for warrants it received as part of the initial loans to banks in the form preferred stock purchases. Those warrants gave the government the option to buy stock at a set price over a period of 10 years.

But now that banks want to return the bailout funds, the government and the banks will have to settle the issue of how much the stock warrants are worth.

Treasury spokesman Andrew Williams said the department would have a "robust process" for valuing the warrants, but he did not provide details on how that would work. Treasury's total warrant holdings were worth more than $5 billion, a value that fluctuates along with the underlying prices of the banks' stock and other factors, he added.

Some financial experts say pricing the warrants at anything less than their market value amounts to a massive giveaway to the banks at taxpayers' expense. In addition, by selling the warrants now instead of waiting a few years, the government risks missing out on the upside once the financial crisis subsides and bank stocks recover.

"Taxpayers have incurred significant risk and so should get significant returns," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "I think it's too early for the government to be cashing out today."

But others say the sooner the government gets out of the banking sector, the better. Banks that repay TARP funds but don't buy back the government's warrants could remain subject to restrictions on executive pay and hiring.

"I don't think the banks are trying to shortchange taxpayers on the warrants," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "They just want to get the government out of their boardrooms."

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