Big Banks Pay Back TARP Funds—But Still Get Government Aid

Posted by: Adrienne Carter on June 17

Ever since the government gave the O.K. for 10 big banks to pay back the bailout funds, the firms have been rushing to return the money. But that doesn’t mean they’ll be off the government dole anytime soon.

Last week, 10 big banks got the blessing from the U.S. to exit the Troubled Asset Relief Program, the rescue fund under which scores of banks got federal funds. Just days later, banks are giving back the money. Morgan Stanley and J.P. Morgan have returned $10 billion; US Bancorp $6.6 billion; and BB&T $3.1 billion. Goldman Sachs says it’s ready to repay the money, as well. In all, the 10 banks are expected to return some $68 billion.

Their reasons are obvious. The TARP money comes with a lot of strings attached. Although the government said it won’t cap salaries, firms receiving bailout money are likely to be subject to limits on bonuses. The U.S. also is appointing a pay czar to keep watch over firms with a lot of federal funds.

Plus, the TARP funds are expensive. Banks pay a hefty dividend to their government shareholders since the bailout funds come in the form of preferred debt. It’s among the most costly ways to finance their operations.

But don’t expect big banks to stop feeding from the government trough. Remember, the TARP funds are only part of the federal aid they’ve been receiving. In fact, it’s a small portion of the help they’ve been getting from the U.S.—and the only one that comes with such onerous restrictions.

For one, banks are aggressively issuing debt guaranteed by the Federal Deposit Insurance Corp., the banking regulator. Since late last year, banks have issued more than $200 billion in such bonds, according to research firm Dealogic. The rates on the government-backed bonds are much cheaper than could get by selling bonds on their own.


The big banks returning the TARP money show no signs of giving up this perk. Goldman has $21 billion of such debt; JPMorgan Chase $40 billion; Morgan Stanley $23 billion. (JPMorgan and Morgan Stanley did say they wouldn't issue any additional bonds backed by the FDIC. And JPMorgan recently sold corporate bonds without the U.S. backing.)

Banks also are benefitting from ultralow interest rates, engineered by the Federal Reserve. The Fed has cut the banks’ borrowing cost to the bone. That means the banks can borrow money for essentially nothing and lend it out on much higher rates. The difference—or the spread—is one big reason why banks reported such strong profits in the first quarter.

Considering all the forms of government aid, the real question is whether banks are healthy enough to stand on their own. Sure, some of the balance sheet muscle to pay back the TARP funds. But that’s just a fraction of their full financial aid package. The banks—and the financial systems—likely would look a whole lot shakier without Uncle Sam propping them up in other ways.

With Theo Francis

Reader Comments

Bill

June 17, 2009 03:11 PM

Great article.
We should begin a discussion about how banks should be insuring themselves against their own excesses, rather than relying on the government.
In the insurance industry, there is something called a state guarantee fund--basically, an assessment against insurers in the state proportional to their policies--to cover the cost of insolvency of a carrier in that state. State guarantee funds create the incentive of the regulated insureds making sure that each of them is well regulated and solvent, lest they are on the hook for one of their brethren's insolvencies. This alligns everyone's incentives to have good solvency regulation--or else, they, not the policyholder, pays.

Hugo van Randwyck

June 17, 2009 04:06 PM

These TARP banks have senior management even more incompetent than GM. GM has figured out, it can raise money by selling it's overseas assets, so why don't all these TARP banks sell off all their international assets, and prop up their own balance sheets, instead of getting bailouts, and preferential treatment, while healthy banks are not rewarded for good practice?! Instead of issuing bonds - i.e. more debt - sell off assets and reduce debts. This is simple, there is obviously money out there for bonds, so the same money can buy assets. For example, Citibank has over 200 million customers in 100 countries - so sell off the business units to raise cash! Then the banking system will heal quicker, and economy create more jobs.

Jack

June 17, 2009 04:26 PM

This financial crisis revealed a huge truth in America. If corruption is defined as government officials using their powers to give favorable treatment and provide financial gains to private organizations or individuals, then the United States is THE MOST corrupt country in the world. Both Bush and Obama, along with their administration's officials and Congress, provided trillions of dollars to private institutions at the expense of taxpayers. When they leave their position, all these government officials will turn around and become private consultants to the very businesses they did huge favors for while they were in power.

Terry Maon

June 17, 2009 06:27 PM

Why didn't our govenment just tell these companies sure you can return the TARP money just as soon as you reay the money that doesn't have as many strings attached. Until then very limited bonuses are allowed.

Gimme a BREAK

June 17, 2009 08:44 PM

Politicians huckstering for campaign dollars; there is NOTHING new here, folks....Govt steals taxpayer money to save the worst racketeering mongrels since the Robber Barons. Now, it's STILL "OPEN SEASON on the PUBLIC." Gee, thanks, Obama....this really establishes your creds with us - you're STILL a Party stooge on the finger tips of Pelosi, Barney Freak and Chris Dodd (Mr Mozillo's pet stooge).

.

June 17, 2009 09:51 PM

That's why we need more regulations imposed on these institutions to protect taxpayer. Sure, free market is the best, but when financial instituitions begs for bail-out money on capitol hill, they are asking for government intervention themselves. And now, after getting all the bail-out money from government, they are complaining about too much governmental control. What fair is this to the taxpayer?

Jack

June 18, 2009 07:40 AM

Not sure if you read the press releases in there entirety but at least TWO of the banks mentioned in this article will not be issueing debt backed by FDIC.

Walter Kurtz

June 18, 2009 10:14 AM

The CDS spreads of banks that are still TARP banks have widened much more than the non-TARP. TARP banks are viewed now viewed by the market as being riskier. Morgan Stanley vs. BofA is a good example. MS CDS was wider than BofA prior to TARP repayment. Now it's the opposite.

Th market views TARP restrictions as adding risk to the banks. Is TARP viewed as potentially cutting profitability, adding risk of loss of talent, restricting certain businesses? Is TARP associated with potential loss of clients? If a bank can't organize a golf outing for key clients, would that be viewed as a potential hit to performance (particularly when competition has none of these restrictions)? The market is saying yes.

---------- www.SoberLook.com -----------

I disagree Adrienne

June 18, 2009 01:16 PM

Adrienne - One of the many reasons you overlooked about why banks are paying the TARP funds back is because taking the funds has tarnished their reputation. You forget that many banks did not ask for these TARP funds. They were healthy enough to not need a "bailout" but the government asked all large banks to take the money, so no one bank would stand out as having poor capital.

Adrienne Carter, Business Week

June 18, 2009 05:50 PM

This is Adrienne Carter, the author of the post.

"Walter" and "I Disagree Adrienne"--You both make good points. The market does agree that TARP is an added restriction--this was also reflected yesterday when the bank stocks got hit after obama came out with his plan for regulations. And yes, many banks want to hand back the funds, which they never asked for in the first place, to improve their image. I still wonder, though, whether the banks would be in such great shape without the FDIC bonds and other forms of government intervention.

Walter Kurtz

June 28, 2009 01:49 PM

For those who are interested in the FDIC guaranteed debt issue, I've posted an overview named "FDIC guaranteed notes - opening up the credit markets" at http://www.SoberLook.com

The FDIC notes opened up the credit markets. When fear ruled the day, this paper got placed, serving to calm the jittery credit investors' nerves. In March-09 (which will be remembered as the turning point in the credit markets), Pfizer sold $13.5 billion of bonds. About $1.25 billion of that was a 2-year floating note (LIBOR + about 2%), which looked similar to the FDIC notes placed by banks. This was a signal that corporates can in fact issue debt without the government guarantee. The market was starved for high quality investment grade corporate paper. We were off to the races. Huge amounts of both bank and corporate paper has been placed since.


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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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