The U.S. Treasury Department said on Tuesday that 10 of the nation's biggest banks were approved to pay back a combined $68 billion of taxpayer money pumped into them last year to combat the credit crisis.
Many banks had chafed at restrictions on executive pay that accompanied the capital injections. Permitting some of them to repay money to the government's Troubled Asset Relief Program, or TARP, effectively initiates a process of separating stronger banks from weaker ones as the financial sector begins to regain its balance.
Treasury refused to name the banks but some quickly stepped forward, including Morgan Stanley <MS.N> and JPMorgan Chase & Co <PJM.N>, to say they were among those cleared to return money.
U.S. Bancorp <USB.N>, American Express <AXP.N>, Bank of New York Mellon <BK.N> and BB&T Corp <BBT.N> also said they had received approval to repay funds the government had pumped into them to try to ensure the banking system was well capitalized.
A source familiar with the matter said Northern Trust <NTRS.O>, State Street <STT.N>, Capital One Financial Corp <COF.N> and Goldman Sachs Group Inc <GS.N> had also received a green light.
The Dow Jones industrial average <.DJI> and the S&P 500 <.SPX> and Nasdaq <.IXIC> pared gains after the approvals were announced on concerns that banks' repayment of government bailout money may damage prospects for economic recovery.
Some analysts, however, viewed the government's decision as a positive as it was announced by the U.S. Treasury after bank regulators had determined banks' had met criteria for repaying, including a proviso that they be in position to support lending.
"People should be pretty comfortable that now the government is allowing these banks to pay the TARP money back, they fully believe that the worst is behind us," said William Lefkowitz, an options strategist with VFinance Investment.
CHAFING OVER PAY RESTRICTIONS
Some banks remain on government life support, which makes them subject to the pay restrictions. Others complained they did not need the help and were being put at a competitive disadvantage because they couldn't set their own pay levels.
Treasury is expected to outline new rules on Wednesday for compensation for top earners at firms still being supported by taxpayer funds, sources have said. Those rules will detail how restrictions Congress has put in place will be applied.
In addition to these limits on pay, U.S. officials are eyeing ways to influence compensation practices across the entire financial industry. Bank regulators want to explore how to effectively influence pay structures in ways that might reduce excessive risk taking.
The Obama administration has argued that the incentive structure on Wall Street encouraged banks to take excessive risks by focusing on short-term gains, helping set the stage for the financial crisis that struck last year.
When the government invested bailout funds in banks, it received dividend-paying preferred shares. The repayments that banks were approved on Tuesday to make will go toward repurchasing those shares.
Treasury said banks that repay their preferred stock get the right to repurchase warrants that Treasury holds in their firms at fair market value. The warrants give the government the right to buy common stock at a predetermined price for up to 10 years and were intended to give taxpayers a chance to share in the profits of healthy banks.
"These repayments are an encouraging sign of financial repair, but we still have work to do," Treasury Secretary Timothy Geithner said in a statement.
Geithner has said that money paid back into the $700 billion bailout fund by healthy banks can be reused to help smaller banks, including those that have already gotten one bailout.
The Treasury said that combined with repayments received so far from other financial firms it will receive $70 billion for companies that took part in the bailout program. More than 600 banks across the country have received funds from the program.
After doling out an additional $30 billion for General Motors Corp <GM.N>, the Treasury's unallocated financial rescue funds had dwindled to about $54 billion, assuming other announced programs are to be fully funded. For details, see [ID:nN0289041]
As a condition of being allowed to repay, banks had to show they could raise money on their own from the private sector both by selling stock and by issuing debt without the help of Federal Deposit Insurance Corp guarantees. The Federal Reserve also had to agree that their capital levels were adequate to support continued lending.
