U.S. banks line up to throw off TARP yoke

By Joseph A. Giannone and Mark Felsenthal

NEW YORK/WASHINGTON (Reuters) - JPMorgan Chase & Co <JPM.N> and several other banks eager to escape the restrictions and stigma linked to government bailout funds may get the chance to do so in the next few weeks.

Regulators are talking to big banks that want to repay funds received under the government's $700 billion (452 billion pound) Troubled Asset Relief Program, or TARP, a Federal Reserve official said on Tuesday.

No announcements on returning funds will come until around June 8, the official added. The Fed official spoke on condition of anonymity because the application process is continuing.

Earlier on Tuesday, JPMorgan Chief Executive James Dimon told shareholders he expects regulators will let a few strong banks repay TARP funds within weeks.

Dimon made it clear that he was eager to escape strict regulations on compensation and other areas for TARP participants. In particular, he called restrictions under the program on banks hiring foreign-born workers "a complete and utter disgrace."

Similar concerns have been voiced by other TARP recipients Goldman Sachs Group Inc <GS.N>, and Morgan Stanley <MS.N>, which like JPMorgan recently submitted applications seeking permission to repay TARP funds, people familiar with the situation told Reuters.

"It's not going to be a big deal stock-price wise, but it is a huge deal competitively that they can use to their advantage," said Greg Donaldson, director of portfolio strategy at Donaldson Capital Management in Evansville, Indiana.

Repaying the government funds will "take the handcuffs off the management of these companies," agreed Brad Hintz, analyst with Sanford C Bernstein in New York.

"What I've told my clients is: 'You want to be the first one out of TARP and you certainly don't want to be the last one,'" Hintz said.

JPMorgan shares closed down 3.9 percent at $35.81 on Tuesday on the New York Stock Exchange.

"There are so many banks talking about repaying TARP that it's already priced in," Donaldson said.

Bank of America Corp <BAC.N>, which has said it hopes to fully repay TARP funds within the next couple of years, said it issued 1.25 billion shares since May 8 at an average price of $10.77 per share, the largest U.S. bank said in a release late on Tuesday. The gross proceeds from the offer amounted to $13.47 billion.

Regulators told the Charlotte, North Carolina-based lender it needed to bolster its finances capital following a government "stress test" of its ability to handle a deep recession.


Last October, the Treasury stepped in with $125 billion of bailout funds for nine of the largest U.S. banks, part of a plan to stabilise a system rocked by the collapse of Lehman Brothers. Regulators wanted banks to have enough capital to lend during one of the worst recessions since the 1930s.

Banks asking to repay TARP are among the 19 institutions that submitted to the stress tests to determine their ability to withstand a sharp economic downturn, the Fed official said. Supervisors will seek more information from the banks and then recommend to Treasury whether to approve repayments.

Recommendations will be made in batches, not on a case-by-case basis, the official said. Going forward, supervisors will make repayment recommendations to the Treasury on a monthly basis, the official added.

Before they make repayments, banks must show they can raise funds from private sources without any government guarantees.

These conditions have sparked a wave of stock and debt sales in recent weeks.

Government officials have expressed concern that banks, in their eagerness to sever government ties, may return the capital too soon, only to need it again later.

JPMorgan, which received $25 billion in funds in October, and Goldman, which received $10 billion, were found by the stress tests to have sufficient capital. Morgan Stanley received $10 billion in October and had a small capital shortfall under the stress tests, quickly erased by stock and debt sales.

Even as banks line up to repay TARP funds, the U.S. Federal Reserve widened its safety net for downtrodden credit markets by making older commercial property loans eligible for an emergency program.

The move could help banks who are trying to move such loans off their balance sheets and allow borrowers to refinance existing loans on better terms.

Separately, the Federal Deposit Insurance Corp is looking to launch its June pilot sale of banks' distressed loans without using TARP money to help private investors buy up the loans, a source familiar with government plans told Reuters on Tuesday.

The FDIC is looking to do a test sale to make sure that investors, banks and the public are comfortable with the mechanics -- without the complication of government co-investment -- before rolling out the full program.

Some potential investors have expressed concern that loan purchases done in partnership with government money from the TARP could expose them to executive pay restrictions and other TARP conditions.

(Reporting by Joseph Giannone; Additional reporting by Elinor Comlay, Jonathan Stempel, Karey Wutkowski and Steve Eder; editing by John Wallace, Carol Bishopric and Tim Dobbyn)

Article Published: 20/05/2009