“Everybody is talking about repaying the TARP. They love the idea. Ten banks, $68 billion worth, getting ready to repay the TARP. We are watching names. American Express has been the best Dow component all day long. Leader there. Watching a lot of others Goldman Sachs, Morgan Stanley, JP Morgan, Northern Trust a few of the names we continue to — that are saying they’re ready to repay.” Fox Business Network 6/9/2009
The big news of the day out of financials is the fact that ten banks have been granted permission by the Treasury to repay more than $68 billion in TARP funding. Now with the economic landscape improving, the government’s lifelines to these financial institution has begun to feel more like a burden to the management of these companies. The reason, aside from the obvious restrictions on executive pay, there are concerns that having TARP funding will lead to over regulation on these banks’ activities. No matter what other motivations there may be, for as much controversy as there has been surrounding the TARP, it appears that at least for the ten banks that have been approved the TARP has served its purpose.
Since the stress tests, released just about a month ago, the banks have been able to raise capital through secondary offerings, forced conversions, and debt offerings. The billions of dollars in private funding has thus far been sufficient to capitalize these financial institutions and thus these firms are eager to through off the yoke of the added attention and government oversight that comes with having TARP funds. After all, there have been many reports that some of these banks (Goldman Sachs (GS), JP Morgan (JPM) and Bank of New York/Mellon (BK) to name a few) did not want the government funding to begin with but had their hand forced by former Treasury Secretary Henry Paulson. It is no surprise that these are taking the first train out of TARP. Interestingly, American Express (AXP) which became a “bank holding company” in order to qualify for the funding is also paying back these funds.
For all of the weeping and gnashing of teeth about TARP and other government bailouts, so far so good right? Well, yes and no, assuming $68 billion will indeed be paid back, it does represent a sizeable chunk of the U.S. investment in banks. However, there is still a massive amount still tied to struggling financials through both direct investment in preferred shares and guarantees against losses. Some of the largest and most important banks are notably note included in this list of “re-payers”; namely, Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC). Bank of America and Citi have been the biggest drags of the financials thus far and everyone expected them to be on a little less stable foundation right now, but Wells Fargo has been heralded as one of the best managed through the crisis.
We hope that this represents a turning point in this downturn where economic improvement allows the government to get out of the business of business. This is a step in the right direction but there is still a very long way to go. The private funding from secondary offerings and the like has replaced the government’s support in the last month which is great; however, before we become truly confident in banks strength will will want to see trends in credit card defaults and foreclosures (especially prime borrowers) to reverse their current course.