First Wave Of TARP Repays (& Hopefully Not The Last)

Earlier Tuesday, the Treasury Department gave approval for a 10 of the 19 largest financial institutions to be able to repay the Troubled-Asset Relief Program (TARP) funds received over the past 11 months as a result of the financial crisis.

Of the 10 institutions that received permission to repay TARP fund, eight passed the government’s “stress tests” announced last month - JPMorgan Chase (JPM: 35.26 0.00 0.00%), American Express (AXP: 26.93 0.00 0.00%), Goldman Sachs (GS: 149.31 0.00 0.00%), U.S. Bancorp (USB: 18.18 0.00 0.00%), Capital One (COF: 24.05 0.00 0.00%), Bank of New York Mellon (BK: 28.79 0.00 0.00%), State Street (STT: 48.26 0.00 0.00%) and BB&T (BBT: 22.45 0.00 0.00%). Even though Morgan Stanley (MS: 30.98 0.00 0.00%) did not pass the stress test, the company was able to quickly raise enough capital to receive permission to repay its bailout fund share. While Northern Trust (NT: 0.32 0.00 0.00%) was not among the 19 banks required to undergo a stress test, it received permission to repay the bailout funds.

In total ,these institutions will repay $68 billion in funds, or only close to 10% of the total funds allocated. We would note 22 smaller institutions have already repaid the funds they received, bring the total to about $70 billion.

President Obama was positive on the “initial return on a few of these investments,” as dividend payments received for all TARP participants total approximately $4.5 billion to date, based on information from the Treasury. The preferred stock dividends paid were about $1.8 billion over the last seven months, and the value of the warrants for banks permitted to repay TARP funds are in the “several billion dollar range” as per Treasury Secretary Timothy Geithner.

While this news is somewhat positive, it does not mean that the problems with our economy or our banking system and the overall crisis are behind us.

The repayment of TARP funds obscures the problems within the broader banking industry - large banks continue to hold the “toxic mortgage-backed assets” that created the financial crisis, and smaller institutions still have billions in risky commercial real estate loans.

While the government asserts that it should receive investment returns from the warrants attached to the preferred stock, which would allow it to buy shares of the banks at a set price over the next 10 years, three of the nation’s biggest banks - Citigroup (C: 3.41 0.00 0.00%), Wells Fargo (WFC: 25.66 0.00 0.00%) and Bank of America (BAC: 12.06 0.00 0.00%) have not received permission to return funds yet. As for AXP and USB, their repayments should result in reduced earnings for 2Q09.

Overall, even if there is repayment of TARP funds, these institutions still dependent on government support, such as debt guarantees from the Federal Deposit Insurance Corp. and credit lines from the Federal Reserve.

Considering that we have yet to see a bottom in the current banking crisis (unemployment continues to rise, which could result in more losses on loans and new bank failures), the rationale for letting these institutions return capital could wind up to be a short-sighted resolution, and could cause the need for the government to come to the rescue yet again.

But at least executive compensation schemes at these institutions can resume for the time being.