Tags: Geithner | TARP | Stress | Tests

Geithner’s Bid to Recoup TARP Gets Boost From Stress Tests

Monday, 19 Mar 2012 12:48 PM

 

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Treasury Secretary Timothy F. Geithner is getting a boost from the Federal Reserve as he seeks to recoup taxpayer money used to bail out banks during the financial crisis.

Regions Financial Corp. and Zions Bancorporation last week said they plan to repay money they received through the Troubled Asset Relief Program after passing Fed stress tests. The tests, designed to ensure that the largest U.S. banks could withstand another severe recession, indicate that that the two lenders are strong enough to repay TARP.

The Treasury is trying to unwind the biggest chunks of TARP as President Barack Obama gears up for his re-election campaign. The public outcry over bailouts in 2008 and 2009 remains part of the political debate. Republican presidential candidate Rick Santorum, who was against bailouts, has criticized rival Mitt Romney for supporting aid to banks while opposing help for automakers.

“The administration needs to clean this out,” said Clifford Rossi, a former managing director of Citigroup Inc.’s consumer lending group and a University of Maryland professor of business. “Now with the stress test release, this is a good time to pull the trigger.”

Regions and Zions are the biggest recipients of aid among the 361 banks left in the bailout program. Regions, based in Birmingham, Alabama, owes $3.5 billion, and Salt Lake City-based Zions must return $1.4 billion. Their payments would reduce the total still owed by banks to the Treasury by about a third, to $11.1 billion.

Selling Stakes

The Treasury is now starting to divest stakes in the remaining banks, most of them small or medium-sized. The department said March 14 it would sell shares in six banks through auctions on or about March 26, including Banner Corp. of Walla Walla, Washington, and First Financial Holdings Inc. of Charleston, South Carolina.

Today, Treasury announced it has wrapped up its mortgage bond program with a $25 billion profit. The Treasury received $250 billion by selling its agency guaranteed mortgage-backed securities it purchased from Fannie Mae and Freddie Mac in 2008 and 2009. The Treasury purchased $225 billion in government- sponsored-enterprise bonds and made the profit of $25 billion from principal, interest and the sale.

Recover Dollars

“We’re working to wind down TARP, exit our investments as soon as practicable, and recover taxpayer dollars,” Treasury spokesman Matthew Anderson said in a March 16 e-mail. “Replacing temporary government support with private capital is an important part of continuing to restore financial stability.”

Investors are eager to see whether the Treasury will “get creative in working with private-equity firms to unload the stakes in these smaller banks,” said Jaret Seiberg, senior policy analyst at Guggenheim Securities’ Washington Research Group. Shares of small banks could be bundled together and sold, he said.

The Fed on March 13 said all 15 of the 19 largest U.S. banks it tested would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario -- even while continuing to pay dividends and repurchasing stock. The scenario included a 13 percent unemployment rate and a 21 percent drop in home prices.

Citigroup

Citigroup Inc., the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in TARP money.

SunTrust Banks Inc. repaid $4.85 billion in preferred stock to get out of TARP in March 2011, and MetLife Inc. didn’t receive any TARP funds. Ally Financial Inc., the Detroit-based lender previously known as GMAC, was rescued with a $17.2 billion bailout in 2008 and is still majority-owned by the government.

JPMorgan Chase & Co. and Wells Fargo & Co. were among banks announcing plans to increase dividends or buy back stock after passing the stress tests. The announcements helped propel a 9.4 percent increase in the KBW Bank Index of 24 lenders in four days.

Regions and Zions are the only TARP banks that owe the Treasury more than $1 billion apiece. Getting the remaining banks out of the program won’t be easy and probably can’t be done by the end of the year, said Brian Gardner, senior vice president of Washington research at Keefe Bruyette & Woods Inc.

Slow Process

“Getting out of TARP is a slow, grinding process,” Gardner said. “Some of them are not publicly traded and have limited access to the credit markets.”

Banks have an incentive to exit TARP because the 5 percent annual dividend they pay the Treasury increases to 9 percent after five years in the program. According to the Treasury, 158 banks missed their last scheduled dividend payment.

The Obama administration has highlighted the performance of the TARP bank program, which has returned about $259 billion, more than the $245 billion lenders received. The largest U.S. banks, including Citigroup, Bank of America Corp. and Goldman Sachs Group Inc., which all received bailouts from the George W. Bush administration in 2008, have repaid.

The government has recouped $331 billion of $414 billion in TARP funds that were disbursed, when the Treasury’s bailouts for American International Group Inc., automakers General Motors Co. and Chrysler Group LLC, and foreclosure-prevention programs are included, according to Treasury data.

Campaign Trail

“Politically, it would be great to say on the campaign trail the program the Bush administration started to keep the banks functioning, that you unwound it at a profit,” Seiberg said. “The government doesn’t want to be in the business of owning banks.”

Regions, the 10th-largest U.S. bank by deposits, sold shares on March 14 for 2.1 percent more than the previous day’s closing price, raising $900 million to help repay the bailout money. Standard & Poor’s restored Regions’ investment-grade credit rating on March 15.

The lender, which hasn’t reported an annual profit since 2007 in the wake of the U.S. housing crisis, is spending less on soured loans and agreed in January to sell its Morgan Keegan brokerage unit to Raymond James Financial Inc. under terms that ultimately will generate proceeds of $1.18 billion for Regions.

TARP Repayments

Grayson Hall, Regions’ president and chief executive officer, said in a March 13 statement that the bank has already paid the Treasury $593 million in dividends.

Zions, the Salt Lake City-based lender, said in a March 13 statement that it plans to repay its $1.4 billion in TARP in two installments of $700 million each. The second portion is contingent on the return of $500 million to Zions from its subsidiaries in the second half of this year.

The Obama administration wants “the idea of a bailout in the rear-view mirror,” said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick P.C. in Washington. “Any TARP payment increases the overall profit on the program, which is a good thing from an election standpoint.”


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