Ten large US banks were to finish repaying about US$68 billion in bailout money on Wednesday, the Treasury Department said.
The Treasury said last week the banks could begin repaying money they received last fall under the US$700 billion financial system bailout known as the Troubled Asset Relief Program, or TARP.
The program was the centerpiece of the government effort to relieve a global credit crunch and teetering financial markets in October.
The banks have since been negotiating with the Treasury over the prices of stock warrants they issued as part of the TARP deal. When the Treasury made its initial investments, it received the warrants, which give it the opportunity to buy the banks’ common shares in the future at a fixed price. The value of the warrants would depend on the shares’ future performance.
The banks repaying TARP are some of the industry’s largest, including JPMorgan Chase & Co, American Express Co, Goldman Sachs Group Inc and Morgan Stanley.
BB&T Corp and US BanCorp also said they were repaying their TARP money.
In addition to the money they’re returning, the banks have paid the Treasury more than US$2 billion in dividends that were mandated under the TARP program. Taxpayers also will receive billions in exchange for the warrants, once the Treasury and the banks can agree on how to price them.
With Wednesday’s repayments, the Treasury will have recovered more than US$70 billion distributed under the program, including about US$2 billion from earlier repayments by smaller banks.
The repayments don’t necessarily mean the Treasury is winding down the program, which injects capital into healthy banks to encourage lending.
Treasury officials have said the money could be reinvested in other healthy institutions, ensuring that government support continues to ease the flow of credit.
Banks have been itching to quit TARP because it subjects them to limits on executive compensation and other rules. Before getting permission to repay their money, the banks had to meet a series of government requirements.
The TARP repayment may seem like a sign of financial strength, but Moody’s Investors Services said late on Wednesday it’s not in the interest of creditors in the short term.
The ratings agency said “the repayments have the immediate effect of lowering capital levels and of shrinking liquidity positions at a time when economic and financial market conditions remain highly unsettled.”
Moody’s does not expect to lower the ratings of the 10 banks, but may do so down the road. If any of the 10, or other banks that repay funds received through the TARP program fail to keep enough cash in reserve to absorb potential losses, Moody’s said it may cut their ratings.
“TARP repayment should in no way be interpreted as a return to a normal operating environment — significant challenges remain that require vigilance,” said Moody’s vice president Jean-Francois Tremblay in a report.
He said the ability to repay follows a period during which banks were able to raise equity capital and issue long-term debt without government backing.
“Nevertheless, the negative outlook on the sector reflects our view that banks’ capital and earnings will continue to be under pressure for the remainder of the year, and into 2010,” he said.
As the government moves to exit from its “extraordinary support to the financial sector,” Tremblay said banks would have to be able to refinance maturing debt or obtain funding on their own. If the capital markets again become erratic, investors are likely to be more discerning about funding banks no longer receiving government support, he said.
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