The Treasury Department granted permission to 10 of the nation's largest financial institutions to repay $68 billion in government-bailout cash, showing that the industry is rebounding from losses that sank some firms and caused the world economy to buckle last year.
Tuesday's announcement set the stage for J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and seven other financial-services companies to escape federal restrictions imposed in return for capital infusions under the Troubled Asset Relief Program. They included curbs on executive pay, dividend increases, hiring certain foreign workers for U.S. jobs, and lavish spending on corporate jets and conferences, which fueled a public backlash.
While the collapse of the U.S. banking system is no longer seen as an imminent danger, access to the capital markets remains difficult and bank balance sheets are clogged with troubled loans and other assets. Most of the nation's 8,000 banks are being hammered by the recession, and the number of bank failures is expected to climb. The 10 banks seeking to return government money will be able to continue leaning on the U.S. government in other ways, including by issuing debt guaranteed by the Federal Deposit Insurance Corp.
In addition to J.P. Morgan, Goldman and Morgan Stanley, Treasury officials gave the go-ahead to return capital to regional banks U.S. Bancorp and BB&T Corp., credit-card issuers American Express Co. and Capital One Financial Corp. and institutional banks Bank of New York Mellon Corp., State Street Corp. and Northern Trust Corp.
When TARP was first announced, the Treasury Department essentially forced all the largest banks in the country to participate. The logic behind that move (which I agree with) was that if one large bank accepted money but others didn't it would make the bank that accepted money look weak, possibly leading to a run on the bank. When all the banks accepted the money no one institution would have the competitive advantage over other banks.
The banks that are returning the money were fairly healthy before the problems emerged -- therefore, there is little shock to their efforts to pay the TARP money back.
However -- there is a possible problem:
Some analysts worry that financial institutions that repay bailout money now may turn to Washington again if the economy worsens and losses overwhelm banks. One of the most vexing problems of the credit crisis — how to rid banks of their troubled mortgage investments — remains unresolved.
Is the Treasury allowing the banks to leave too soon? There is (unfortunately) only one way to find out.
