U.S. Said to Plan Approval Today for 10 Banks to Repay TARP

By Robert Schmidt and Christine Harper

June 9 (Bloomberg) -- The Treasury is preparing to announce today it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.

JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.

The approvals may relieve investor concerns about government ownership after a popular outcry against bailouts for Wall Street. At the same time, they contrast with warnings from International Monetary Fund chief Dominique Strauss-Kahn and others that the financial system remains distressed.

“None of this means that we’re out of the woods yet; there’s a lot of work that the banks have to do and the regulators have to do,” said Richard Spillenkothen, a director at Deloitte & Touche LLP in New York who served as the Federal Reserve’s head of bank supervision from 1991 until 2006.

The Fed yesterday also approved capital-raising plans at the 10 banks judged to have shortfalls after last month’s stress tests on the 19 biggest U.S. lenders. That list includes Citigroup Inc. and Bank of America Corp., firms that have had more than one round of federal rescues.

Compensation Guidelines

On June 10, the Treasury will likely release its guidelines for executive compensation at banks that retain government shares, a person familiar with the matter said.

Treasury Secretary Timothy Geithner may be asked about the TARP repayments, compensation rules and the outlook for financial markets in a Senate Appropriations Committee hearing at 10:30 a.m. today in Washington.

Nine of the 19 banks subjected to stress tests by U.S. regulators were told last month they needed no additional capital to withstand a deeper economic downturn. Officials later told some of the banks, including JPMorgan and American Express, they still needed to boost their common equity.

The number of banks likely to be allowed to retire government shares indicates the Treasury will receive more than the $25 billion of repayments that the department anticipated this year. JPMorgan alone received $25 billion of TARP funds last year and Goldman Sachs got $10 billion. American Express has received $3.4 billion, Bank of New York Mellon Corp. has taken $3 billion and State Street has $2 billion.

Morgan Stanley

Morgan Stanley has raised $6.8 billion in two separate common equity offerings since May 7, exceeding the $1.8 billion it was required to raise by the stress tests, as the company sought to be included in the first round of banks allowed to repay the TARP money. Morgan Stanley received $10 billion from program last year.

The repayments come almost eight months after the Treasury, seeking to quell market panic that followed the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc., provided nine banks with the first $125 billion of $700 billion in money allocated to the TARP.

Banks have unveiled plans to raise a total of $100.2 billion since the stress tests found 10 of the 19 biggest lenders needed $74.6 billion in additional capital buffers.

Financial shares have surged on rising confidence that the financial crisis is past its worst and that banks are viable enough to survive the deepest recession in half a century. The Standard & Poor’s 500 Financials Index has gained 49 percent in the past three months.

Retire Warrants

Even after paying back the preferred shares issued to the government, banks that took TARP money will still need to retire warrants given to the government to allow taxpayers a potential return on their investment.

Herb Allison, the Obama administration’s nominee to run TARP, told lawmakers last week that the Treasury would soon announce details of its policy handling the warrants. The total value of the warrants is about $5 billion, according to Treasury calculations made last month.

Some analysts estimate that banks will still face mounting losses as defaults on credit cards rise and commercial property values sink.

Jan Hatzius, chief U.S. economist at Goldman Sachs, said at a conference in Montreal yesterday that “U.S. banks probably need to recognize another $500 billion or so in losses.”

Strauss-Kahn, managing director of the IMF, said at the conference that banks must disclose any losses on their balance sheets to help restore confidence in the global financial system.

“If the banking crisis is not resolved, growth will not come,” Strauss-Kahn, speaking in French, told reporters after his speech. “What strikes me today is that the credit market is not yet functioning normally.”

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Christine Harper in New York at charper@bloomberg.net