The Juice Is in the Squeeze for TARP Banks

By JIM KUHNHENN
|  Wednesday, May 6, 2009  |  Updated 3:45 AM EDT
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Blame Them For Your Empty Wallet

AP

The Treasury and the Federal Reserve are expected to issue TARP repayment guidelines on Wednesday.

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WASHINGTON – Banks that want to pay back their federal bailout funds and free themselves from government restrictions on compensation and dividends will have to sever their ties to another financial assistance program.

Financial firms eager to return infusions from the $700 billion Troubled Asset Relief Program will have to demonstrate that they can operate without debt guarantees provided by the Federal Deposit Insurance Corp., a senior government official said Tuesday. The FDIC program allows financial institutions to borrow money at lower costs.

The new requirement will make it harder for some institutions to get out from under government rules attached to the bailouts, another shift in a changing landscape for banks. It also illustrates the government's desire not to have banks abandon the bailout program if they are not financially prepared to do so.

The official spoke on condition of anonymity because the standards have not been made public. The Treasury and the Federal Reserve are expected to issue TARP repayment guidelines on Wednesday, a response to banks that want to get out from under bailout conditions. The change was first reported Tuesday evening by The Wall Street Journal.

By linking the two programs, the government could motivate banks to cut themselves off from the various assistance programs that it put in place to unclog credit and free up lending in the midst of the financial crisis.

The bailout program has been unpopular in Congress and prompted a new round of conditions earlier this year following news reports about lavish spending on perks, retreats and corporate planes.

Initially, the government required banks that wanted to repay early to raise money from the private sector. Then Congress eased that rule but attached greater restrictions on the government funds. Among the rules restricting banks were conditions on employee compensation, bonuses and dividend payouts. Congress also required the Treasury to review previous compensation payments.

The FDIC debt guarantee, meanwhile, has proven to be popular with some banks as a way to increase liquidity and does not impose the same restrictions as TARP. So far, banks have issued more than $330 billion under the program, which the FDIC launched in October to help financial institutions finance themselves and make loans.

"It throws a hurdle as far as the banks repaying TARP," Scott Talbott, a senior lobbyist for the Financial Services Roundtable, a bank industry group, said of the new condition.

Banks have become increasingly wary of the bailout funds, chafing at the restrictions and worried that acceptance of the money somehow tagged them as troubled institutions. As a result, a handful of banks have returned a small amount of money and bigger institutions have indicated a desire to repay.

Banking industry consultant Bert Ely said requiring banks to first show an ability to operate without the FDIC guarantees does complicate their payback of TARP money. But he said it also demonstrates a change in the Federal Reserve's and the Treasury's approach to TARP.

"A couple of weeks ago it was, 'Oh, we don't know if want to let you repay,'" he said. "There's been a reversal of position here as far as I'm concerned. It will be interesting to see how fast banks move in that direction."

The Federal Reserve and the Treasury are expected to announce the new payback standards just ahead of Thursday's planned release of the results of "stress tests" on the country's top 19 financial institution.

The tests gauged the ability of the banks to weather an even deeper economic crisis than the country currently faces. Several of the 19 banks will be asked to seek additional capital.

Those banks will have six months to raise money from private investors, sell off assets or tap what remains of the $700 billion TARP.

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