And then there were none.
Of the 19 major U.S. banks to take the bulk of the TARP bailout, only Bank of America, Wells Fargo and Citigroup had yet to repay the taxpayers.
After Bank of America coughed up $45 billion last week to extinguish its TARP (Troubled Asset Relief Program) debt, the pressure mounted on Citigroup and Wells Fargo.
All three banks have been anxious to shed the bailout stigma. With year-end bonuses just around the corner, bank execs have been even more eager to free themselves of federal government control over their pay packages.
With these final repayments, presidential Pay Czar Kenneth Feinberg will be left to focus his attention on a quickly dwindling group of corporate unfortunates – specifically A.I.G., General Motors, Chrysler and their respective financing arms.
Before they could start repaying the U.S. taxpayers, each of these banks had to demonstrate to federal banking monitors that the multi-billion dollar payments would not jeopardize their continued solvency. While there was little doubt that both Bank of America and Wells Fargo would get the green light from the feds, Citigroup remained a question mark.
Although Citigroup is emerging from the U.S. bailout with higher capital levels and loan-loss reserves than any of its peers, it still has a $617 billion reason to worry.
Uncertainity of the Future
That’s the amount of assets left in Citi Holdings, the division that CEO Vikram Pandit set up to strip his bank of unprofitable businesses, troubled loans and securities. To date, the bank has unloaded almost $100 billion of these toxic assets. As long as the bank continues to storehouse these assets, however, its future profitability will remain uncertain.
Several other finance giants, including JP Morgan Chase, Morgan Stanley and Goldman Sachs, already have squared their debts with the federal government. With this latest batch of payments, banks will have paid off $161 billion of the total $245 billion of bailout money injected into 700 financial institutions at the height of the economic crisis.
The calculus allowing these banks to start repaying TARP may prove to be pre-mature. Most analysts agree that each of these banks is not out of the woods. In particular, Citi and Wells still face big loan losses that could cause a dangerous erosion of their capital. If these banks are unable to resolve their suspect liabilities, the taxpayers may be forced to step in once again to prevent them from imploding.
Along with obtaining permission to repay its TARP debt, Citigroup also got an additional holiday gift from the Treasury – a special tax break.
The Anemic State of Lending
Following months of extensive discussions with the IRS, the government finally granted an exemption late Friday that allowed Citigroup to preserve a $38 billion tax benefit it stood to lose if it repaid the government. The IRS decision essentially waived a longstanding rule that disqualified certain tax breaks if a significant ownership stake changed hands in an effort to discourage outside investors from buying tax benefits.
In exchange for additional financial aid, the Treasury Dept. accepted Citigroup shares, leaving the government with a significant stake in the bank. The Treasury Dept.’s plans to begin selling its one-third ownership in Citigroup, along with the bank’s planned $17 billion stock offering, would have been the type of ownership change the IRS rule was aimed at discouraging.
Even with the bulk of TARP monies being repaid, bank lending has remained anemic. Much to the frustration of President Obama, instead of lending, these banks along with several others have been building up their books by trading.
Historically low interest rates, combined with the continued liberal monetary policies from the Fed, have paved the way for the banks to borrow on the cheap in order to speculate in everything from currencies and precious metals to energy. With the type of profits they have been reaping through these short-term speculative trades, the banks have no real incentive to lend.
The banks have defended their current stinginess, saying that tightened federal scrutiny over their lending practices and heightened capital reserve standards have kept them extending more credit to Main Street. With billions in adjustable rate mortgages getting ready to re-set in 2010 and 2011, it’s more likely the banks are also desperate to build a protective hedge against projected future loan losses.
Either way, with the Pay Czar finally off their backs and out of their board rooms, it’s starting to look a lot more like Christmas at the nation’s major banks.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
