By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, June 10, 2009
Ten of the nation's largest banks will be allowed to repay $68 billion in federal aid granted at the height of the financial crisis, the Treasury Department announced yesterday.
The banks, which could begin to return money this week, include J.P. Morgan Chase, Goldman Sachs and Capital One Financial, according to company statements.
The decision is a milestone for the Obama administration's financial rescue plan, reflecting new confidence that some large banks have returned to stable profitability. It is also a victory for the banks, which have pressed for permission to show strength and avoid restrictions including executive pay limits. But senior officials cautioned that the repayments are not a sign of a broader economic revival.
"These repayments are an encouraging sign of financial repair, but we still have work to do," Treasury Secretary Timothy F. Geithner said in a statement.
The focus of that work increasingly will turn from rescue efforts to addressing the causes of the crisis by overhauling supervision of the financial industry. The administration plans to unveil a blueprint for sweeping reforms next week.
President Obama said yesterday that the ability of companies to repay the government does not detract from the need for reform.
"The return of these funds does not provide forgiveness for past excesses or permission for future misdeeds," Obama said in remarks at the White House. "It's critical that as our country emerges from this period of crisis, that we learn its lessons, that those who seek reward do not take reckless risk, that short-term gains are not pursued without regard for long-term consequences."
The list of banks granted permission to repay the government was longer than many financial analysts had expected, in part because banks have been able to attract billions of dollars in new capital from private investors following the conclusion of government stress tests.
The Treasury granted repayment requests from eight banks that received a clean bill of health after the tests, plus Morgan Stanley, which was required to strengthen its capital reserves, and Northern Trust, which was not subjected to a test. The government did not announce the names on the list, allowing each bank to disclose the news on its own. Others are American Express, Bank of New York Mellon, BB&T, State Street and U.S. Bancorp.
If all 10 banks return the money, the government will recoup roughly one-third of the $200 billion so far invested in about 600 banks under its financial rescue plan.
Capital One, which operates retail branches in the Washington area as Chevy Chase Bank, said in a statement yesterday that it planned to repay the government's $3.5 billion investment "in the coming weeks."
BB&T, which has a large retail presence in the Washington area, said it would move immediately to pay the government $3.13 billion. The company's chief executive, Kelly S. King, issued a statement hailing the government's decision.
"We will become even more focused on the business of serving our clients, rather than dealing with government distractions," King said.
The government already has allowed 22 community banks to repay about $1.8 billion in federal aid, but the announcement yesterday marks the first time large banks have been given permission to return money. Treasury officials say they are comfortable that these banks can weather the recession without direct government support. The government continues to support banks through other less visible programs, including debt guarantees, cheap loans and a pledge that the largest banks will not be allowed to fail.
Former Treasury Secretary Henry M. Paulson Jr., who made the decision to invest federal money in the banks last fall, said yesterday that the repayments validated his strategy.
"The recovery of our financial system is underway, but the road ahead is not short," Paulson said in a statement. "I look forward to the day when our system and our economy are sufficiently strong that we can end the FDIC debt guarantee, close the Fed's liquidity programs, and resolve the permanent status of Fannie Mae and Freddie Mac."
The government will continue to hold warrants in the 10 banks, allowing it to buy shares of their common stock. Administration officials say they do not intend to exercise the warrants, which would give the government ownership stakes. Negotiations are ongoing over how much the banks should pay the government to rip up the warrants.
The repayments will create a clear line of demarcation between these banks and their weaker rivals. The stress tests found that 10 banks needed to strengthen their capital reserves against projected losses, including Bank of America and Citigroup. Only one of those companies, Morgan Stanley, has been approved for repayment.