The problem with paying back TARP $

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Several bank CEOs that testified before Congress Wednesday told lawmakers they hoped to pay back TARP funds ahead of schedule.

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NEW YORK (CNNMoney.com) -- Banks may need money - they just claim that they don't want it from the U.S. government anymore.

Several of the top executives from eight of the industry's biggest institutions said at a high-profile Congressional hearing Wednesday that they were anxious to pay back funds from the government's Troubled Asset Relief Program, or TARP.

"We would like nothing better than to pay it back early," said Ken Lewis, Bank of America's (BAC, Fortune 500) chairman and CEO. His firm has received $45 billion from TARP so far.

Some of Lewis' peers, including JPMorgan Chase (JPM, Fortune 500) chief Jamie Dimon and Goldman Sachs' (GS, Fortune 500) Lloyd Blankfein echoed those remarks before Congress.

To be sure, one reason bank executives want to get out from under the TARP program is because of fears of greater regulation.

But it goes without saying that paying back the TARP funds sooner rather than later would go a long way toward mollifying angry politicians and taxpayers who believe that the banks are not using the money for loans to consumers and businesses.

As such, some lawmakers suggested Wednesday that they were eager to have the banks pay the government back. Still, reimbursing billions to taxpayers will require much more than simply writing a check.

For starters, according to the way TARP is currently structured, a bank would have to go out and raise a staggering amount of new capital to replace the government's stake before being permitted to return it.

When Treasury unveiled its capital purchase program last October, the plan required that the government would maintain a stake in banks it invested in until 2012, unless the bank could swap it out with private capital.

So far, Treasury has funneled close to $200 billion in funds into banks across the country, including the $165 billion that was injected into the eight leading institutions that appeared before Congress this week.

Raising that amount of money would require pretty a robust appetite by outside investors - a group that has been pretty unwilling as of late to bet on anything related to the financial services industry.

Banks may soon not have to deal with this requirement though. The stimulus bill that passed the House late Friday included language that instructs Treasury to let banks repay TARP investments without raising fresh capital.

Nonetheless, the terms of TARP still dictate that both Treasury as well as an institution's respective regulator, such as the Office of the Comptroller of the Currency or Office of Thrift Supervision, would have the final say before allowing them.

Some bankers groused Wednesday that those restrictions have served as an impediment, prompting some lawmakers to consider making it easier to pay back the government.

"If you want to give back the money we will take it, and if there are obstacles we will undo those obstacles," said Rep. Barney Frank, D-Mass, the chairman of the House Financial Services Committee.

Still, it is becoming clear that regulators may not want banks to return TARP money so soon...even if Congress were to allow it.

A source familiar with the situation indicated there was a sense of hesitancy within the Treasury Department to let TARP recipients pay back the government funds. That's because doing so could send a signal to the markets about which banks are strong and which are not.

Treasury officials would not comment on which institutions, if any, have approached the agency about repaying the funds early.

But some industry observers noted that fears about how a bank that doesn't quickly return TARP money may be perceived are overblown. After all, investors already have a clear notion about which banks are healthy and which are continuing to struggle.

"The market already understands who needs the money and who doesn't," said Dave Kaytes, managing director at the New York City-based consultancy Novantas, which focuses on financial institutions.

What's more, healthy banks that want to get out from the under the watchful eye of regulators may still have a hard time justifying doing so. That's because it may be difficult to find capital on terms that are as inexpensive as the government is offering.

So even if they are permitted to do so, banks will have to think twice about bailing on the TARP program.

Banks have already lost billions of dollars as a result of the freefall in the housing market. If the unemployment rate continues to climb, banks would face additional loan losses, putting further pressure on their capital levels.

In other words, bankers could soon find themselves eating their words about giving back TARP funds...assuming that they were serious about returning the money quickly in the first place.

"In our view, the comment on paying back TARP is simply posturing," said Tim Backshall, chief strategist at Credit Derivatives Research.