Banks: Take my TARP. Please!

ROAD TO RESCUE

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A growing number of banks are looking to return government money received under the Treasury's TARP program after Congress removed several repayment restrictions.

NEW YORK (CNNMoney.com) -- Taxpayers hate the bank bailout. Lawmakers too. And now it looks like some of the bailed out banks themselves are starting to get fed up with it as well.

Just weeks after Congress removed a key hurdle that prevented banks from paying back funds from the Troubled Asset Relief Program, or TARP, some banks are already queuing up with checks in hand.

So far, three banks have formally declared their intentions to pay back the government. Last month, Louisiana-based IberiaBank Corp. (IBKC) said it would return $90.6 million while TCF Financial (TCB), a bank headquartered just outside of Minneapolis announced last week it was returning $361.2 million.

On Tuesday, New York City-based Signature Bank (SBNY) became the latest, announcing at a conference it had filed notice with the Treasury Department to pay back $120 million in TARP funds.

This list doesn't include the dozens of institutions that were approved for government aid, but subsequently decided to turn down the money. New Jersey-based lender Sussex Bancorp (SBBX) added itself to that group after it withdrew from the program last week.

But even more banks are poised to return TARP money, including some of the nation's largest.

Asset manager Northern Trust (NTRS, Fortune 500) told members of Congress last month that it wanted to repay the $1.57 billion in government funds "as quickly as prudently possible" after the Chicago-based firm came under heavy scrutiny for its sponsorship of a recent golf tournament in California.

And other big banks, including PNC (PNC, Fortune 500) and US Bancorp (USB, Fortune 500), as well as JPMorgan Chase (JPM, Fortune 500) and Goldman Sachs (GS, Fortune 500), have been stating they hope to return the funds as quickly as possible. A repayment by those four alone would return an estimated $49.2 billion to government coffers.

Brian Klock, an analyst with Keefe, Bruyette & Woods in San Francisco, noted that the list may not end there. A handful of regional banks that he tracks could very well repay the government's stake with existing capital in the near-term, including Comerica (CMA), the Beverly Hills-based City National (CYN) and Trustmark Corp. (TRMK)

One common thread between these three is that each bank has a healthy level of tangible common equity, a measure of a bank's ability to absorb future losses that is increasingly viewed by analysts as one of the best indicators of a bank's health.

Some institutions have argued that it is too costly to keep government capital on their books at a time when banks in general have been resistant to make new loans as the economy sours and more Americans lose their jobs.

Other banks have suggested that the recently passed stimulus package, which included a measure aimed at reining in bonuses for senior executives and top earners at banks that got TARP funds, would harm their firms even further.

"We believe participation in TARP has created a competitive disadvantage for TCF and it is in the best interest of our shareholders to redeem these shares," said TCF Chairman and CEO William Cooper in a statement when the company announced its plans last week.

Many bankers are also troubled by the inconsistency in the government's rescue efforts so far. Others worry that regulators or lawmakers could change the accompanying terms of the government's capital purchase program as they see fit in the future.

For example, some fear that banks which have received TARP funds could be pushed to make certain types of loans or fulfill some sort of loan quota, following the ongoing public outcry that banks are not lending.

"The biggest issue is just the fact that the rules can change," said Alan Avery, a partner in the financial services group at the law firm Arnold & Porter.

Many have argued that the TARP program has been troubled from the start. When it was first pitched to Congress, it was described as a program geared towards buying troubled assets from lenders to help thaw frozen credit markets.

But when pricing issues derailed those efforts, government officials moved instead to inject capital directly into banks to bring some stability back to the financial system and prevent banks from tightening credit any further.

One key sticking point, however, was that the government would maintain its stake in an institution until 2012 unless a company could swap it out with private capital.

That required a bank to go out and raise an equivalent amount of new equity capital to replace the government's stake, as well as securing regulatory approval.

Congress struck down those requirements in the recent stimulus package, allowing banks to pay back TARP funds after giving just a minimum of 30 days notice to the government.

But as banks start lining up to return taxpayer funds, one unanswered question is just how quickly regulators will move to sign off on repayments.

Federal agencies that oversee the nation's banking industry, including the FDIC and Office of the Comptroller of the Currency, are already in the midst of "stress testing" the nation's 19 largest banks to determine whether additional bailout funds will be required, point out experts.

Having to commit more capital to a bank after it repaid TARP funds would not reflect well on regulators.

"My sense is that a lot of these institutions are only surviving because they have the money injected from the government," said Viral Acharya, a professor of finance at New York University's Stern School of Business.

At the same time, questions remain about just how quickly Treasury will be able to unwind its holdings in those banks, given that it involves a combination of both preferred shares and warrants. That, combined with a widely reported staffing shortage at the agency, could also pose a hurdle.

Yet another unanswered question is what will Treasury actually do with the refunded money.

Calls to the Treasury Department on the matter were not returned. But if even a fraction of the nearly $200 billion that the government has injected into banks since last fall is used to plug holes in the nation's widening budget deficit for example, that could be helpful.