Banks get ready for life after TARP

Long frustrated by TARP, some big banks are poised to win approval to pay back taxpayers next week. But experts say regulatory scrutiny is far from over.

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By David Ellis, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- At long last, the end of TARP may be here for some big banks.

Next week, the Federal Reserve will unveil which of the 19 banks that underwent the government's stress test program will be allowed to repay money under the Treasury Department's controversial Troubled Asset Relief Program.

Industry analysts estimate that as many as 10 banks, and as few as four, could win approval to exit TARP next week.

Weary of the intense scrutiny and fickle nature of lawmakers, banks have been scrambling to comply with the rules associated with repaying taxpayer funds. Most notably, several have been busy raising massive amounts of capital in order to redeem the preferred-shares the government acquired in them.

Just this week, JPMorgan Chase (JPM, Fortune 500), Morgan Stanley (MS, Fortune 500) and American Express (AXP, Fortune 500), announced plans to raise a combined $7.7 billion through the sale of common stock.

JPMorgan Chase, AmEx,Goldman Sachs (GS, Fortune 500), State Street (STT, Fortune 500) and Bank of New York Mellon (BK, Fortune 500) have all been widely mentioned as banks capable of repaying government funds after they were deemed well capitalized as part of the stress-test program.

Others thought to be included in that group are regional banking giants Capital One (COF, Fortune 500), BB&T (BBT, Fortune 500) and U.S. Bancorp (USB, Fortune 500).

Investment bank Morgan Stanley, which faced a $1.8 billion capital shortfall following the stress tests, may be the one exception as the firm has raised most of the $6.2 billion in capital it planned to sell through common stock over the past month.

Others are racing to catch up as well, including Bank of America (BAC, Fortune 500), which revealed Tuesday that it had raised almost $33 billion of the nearly $34 billion in capital it needed as a result of the stress-test program.

The Charlotte, N.C.-based lender added that it would "comfortably exceed" that amount soon enough, suggesting that it too was eyeing to free itself from the clutches of TARP, although it is widely doubted the nation's largest bank by assets will win approval as part of next week's announcement.

What troubles many lenders about TARP nowadays, said Standard & Poor's equity research analyst Stuart Plesser, is that they will remain at a severe competitive disadvantage.

Not only are those banks obligated to pay a hefty dividend on the government's preferred shares that weighs on their quarterly results, these banks also stand to be viewed by clients and the market as weaker than rivals.

And there is also the issue of compensation. Banks stuck in TARP will likely be obligated to abide by more severe restrictions on salaries and bonuses, potentially allowing their peers to lure top earners away. That could make it even tougher for some of the struggling banks to remain competitive.

"Banks don't want to let that kind of talent leave," said Plesser.

The ins and outs of TARP

Those banks that exit the Treasury program will, among other things, need to prove that they can issue debt without having to rely on the Federal Deposit Insurance Corp.'s debt guarantee program. They will also need to have enough capital to continue lending to creditworthy consumers and businesses.

Banks' ability to keep lending after paying back TARP has remained a key concern for regulators.

Credit is already tight at those 500 or so lenders that took taxpayer funds, according to a report published this week by the Treasury Department. But there are fears that the availability of credit could deteriorate further among big banks once they return TARP funds as they try to insulate themselves from future loan losses.

"The administration and regulators would really prefer not to get the money back at this point," said Douglas Elliott, a former investment banker who now serves as a fellow at the Brookings Institute. "They need to let the strongest banks repay, but they're not trying to make it easy."

To date, just 20 of the 500 or so banks that have taken TARP funds have managed to repurchase their shares from the Treasury Department, according to agency transactions records. Many of those firms have been smaller regional banks or community lenders.

One question that regulators have not directly addressed is what they intend to do with the warrants, or rights to purchase shares, the government acquired when it injected capital into many of these banks last fall.

Banks have been anxious to buy back these obligations, but there have been concerns that allowing banks to redeem warrants would be to the disadvantage of U.S. taxpayers who stand to make significant gains should bank stocks continue to move higher in the months and years ahead.

But even as banks race to escape the clutches of TARP, analysts say they are hard pressed to believe that those firms will be free and clear of scrutiny.

Robert Maneri, managing director at Victory Capital Management, whose firm owns shares of names like Bank of America, JPMorgan and U.S. Bancorp, said banks will face more regulatory pressure over their loan portfolios and capital levels as the U.S. economy attempts to navigate the ongoing recession.

"Let's face it, regulators don't need TARP money if they want to be involved," said Maneri. To top of page

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