Bailout redux: Repaid money could go back to banks
NEW YORK — After acing their “stress tests,” some big banks are rushing to raise capital and return billions in federal bailout money. But don’t expect it to replenish government coffers.
Instead, the money is being pumped back into the bailout fund and recycled back out to other wobbly banks and other desperate companies, angering critics who say the $700 billion program was never meant to be a revolving door.
The government has the power to recycle money from the Troubled Asset Relief Program until late 2010, two years after the bailout fund was created. After that, any money left over would go back to the government.
Critics worry that by then, there won’t be anything left.
The broad authority for the Treasury, tucked into a two-paragraph insert in the hastily written TARP legislation last fall, means it can continually tap bailout money as it’s repaid without going back to Congress each time for approval.
“The premise of the whole bailout was that taxpayers would be able to recoup the money,” said Steve Ellis, vice president of Taxpayers for Common Sense in Washington. “That’s how it was sold. It wasn’t supposed to be some revolving fund.”
The administration first indicated that the repaid money would be recycled earlier this month, when regulators announced results of the tests they conducted on the nation’s 19 largest banks.
On Wednesday, Treasury Secretary Timothy Geithner specifically said some of the recycled bailout cash will go to community banks. But it’s not clear how many banks even want TARP money.
Some have canceled plans to take bailout funds or are considering doing so. They worry the money could give the government too much control over their operations.
“Our interest in TARP money has diminished by the month since we applied,” said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J., which has preliminary approval for $3.6 million from TARP but hasn’t decided if it will take it.
Congress created the $700 billion bailout plan in October as the financial crisis threatened to topple the economy. Six months later, the chaos in financial markets has at least temporarily subsided, even if lending is tight.
On Monday, four banks — U.S. Bancorp, Capital One Financial Corp., BB&T and Bank of New York Mellon Corp. — said they were raising a total of $8.3 billion to pay back the bailout fund.
They are among nine big banks that last week were judged by government stress tests to have enough capital in reserve to withstand an even worse recession. Ten others were ordered to raise additional money.
Goldman Sachs and Morgan Stanley were also judged to have enough capital and are expected to get approval to repay TARP funds soon.
At least four of the 10 banks found to need more capital — Wells Fargo, Bank of America, Citigroup and Morgan Stanley — have said they will sell or convert stock to bridge the gap. Some of them may still need more cash from the bailout fund.
But critics say recycling bailout money puts taxpayers on the hook even more if weaker recipients can’t repay, and plans to send paid-back TARP money out again have angered some in Congress.
“If the Treasury secretary wants more money, he should come and ask Congress for it,” said Rep. Jeb Hensarling of Texas, one of two Republicans on the five-member Congressional Oversight Panel. “The taxpayers would like their money back. They don’t want it to go right back out the door.”
Banks that want to pay back TARP money have to show they are healthy enough to operate without new government guarantees on debt.
Goldman Sachs and Morgan Stanley, both chafing under government-imposed restrictions on executive pay for bailout recipients, say they want to repay TARP as soon as possible.
To date, Treasury has deployed roughly $200 billion in bailout cash to 579 banks. Citigroup and Bank of America have received an additional $52.5 billion in government capital and guarantees.
But TARP money has gone elsewhere, too: Insurer American International Group and troubled automakers have been helped. Bailout money has also been committed to make housing more affordable, to spur private lending and to help private investors buy toxic assets from banks.
“We were supposed to be buying things of value,” said Sen. Bob Corker, R-Tenn. “AIG was a departure, and moving into the automotive world was totally a departure.”
The Treasury estimates about $110 billion is left of the original $700 billion. Speaking to lawmakers last week, Federal Reserve Chairman Ben Bernanke said he thinks the government will recoup most if not all of the $700 billion.
Many experts say the government may even make money on the money it plowed into banks, with returns coming from dividends and stock. In the first quarter, the government collected $2.5 billion in dividends on bank shares it bought under TARP. Unlike repaid TARP money, dividend payments from banks go straight to the government.
“I think we all assume that some of these banks won’t pay us back, so there will be some actual losses,” said Douglas J. Elliott, a former investment banker and current fellow at the Brookings Institution in Washington. “But it’s entirely possible that those losses will be made back.”
Others aren’t so optimistic. Ethisphere, a business ethics think tank, estimates that unrecognized losses at Citigroup alone will ultimately cost taxpayers $64.7 billion.
And then there’s the $100 billion in TARP money used to bail out AIG and automakers. Many experts question whether taxpayers will ever see that money again.
They say government-controlled AIG assets will probably fetch only pennies on the dollar. And they’re pessimistic about that Chrysler, which is reorganizing in bankruptcy court, and General Motors, which is struggling to stay out of Chapter 11, will ever pay back their shares of TARP.
AP Economics Writer Christopher S. Rugaber contributed from Washington.