"U.S. May Set a Debt Test for Banks
The Treasury Department is planning to require banks seeking to free themselves from the government’s grip to show that they can survive without the taxpayer aid that has helped them through the financial crisis, senior government officials said Tuesday.
Banks have been enjoying an indirect subsidy adopted by the government last fall that allows them to issue debt cheaply with the backing of the Federal Deposit Insurance Corporation. The Treasury is expected to announce as early as Wednesday that healthier banks must show that they can issue debt without the guarantees before they are allowed to repay the money they accepted from the Troubled Asset Relief Program, or TARP.
The banks also must demonstrate that they will be able to sell stock to private investors and pass a government stress test to show that they are healthy enough to survive without the taxpayer aid.
The Obama administration plans to publicize the results of stress tests for the nation’s 19 largest banks on Thursday. The results are expected to reveal that a number of them need additional capital.
Even before the conditions were formally announced, several banks were trying to raise money in the financial markets without relying on the F.D.I.C. backing.
Banks have grown eager to repay TARP money as quickly as possible, to rid themselves of compensation caps and other restrictions that they complain has hurt their competitiveness.
On Tuesday, Bank of New York Mellon announced it had raised $1.5 billion by selling debt not guaranteed by the F.D.I.C., in a move that positions it to repay the government.
The deal was oversubscribed by investors at a lower cost than previous sales, a sign that analysts said showed how credit was thawing for stronger banks.
JPMorgan Chase raised $3 billion of nonguaranteed debt in April, after a similar offering the month before.
Goldman Sachs sold $2 billion in nonguaranteed debt in late January, and took the additional step of raising $5 billion from private investors after it reported earnings last month.
Healthier banks have complained since Congress attached what the banks consider onerous restrictions to the bailout funds.
At a White House meeting with President Obama in late March, several banks asked the administration to lay out a plan for them to repay the money.
Mr. Obama said he understood their concerns, but did not want to undermine his effort to bolster lending.
The large banks were later told that they would have to wait for the results of the stress tests before they could repay TARP.
So far, only 11 small banks that did not undergo the stress tests have been permitted to repay the bailout money.
But they also must buy back warrants they issued to the Treasury to completely extricate themselves from the government. The warrants are a mechanism that ensure taxpayers will share in any upside for providing aid to the banks.
But banks have been tussling with Treasury over how much they should pay to repurchase the warrants from the government.
It is so difficult to find common ground that just one bank, Centra Financial of West Virginia, has bought back the securities.
That could pose an additional hurdle for bigger institutions like JPMorgan Chase or Goldman Sachs to fully untangle themselves from the government.
On Tuesday, Federal Reserve officials privately delivered the final stress test results to the banks after more than a week of intense negotiations.
Citigroup, Bank of America, Wells Fargo, PNC Financial and several other large regional lenders argued that they were much stronger than the regulators thought, hoping to avoid raising additional capital.
Citigroup, the largest and most deeply troubled of the banks, is expected to need $5 billion to $10 billion of additional capital, according to people briefed on the final results.
Citigroup executives say the bank can easily cover any shortfall, and is considering several options to close that gap.
Among them are efforts to accelerate the sales of several businesses within Citi Holdings, a holding tank for assets it plans to shed, or to expand its common stock conversion plans to a broader base of private investors who hold Citigroup preferred stock.
Both measures would avoid an increase in the government’s expected 36 percent ownership stake."