Healthier banks have complained since Congress attached what the banks consider onerous restrictions to the bailout funds.

TO BE NOTED: From the NY Times:

"U.S. May Set a Debt Test for Banks

By ERIC DASH

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.

They are also expected to show that several banks — including Bank of New York Mellon, Goldman Sachs and JPMorgan Chase — are healthy enough to repay TARP funds.

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."

“It almost makes the Treasury look like a payday lender.”

TO BE NOTED: From Bloomberg:

"U.S. May Retain Grip on Banks With Warrants After Share Buyback

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By Rebecca Christie

April 17 (Bloomberg) -- The Treasury may retain a stake in many U.S. banks even after they buy back the shares the government currently holds.

The government will continue to hold warrants, attached to every capital injection it has made, even after any share buybacks, Treasury officials said. Banks seeking to escape the government’s grip want to retire the warrants -- which give the right to buy stock in the future at a preset price -- at the same time they acquire the government-owned preferred shares.

The officials said the U.S. would give up the warrants only after subsequent talks with appraisers and the banks to agree on a price. As long as the warrants remain, lenders would continue to face some federal constraints, including limits on hiring non-American citizens, the officials said. Lenders would be freed of restrictions on executive pay and dividends, they said.

“When this program was created, everything was done so fast, I don’t think people were contemplating they would be exiting this quickly,” said Diane Casey-Landry, chief operating officer of the American Bankers Association.

Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the Treasury’s rescue program. The warrants issue may be the latest complication in a $700 billion effort to unfreeze credit that has sparked an outcry among both lawmakers and some bankers.

Most of the funds from the Troubled Asset Relief Program distributed so far have been used for buying stakes in financial companies. Warrants apply to all elements of TARP, and officials are still wrestling with how to include them in their plan to finance purchases of distressed assets.

Toxic-Debt Programs

Treasury representatives are working with the Federal Deposit Insurance Corp. and potential participants in the toxic- debt programs on how to apply the warrants requirement.

Lawmakers pressed for warrants in the TARP law enacted in October as a way for taxpayers to benefit from future profits of companies getting help. When exercised, the government can buy newly issued shares from the company at a pre-determined price.

It’s unclear how much the warrants may be worth and valuing them may prove contentious. Bankers said the warrants, under current market conditions, may turn out to be expensive for those looking to exit the rescue programs quickly.

“If you look at the cost of those warrants and turn it into an annual percentage rate, it’s enormous,” said Camden Fine, president of the Independent Community Bankers of America. “It almost makes the Treasury look like a payday lender.”

Goldman Share Sale

Goldman Sachs Chief Financial Officer David Viniar said in an April 14 interview that “there’s a prescribed process for how you do it -- where you propose a price, they accept or not, you negotiate and then you hire appraisers and come up with an agreed-upon valuation.”

“We’ll figure it out, we don’t know” the cost, Viniar said. Goldman Sachs raised $5 billion this week in a share sale in order to help pay back the $10 billion it took from the government in October.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 his firm could repay U.S. government rescue funds “tomorrow.” He called the receipt of the $25 billion in TARP money last year “a scarlet letter.”

JPMorgan spokesman Joseph Evangelisti declined to comment on the warrants.

For the top 19 banks, any TARP repayments will have to wait until after the so-called stress tests conclude, a Treasury official said. U.S. regulators are reviewing the biggest banks to gauge whether they have enough capital to survive a deeper economic slowdown. A Federal Reserve official said yesterday that the results are planned for release May 4.

To repay, a bank must apply to the Treasury. The request then goes to the bank’s regulators, who review the soundness of the institution. If the bank is deemed in good shape, it’s allowed to buy out the government stake.

Some smaller banks are already in the process of repaying their TARP funds. Of the six who have repaid so far, five have outstanding warrants that need to be addressed."