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."

If needed, big banks and other financial institutions should be broken up in those instances

TO BE NOTED: From the NY Times:

"FDIC's Bair Calls for 'Systemic Risk Council'

By THE ASSOCIATED PRESS

Filed at 10:33 a.m. ET

WASHINGTON (AP) -- The head of the Federal Deposit Insurance Corp. says new powers are needed to oversee companies that pose financial risks to the economy, an authority that could be shared by the FDIC and other regulators.

In testimony at a Senate hearing Wednesday, FDIC Chairman Sheila Bair called for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.

She suggested the Treasury Department, FDIC, Federal Reserve and Securities and Exchange Commission could be members of a new ''systemic risk council'' set up to monitor large institutions and potential risks to the system.

Bair stressed again that the ''too big to fail'' policy used by the government in the financial crisis must end.

''Our current system has clearly failed in many instances to manage risk properly and to provide stability,'' Bair said.

She maintains that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts.

''We're talking about a resolution and not a bailout,'' Bair told the Senate Banking Committee. If needed, big banks and other financial institutions should be broken up in those instances, she said.

Policymakers are trying to craft a new system of financial rules to replace the ''too big to fail'' stamp put on federal policy in the financial tumult, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.

The Obama administration has presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year.

A ''council'' of regulators would be better equipped than a single agency to exercise that oversight, writing rules and collecting data on large institutions that pose potential risk to the system, Bair said.

For taking over and resolving financial institutions, Bair said the FDIC is well equipped to do so. She suggested Congress could give the agency the authority to resolve bank holding companies like Citigroup or Bank of America -- now under the supervision of the Fed. The FDIC now can take over and resolve only the subsidiaries of bank holding companies that take federally insured deposits.

Rep. Barney Frank, chairman of the House Financial Services Committee, and other lawmakers have proposed that the Fed assume the role of systemic regulator."

Yet the banks contend that they must take care of their own constituents.

TO BE NOTED: From the NY TIMES:

The Treasury Department has sweetened the terms of its offer to Chrysler’s senior lenders on how to reduce the company’s debt with a new offer, a person with knowledge of the matter said Wednesday.

Yet the government’s new plan still shows a broad chasm between the two sides, as Chrysler races to complete a reorganization plan by April 30, or face a near-certain liquidation.

Under the terms of the new plan, presented Wednesday afternoon, Chrysler’s lenders, who hold about $6.9 billion worth of debt, would receive about 22 cents on the dollar, or $1.5 billion. They would also receive a 5 percent equity stake in the reorganized company, this person said.

That is an improvement from the government’s original proposal, presented late April 12th, under which the lenders would have received just 15 cents on the dollar, or $1 billion. But the steering committee of Chrysler’s lenders presented a plan late Monday that would give them 65 cents on the dollar, or $4.5 billion, and a roughly 40 percent equity stake in a restructured Chrysler.

The quickening back-and-forth between the two sides represents the growing urgency of the situation. By the government-mandated deadline, Chrysler must complete an alliance with Fiat, the Italian carmaker, and won concessions from both its lenders and the United Auto Workers union. If the company succeeds, the government would give it $6 billion in more loans.

The lenders’ steering committee, comprised of five banks and three investment firms and led by JPMorgan Chase and Citigroup, has argued that they would recover from a liquidation of the company’s assets than under the government’s offers.

These creditors have also argued that Fiat should contribute more capital to its proposed alliance with Chrysler. Under the terms of the potential deal — which cannot be completed without concessions from the lenders and the union — Fiat would take a 20 percent stake in the company in exchange for small-car models and various technologies. It would not invest any cash.

Chrysler’s lenders have also said that the U.A.W. should be forced to accept greater concessions. The current deal terms envision the company using stock to finance half of a $10.6 billion fund for retired workers’ health care obligations. That has won tentative approval by the U.A.W., though the union has not reached an accord with Chrysler over cash contributions to the health care trust.

The committee, which also includes the banks Morgan Stanley and Goldman Sachs and the investment firms Elliott Management, Stairway Capital Management, Oppenheimer and Perella Weinberg Partners, represents a wider group of about 45 banks and hedge funds. But some of the lenders are split over how to negotiate with the Treasury Department’s task force, people with knowledge of the matter said, with some institutions, mostly the banks, favoring a more flexible negotiating stance and others advocating a hard-line position.

The Treasury task force has been reluctant to give the lenders’ debt more value than it currently trades at in the debt markets. And some politicians have pointed out that many of the banks involved have taken federal bailout financing. Yet the banks contend that they must take care of their own constituents.

–Michael J. de la Merced"

juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayer

TO BE NOTED: From the NY Times:

"U.S. May Convert Banks’ Bailouts to Equity Share

By EDMUND L. ANDREWS

WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.

The Treasury has already negotiated this kind of conversion with Citigroup and has said it would consider doing the same with other banks, as needed. But now the administration seems convinced that this maneuver can be used to make up for any shortfall in capital that the big banks confront in the near term.

Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank’s board. Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.

Treasury officials estimate that they will have about $135 billion left after they follow through on all the loans that have already been announced. But the nation’s banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other loan defaults.

In his budget proposal for next year, Mr. Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually indicated that Mr. Obama might ask Congress for as much as $750 billion.

The most immediate expense will come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 biggest banks. The tests are expected to show that at least several major institutions, probably including Bank of America, need to increase their capital cushions by billions of dollars each.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.

The White House chief of staff, Rahm Emanuel, alluded to the strategy on Sunday in an interview on the ABC program “This Week.” Mr. Emanuel asserted that the government had enough money to shore up the 19 banks without asking for more.

“We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective,” Mr. Emanuel said. “If they need capital, we have that capacity.”

If that calculation is correct, Mr. Obama would gain important political maneuvering room because Democratic leaders in Congress have warned that they cannot possibly muster enough votes any time soon in support of spending more money to bail out some of the same financial institutions whose aggressive lending precipitated the financial crisis.

The administration said in January that it would alter its arrangement with Citigroup by converting up to $25 billion of preferred stock, which is like a loan, to common stock, which represents equity.

After the conversion, the Treasury would end up with about 36 percent of Citigroup’s common shares, which come with full voting rights. That would make the government Citigroup’s biggest shareholder, effectively nudging the government one step closer to nationalizing a major bank.

Nationalization, or even just the hint of nationalization, is a politically explosive step that White House and Treasury officials have fought hard to avoid.

Administration officials acknowledged that they might still have to ask Congress for extra money. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks and may need to provide more money before the financial crisis is over.

Treasury officials say they have more money left in the rescue fund than might be apparent. Officials estimate that the fund will have about $134.5 billion left after the Treasury completes its $100 billion plan to buy toxic assets from banks and after it uses $50 billion to help homeowners avoid foreclosure.

In practice, the toxic-asset programs are not expected to start for another few months, and it could be more than a year before the Treasury uses up the entire $100 billion. Likewise, it will be at least a year before the Treasury uses up all the money budgeted for homeowners.

But the biggest way to stretch funds could be to convert preferred shares to common stock, a strategy that the government seems prepared to use on a case-by-case basis.

Ever since the Treasury agreed to restructure Citigroup’s loans, officials have made it clear that other banks could follow suit and convert their government loans to voting shares of common stock as well.

In the stress tests now under way, regulators are examining whether the big banks would have enough capital to withstand an economic downturn in which unemployment climbs to 10 percent and housing prices fall much further than they already have.

As their yardstick, regulators are expected to examine a measure of bank capital called “tangible common equity.” By that measure of capital, every dollar a bank converts from preferred to common shares becomes an additional dollar of capital.

The 19 big banks have received more than $140 billion from the Treasury’s financial rescue fund, and all of that has been in exchange for nonvoting preferred shares that pay an annual interest rate of about 5 percent.

If all the banks that are found to have a capital shortfall fill that gap by converting their shares, rather than by obtaining more cash, the Treasury could stretch its dwindling rescue fund by more than $100 billion.

The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.

Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall."