Banks Eager to Repay Bailout Money to Escape Government Control

Many of the financial institutions that received Troubled Asset Relief Program (TARP) money are now looking to repay it to prevent government intervention into their operational decisions.

The money has been used primarily to shore up balance sheets, according to Dana Wiklund, research director for Financial Insights. “For example, 64 percent of Citi’s assets are in investments. As the value of those investment erodes, more equity is needed.”

The TARP provided that equity.

“The whole idea was to help support the balance sheets of these banks that had stopped lending,” agreed Dan North, chief economist at Euler Hermes ACI, a trade credit insurance firm.

But some banks are saying they are lending out the TARP money, not using it primarily to shore up capital.

Citi (NYSE: C) announced last week that it would lend up to $5 billion to state and local governments, municipal agencies, universities and non-profit hospitals to fund projects that will help create jobs and spur economic growth. The municipal program and three other new primary lending initiatives approved by Citi in the first quarter of 2009 are supported by capital the U.S. Treasury invested in the company as part of TARP.

All of the initiatives are presented in Citi's second quarterly TARP Progress Report published this week: "What Citi is Doing to Expand the Flow of Credit, Support Homeowners and Help the U.S. Economy." The report can be found at on Citi’s Web site.

Wiklund called the posturing by banks to show that they are lending TARP funds a public relations move; if the balance sheets weren’t shored up first, the lending wouldn’t have occurred.

Paying It Back
Now that the financial markets are stabilizing, “banks want to get back to business as usual, without having the spectre of the government hanging over them,” North says. “On the other side, Treasury doesn’t want to take this money back right a way. A number of banks that passed the stress tests are eligible to give back the money, but the government wants to make sure that not only these banks, but the whole financial system is in good shape.”

Another analyst noted that there is a bit of a paradox in the government’s position. “If the government gets the money back, TARP will have worked and the taxpayer will be made whole,” said John Jay, senior analyst at Aite Group. “So [the hesitation to take the money back] is a little curious, I just wonder if they want to keep their hands in these banks for a while to make sure things are OK.”

He added that banks are trying to get out from under TARP because they think government intervention is too heavy handed.

“Any time you want to do anything minor, you have to get approval,” Jay said. “Bankers feel that the government provided TARP to save them, but isn’t let them do what they can in order to be profitable.”