Banks May Be Allowed To Repay Some TARP Money

When the financial crisis was at its worst late last year, the federal government gave $125 billion of taxpayer capital to the country's biggest banks. This week, the government reveals which banks will be permitted to give money back. David Wessel of The Wall Street Journal talks with Steve Inskeep about whether that is good news for the economy.

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STEVE INSKEEP, host:

Now sometime this week, we could find out, which banks give our money back. The government plans to reveal which banks will be allowed to return their bailout funds. Many bankers want to give back their share of the hundreds of billions of dollars in capital from the U.S. Treasury and other sources, government sources. Regulators, though, have not made it easy.

And to find out more, we turn to David Wessel. He's economics editor of The Wall Street Journal, a regular guest on this program. David, good morning.

Mr. DAVID WESSEL (Deputy Bureau Chief, Economics Editor, The Wall Street Journal): Good morning, Steve.

INSKEEP: If banks are giving back the money, does that mean the crisis is over?

Mr. WESSEL: Well, it certainly means that we've pulled back from the abyss. It means that the Treasury and the Federal Reserve and the regulators think some banks are now strong enough to stand on their own and withstand an even worse economic storm. We know that a number of the big banks, Goldman Sachs, J.P. Morgan, Bank of New York Mellon, American Express are preparing to pay back the money if the government will let them. But there are other big banks - Citigroup, notably - that are still not able to stand on their own.

INSKEEP: David, I think we understand why the banks want to give back the money - because they don't want the strings that are attached - but why would the government make it hard to pay back this capital and loans and other kinds of funding?

Mr. WESSEL: Now that's a good question. The government wants to make sure, I think, that the banks that it liberates from this program are really strong enough to stand on their own. A couple of banks - Citibank particularly, but also an insurance company, AIG - they got money from the government. It wasn't enough. The government had to come back again, and they want to make sure that once the banks leave this program, this kind of hospital ward, that they are really strong enough. We don't have the embarrassment and the confidence shattering effect if the banks say, oh, my God. We made a mistake. We've got to come back and need more money.

INSKEEP: Okay, so how do you decide who can do without government support?

Mr. WESSEL: Well, you remember those stress tests that got so much attention, a while back?

INSKEEP: Hmm.

Mr. WESSEL: The banks were required to raise enough capital for it to satisfy regulators they could get through a really bad economy. They're required to show that they can borrow money on their own in the markets, without public taxpayer guarantee of their debt. And now the government is looking at their management and saying, do you have the right management to get through? So if you meet all this criteria and everybody smiles, then you can get your money back.

One very pleasant surprise to everyone inside the government and outside, is how much capital some of these banks have managed to raise since those stress tests result - were released in May. So far, they - the 19 stress-tested banks have raised $65 billion by selling shares and another $20 billion in other ways. So that's a lot of money.

INSKEEP: If they can sell that capital, if they can sell those shares, that suggests that the market thinks the banks are okay. Is that right?

Mr. WESSEL: The market thinks that those banks are strong enough to get through and that the market had given too harsh a judgment on their abilities to survive before. The economy's gotten a little better, and people do have more confidence in some of these big banks.

INSKEEP: Let me ask, though, about something that was seen as being at the heart of the financial crisis, these so-called "toxic assets," these mortgage-backed securities and other kinds of securities that nobody could have - could put a value on, that the banks needed to get rid of, that the government was going to help them get rid of, even if it cost immense amounts of money. Where does that stand?

Mr. WESSEL: Well, it's kind of stillborn. The latest version had the government, in various forms, buying loans off the bank books. And that has gone absolutely nowhere. The Federal Deposit Insurance Corporation the other day said that it was basically postponing it because it couldn't find investors or willing banks to sell. The more capital that the big banks have does give them the wherewithal to absorb more losses. But the bad loans still take a lot of management time and interfere with their attention to making new loans, so it's a problem.

So raising capital is good and it takes some of the pressure off the banks to sell these loans, but it doesn't solve the problem. There is another program that the government's working on to get not loans, but bad securities off the books of the banks. And for various reasons, this one seems to be doing slightly better. It hasn't started yet, but at least there's an appearance of motion and they probably would begin buying some of these securities in the next couple of weeks.

INSKEEP: Okay, thanks very much. That's David Wessel, economics editor of The Wall Street Journal.

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