Goldman Sachs and Other Banks Feel the Heat to Pay Back Bailout Billions
Goldman Sachs Wants to Repay Government Aid; Other Big Banks May Soon Follow Suit
By MATT JAFFE
WASHINGTON, April 15, 2009—
More and more of the nation's banks are starting to pay back billions in government bailout aid, a move analysts warn might seem to be a sign of strength, but could ratchet up pressure on other banks to follow suit and result in some institutions prematurely getting out of the government program.
"There's no question that it will put pressure on other financial institutions to repay the [Troubled Asset Relief Program] money so that they are perceived as strong credit to the market," said Sean Egan, president of Egan Jones Ratings Company.
"This could absolutely lead to institutions getting out prematurely," he said. "Not only that, but in many cases they can't afford to pay it back, but they might do it for the marketing perspective."
Former Treasury Secretary Paul O'Neill noted that at the start of the TARP program, the heads of the major U.S. banks were summoned to Washington and told they were required to take the money so that those who needed it would not be stigmatized.
"So they all took the money. Stop and think about that. What was the purpose of this policy? To deceive the people so that the public would not know which banks were in danger of failing? Why didn't any of the CEO's, claiming not to need the money, have the courage to refuse?" O'Neill said in an e-mail to ABC News. "If banks now claim they want to return the money because they don't need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?"
O'Neill said that unfortunately the government is permitted to practice a policy of deception for the greater good of the society.
"Is the public ever going to have clear facts regarding any of the individual institutions?" he said. "For months I have been calling for a public disclosure of all bank assets by rating class, along with facts showing the face value of so-called toxic assets along with the associated current book keeping value and associated reserve account. The public and members of Congress seem to be accepting of the idea that a handful of people in the administration and the Fed should do all of this in secret."
Earlier this week, Goldman Sachs, reporting better than expected first-quarter profits of $1.66 billion, said it would become the latest in a growing line of banks trying to return federal money.
To calm investors the Obama administration now looks like it will be forced to release information about the health of 19 of the country's largest banks that it gathered as part of its "stress test" process, The New York Times reported this morning.
All attention on Wall Street though is likely next to turn to JP Morgan Chase for the release of its first-quarter earnings report tomorrow.
Last month JP Morgan Chase CEO Jamie Dimon told ABC News that banks should return the money only if they are strong enough to do so, rather than simply to increase their executive compensation payments.
"When it gets returned, it shouldn't get returned so you can pay people. That is not why anyone wants to or should return the TARP money," Dimon told ABC after he and a dozen other bank CEOs met with President Barack Obama at the White House.
"I think the interest of everyone is the same -- do what's right for the country, not what's right for your institution," Dimon added.
By returning the government aid, financial institutions stand to benefit in a variety of ways. Not only will they appear to be in stronger financial shape, but they will also be able to avoid the administration's restrictions on executive compensation.
On Tuesday, Goldman Sachs sold $5 billion in a public stock offering in an effort to pay back the $10 billion it received as part of TARP, the government's $700 billion bailout program.
Goldman to Repay TARP 'If Permitted'
In a statement Monday, the bank said it would repay the funds "if permitted by our supervisors and if supported by the results of the stress assessment," which chief financial officer David Viniar said the bank expected "to be completed around the end of this month."
The Treasury Department had no comment.
Goldman is just one in a string of banks starting to give back government aid.
Bank of America, along with Goldman, one of the nine original recipients of TARP money, may also start repaying the government the $45 billion in bailout help that it received
Earlier this month, five smaller banks said they would return the money, with one bank even citing the compensation issues.
After Signature Bank in New York returned $120 million, its president and CEO Joseph DePaolo cited the restrictions on executive pay written into the administration's $787 billion stimulus bill.
"The revised, expanded legislation included in the American Recovery and Reinvestment Act of 2009, passed on Feb. 17, 2009, adversely affected our business model and it became apparent that we should return these funds to the Treasury," DePaolo said. "The return of these funds allows us to continue to execute our business model, which includes the successful recruitment and retention of highly talented banking professionals throughout the metropolitan New York area."
After the meeting at the White House on March 27, one CEO told ABC News that every bailed-out bank in the meeting wanted to pay back the government as soon as possible.
"I think every bank in the room wants to return their TARP money, but not so much because of the strings that are starting to be attached or may be attached, but because I think they're starting to feel confident enough that they don't need it," said Cam Fine, CEO of Independent Community Bankers of America. "At least several of the banks in the room expressed a desire to give it back as soon as they could give it back."
Return of TARP Funds
But the approach from these banks was met with some disagreement by the administration.
As has been reported by Politico.com and confirmed by ABC News with a source familiar with the meeting, Dimon jokingly offered Treasury Secretary Tim Geithner a fake check for $25 billion, the amount of money the bank received from TARP. But Geithner did not take the check.
The source noted that the CEOs and President Obama were hardly seeing eye to eye about returning TARP funds.
At the meeting, some executives argued that they wanted to return any unneeded money as soon as possible and that the process should be streamlined. But the president compared the situation to sick patients taking antibiotics -- even if they start feeling better, they shouldn't stop taking the medicine.
"Treasury has to look at what is best for the overall economy, not what is best for Goldman Sachs," Egan said.
If banks feel pressure to return the money just to avoid compensation restrictions or to appear strong, that could prove detrimental for both the banks themselves and the country's economic recovery effort.
Currently, institutions that want to repay the government must notify the Treasury Department and the appropriate federal banking agency about their intentions.
"After receiving your notice, Treasury and your primary regulator will consult about the request," the Treasury Department says on its Web site. "When all consultations have been completed, we will contact you to discuss the redemption request."
Analysts caution that Goldman Sachs, unlike some other big banks, is not a consumer-based lending bank and therefore is in a unique position to return its TARP money.
"They can easily raise money in the markets," Egan noted.
This difference is one reason why Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, believes that institutions will not feel pressure to return any aid they have received.
"Many banks will choose to remain in TARP," he said, adding that "each bank makes its own decision about TARP."
The real risk that banks face, he said, is not returning government money for the wrong reasons, but rather the risk that "the government will change the rules after the fact -- that is a real risk."
All in all, Talbott said, it is a good sign that banks are returning the money.
"It shows signs of strength that Goldman is able to raise the capital to help repay the TARP funds," he said. "There is liquidity in the markets and confidence in the markets and the industry is returning. Stock prices are returning to normal. This benefits investors, 401k plans, and the economy."