Citigroup: Will Bank Comeback Mean Taxpayer Payback?

April 17, 2009— -- The nation's largest banks have made quite a comeback. Having nearly brought the market to its knees a few months ago, the financial sector has surprised experts with impressive profits.

Citigroup -- widely considered to be the country's weakest big bank -- reported this morning net first-quarter income of $1.6 billion, beating analyst expectations and making it the bank's best quarter since 2007, Citi CEO Vikram Pandit said.

Citi's news comes on the heels of reports showing better-than-expected, first-quarter profits by three other major banks: $2.1 billion for JPMorgan Chase, $1.7 billion for Goldman Sachs and $3 billion for Wells Fargo.

Since the beginning of March, most major banks have seen their stock prices soar. Citigroup saw the most dramatic increase; its share price shot up 75 percent.

"I think the American banks are healthy," said said Dick Bove, a banking analyst at Rochdale Securities. "In the fourth quarter, we saw people put over 100 billion a month in net new deposits into the banking system and that's never happened before."

In addition to record deposits coming from U.S. consumers, financial firms are also benefiting from low-cost loans from the Federal Reserve, as well as stronger performance from their investment banking arms.

But the bad news is that lending to consumers and businesses is still lower than it was before the start of the recession, raising criticism from those who argue that the banks should be spending the billions in aid they received from the government's Troubled Assets Relief Program to provide more loans. Bank executives have countered that they're not to blame for lower lending levels; reduction in lending by non-bank businesses hurt or shuttered by the recession is the problem, they say.

Meanwhile, the bank's impressive profits are raising another TARP-related criticism: If banks are making money, why aren't they paying the TARP funds back?

Some bank chiefs say they'd like to repay the TARP funds immediately, but are awaiting guidance from the U.S. Treasury Department.

Bank Bailout: Great Leverage for the Government?

JPMorgan chief Jamie Dimon has made no secret that he believes holding on to TARP money reflects poorly on his bank.

The government's $25 billion investment of taxpayer funds into JPMorgan has been a "scarlett letter," Dimon said during an analyst conference call Thursday.

"We can pay it back tomorrow. We have the money," he said.

Goldman Sachs CEO Lloyd Blankfein has also said the firm would like to quickly repay the funds.

"When the banks got the TARP money, they didn't need it to run their businesses," analyst Bove said. "Since they never used it, it's sitting on the balance sheet and they can give it back to the government."

But it's unclear exactly when the banks will be able to repay the TARP funds. Some experts have raised concerns that if some banks return the funds earlier than others, the latter will look weaker by comparison and will see their share prices fall once again.

There are hopes that the banks will get the green light to repay the money around May 4, when the government is reportedly expected to release the results of its "stress tests" -- evaluations designed to determine how much more government aid, if any, individual banks would need to survive a deeper downturn.

Some say the government is hesitant to take back the money because it's seeking to maintain more control over the financial sector.

"They want to keep the banks in their clutches, without question," banking consultant Bert Ely told the Wall Street Journal. "The bailout is giving the government leverage, and they don't want to give that up."