Regulators Brace for TARP Exodus as Banks Snub PPIP

[Update 1 adds details regarding BofA and Morgan Stanley.] Hours before US Treasury Department secretary Timothy Geithner warned today that toxic asset-purchasing plans are beginning to look less appealing to banks, the Federal Reserve outlined criteria it will use to evaluate applications by the 19 largest banks to redeem US Treasury capital. While on a trip in Beijing, Geithner told CNBC that banks’ efforts to raise private capital in the wake of negative stress test results have raised banking confidence, which will likely curb interest in any government toxic asset-purchasing plan. The main plan in question, the Public-Private Investment Program (or PPIP), already faces doubt and criticism from prospective participants that say any more government aid might affect whatever confidence banks have regained, especially if the rules change months into the program. “As confidence has improved a little bit, we may see less interest — both on the selling side and the buying side” of the toxic asset-purchasing plan, Geithner told CNBC in a recorded interview. “It’s hard to tell, though, how much interest you’re going to see. There’s still some concerns, too, about the rules of the game.” Geithner also said he anticipates “substantial” capital repayments near on the horizon as the more well capitalized banks find more confidence in each capital-raising effort they undertake. Repayments under the Troubled Asset Relief Program (TARP) so far have been scattered among mid-sized institutions, totaling $1.77bn in repaid capital from a handful of institutions, according to the latest TARP transaction report. TARP repayment might become more widespread, now that the Fed outlined the criteria it plans to use to evaluate whether any of the 19 largest bank holding companies (BHCs) studied in the stress tests qualify for repayment. Any BHC wishing to redeem Treasury capital must prove its ability to access the long-term debt markets without relying on the Federal Deposit Insurance Corp.‘s Temporary Liquidity Guarantee Program, the Fed said in a media statement. BHCs must also demonstrate their ability to continue lending to creditworthy borrowers in the absence of the Treasury capital and to maintain expected capital levels. For a bank or institution found to have sufficient capital under the government’s stress tests, these criteria might seem easier to meet, if statements this week from several institutions are any indication. JPMorgan Chase (JPM), which in October ’08 received $25bn through TARP and later passed the government’s stress test, said Monday it plans to raise $5bn of common equity to meet the requirements for repayment. It expects to satisfy the criteria, obtain authorization for repayment and complete the process before the end of June. “JPMorgan Chase believes that redeeming the TARP preferred capital is in the best interests of the country and the company, and that these funds can be used by the government for other critical purposes,” company officials said in a media statement. American Express (AXP), which in January received $3.39bn and also passed the stress test with no capital gap, said on Monday it planned to raise additional capital — $500m — and apply for repurchase. The company holds none of the mortgage-related toxic assets weighing on other institutions’ balance sheets, but it shares in other banks’ efforts to repay TARP, which was never considered a permanent capital solution, as CEO Kenneth Chenault said Monday in a media statement. “We’ve always viewed the Capital Purchase Program as a temporary program and are pleased to be in position to repurchase the preferred shares issued to the Treasury,” he said. But institutions found under the stress tests to be well-capitalized aren’t alone in the efforts to qualify for repayment. Several large firms continue to successfully sell shares today ahead of hopeful repayment authorizations. Bank of America (BAC), the recipient of $45bn through TARP and the bank found to be in the greatest need of fresh capital, touted today it has raised almost $33bn toward the $33.9bn needed to satisfy the Supervisory Capital Assessment Program stress test. BofA touted its capital-enhancing efforts through selling $13.5bn of common stock and raising long-term debt by selling 43bn in five-year notes and $2.5bn in 10-year notes without FDIC guarantees. The company says it now expects to “comfortably exceed” the capital requirements. “We are pleased to have nearly reached our goal this quickly,” CFO Joe Price says in a media statement today. Morgan Stanley (MS) today said it plans to raise $2.2bn in common equity to meet the criteria for repayment. After receiving $10bn in October through TARP, government stress tests found the company to lack $1.8bn of capital. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.