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Banks repay bailout funds, but it doesn't mean they'll lend

WASHINGTON — A day after Citibank and Wells Fargo announced that they'd soon repay taxpayer bailout money, General Motors said Tuesday it would follow suit, raising questions about the health of banks and whether the government should recycle the incoming funds to spark job creation.

"GM is scheduled to fully repay . . . loans by June 2010, assuming no adverse economic or business conditions," the company said in a one-paragraph statement that wasn't attributed to any company official. "As previously announced, the first installment of $1.2 billion . . . will be paid this month."

GM's surprise announcement Tuesday followed word a day earlier from San Francisco-based Wells Fargo that it would issue new shares of stock to raise $10.4 billion and use its balance sheet to fully repay the $25 billion in taxpayer bailout funds it received last year under the Troubled Asset Relief Program. Citibank issued a statement earlier Monday saying it intended to repay $20 billion and wind down other bailout support.

Coming on top of a Dec. 2 announcement by Bank of America to repay $45 billion, this week's announcements mean that large banks will soon have repaid their TARP money — bringing back to taxpayers $161 billion of the $245 billion capital injection made in banks.

With money flowing back to the government, dibs are being called on it.

Republicans want it used to bring down the $1.4 trillion deficit. House Speaker Nancy Pelosi, D-Calif., wants to direct incoming TARP money for job creation, an idea supported by President Barack Obama.

Other Democrats, such as Sen. Carl Levin, D-Mich., argue the money should be redirected to community banks.

"The confluence of drastic asset devaluation, increased loan losses, and more stringent capital standards, has pulled many small lending institutions to the edge," Levin wrote to Treasury Secretary Timothy Geithner on Tuesday.

There's no stipulation that TARP money must be retired when returned, said Bert Ely, a banking consultant.

"It was not set up for 'once out and back and that's it.' It's more like a $700 billion (revolving) line of credit," said Ely, noting TARP money can be recycled until the TARP is wound down, a date Treasury has set for October 2010.

So if companies are repaying TARP money, does it mean all is well and that lending will resume soon?

"I don't view the TARP repayment as evidence that banks are healthier and now can do it. It's rather that banks have an incentive to do it now because they see the stigma associated as even more significant than they had thought previously," said Vincent Reinhart, a former top economist at the Federal Reserve.

Banks are still under severe stress, he said.

"Double-digit unemployment is bad for any business model. Banks aren't making loans, if anything the commercial real estate looks worse than it did, and commercial real estate is an asset you actually retain on your balance sheet," said Reinhart, now a senior researcher at the American Enterprise Institute, a policy research group.

Even if GM repays its $6.7 billion in government loans, it's just a fraction of the $50 billion in government support the automaker received. It would still have to conduct a public offering of its shares, with the government now owning more than 60 percent of GM, before the Detroit carmaker could completely shed the "Government Motors" label.

There are also those toxic assets, the original purpose for TARP. They're still on banks' books, but a relaxation of accounting rules this year allowed banks to value them at expected future prices and not present-day value.

Obama blasted bankers as "fat cats" in a Sunday night TV interview, but on Monday hosted them at the White House, pleading for greater lending to spark the economy.

Ironically, by repaying the TARP, banks could end up lending even less.

Banks are paying off at least some of their TARP loans from their own balance sheets, meaning their ratio of capital in reserve to outstanding loans will fall just as regulators are requiring higher capital reserves.

It means money that could be lent may instead be used to guard against future losses.

"This is clearly a conflicted administration. They want banks to make loans, but they want banks to improve their capital positions," Reinhart said.

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