Geithner welcomes return of bailout funds

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Treasury Secretary Timothy F. Geithner on Tuesday morning acknowledged for the first time publicly that the Treasury Department is depending on banks to return $25 billion of bailout funds they received last year.

The Treasury’s calculation that restrictions on the pay and perks of executives will prompt banks to return the money was first reported in The Washington Times last week. In recent days, bank executives have trumpeted their determination to get out from under the taboo associated with taking the money, with JP Morgan Chase chief executive Jamie Dimon calling it a “scarlet letter.” “We would welcome the capital coming back to the Treasury as a result of the success of this program,” Mr. Geithner said in testimony before the Congressional Oversight Panel. The Treasury released details of the money it expects to disperse under the $700 billion bank bailout program, leaving it with $134.6 billion of uncommitted funds, also as reported last week by The Washington Times.

While Mr. Geithner did not specify under what circumstances banks can return the money, the $25 billion estimate suggests that only a small number will, since banks are expected to receive a total of $220 billion in capital funds from Treasury. Already, Goldman Sachs has issued $5 billion in stocks with the goal of starting to repay the $10 billion it was forced to take in a widely publicized meeting with former Treasury Secretary Henry Paulson in October.

Mr. Geithner said the results of stress testing that the Treasury is performing on the 19 largest banks will be revealed in early May, along with details of how much further capital some of the banks must raise to shore up their balance sheets against mounting losses on all kinds of loans. The Treasury also is expected to specify how healthy banks could return funds at that time.

Banks that need additional funding will be given a variety of ways to raise the money, including issuing new stock as well as taking further funds from the Treasury. One ploy the Treasury used to bolster Citigroup’s balance sheet earlier this year also will be available, whereby banks convert the preferred shares they gave Treasury last year into common shares that are given more weight as a capital cushion against losses by regulators.

But the switch of Treasury shares into common stock also raises the specter of increased government ownership of the banks, an issue that has roiled the stock market in recent days and driven down the stocks of major banks such as Citigroup and Bank of America. Treasury’s acquisition of common stock would dilute the value of the outstanding bank stock.

Mr. Geithner said he also worries about “creeping nationalization” that would damage the “franchise value” of the banks, and he wants to avoid that if possible.

On another issue, Mr. Geithner said the Treasury will publish rules shortly on whether and how executive compensation restrictions will apply to a separate program the Treasury set up to purchase toxic loan assets from ailing banks through public-private partnerships.

The Treasury is planning to hire five or more private funds such as Pimco and BlackRock to manage parts of the program, while hedge funds and other Wall Street financial firms are expected to participate in purchasing the toxic assets jointly with the Treasury.

“It is my judgment that the compensation restrictions do not need to apply” to participants in these programs, he said.

Mr. Geithner vehemently denied charges by a labor union representative on the panel that the Wall Street firms will be able to contribute as little as 7 percent of the funding for purchases under the program, yet earn 50 percent of the profits if the investments gain in value.

Mr. Geithner said that taxpayers also will profit from the program but that profits from the investments will not be the only gain to the public from taking the bad loans off bank books and enabling them to start lending more freely again.

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