Treasury counts on banks to repay

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By Patrice Hill

Treasury Secretary Timothy F. Geithner on Tuesday acknowledged for the first time publicly that his department is depending on banks to return $25 billion of the 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, a committee created to oversee the bank-bailout fund.

The Treasury also released details of the money it expects to disburse under the $700 billion bank-bailout program, leaving it with $134.6 billion of uncommitted funds.

While Mr. Geithner did not specify under what circumstances banks can return the money, the $25 billion estimate suggests that only a small number of banks will any time soon. Banks are expected to receive a total of $220 billion in capital funds from Treasury.

Already Goldman Sachs has issued $5 billion in stock with the goal of starting to repay the $10 billion it was forced to take in a widely publicized meeting with then-Treasury Secretary Henry M. Paulson Jr. in October. Mr. Dimon also has expressed his desire to return $25 billion of funds he said his bank didn't need.

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

The Treasury does not expect to have to provide much more capital funding for banks.

"Currently, the vast majority of banks have more capital than they need to be considered well-capitalized by their regulators," Mr. Geithner said, in a reassuring statement that helped provoke a rally in stocks Tuesday.

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

But the switch of Treasury's 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. Acquisition of common stock would dilute the value of outstanding bank shares.

Mr. Geithner said he has concerns about "creeping nationalization" that would damage the "franchise value" of the banks, and wants to avoid that if possible.

On another issue, Mr. Geithner said the Treasury will publish rules shortly on whether 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 Congressional Oversight 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 taxpayers will also 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.