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Big Banks Pay Back TARP Funds—But Still Get Government Aid

Ever since the government gave the O.K. for 10 big banks to pay back the bailout funds, the firms have been rushing to return the money. But that doesn’t mean they’ll be off the government dole anytime soon.

Last week, 10 big banks got the blessing from the U.S. to exit the Troubled Asset Relief Program, the rescue fund under which scores of banks got federal funds. Just days later, banks are giving back the money. Morgan Stanley and J.P. Morgan have returned $10 billion; US Bancorp $6.6 billion; and BB&T $3.1 billion. Goldman Sachs says it’s ready to repay the money, as well. In all, the 10 banks are expected to return some $68 billion.

Their reasons are obvious. The TARP money comes with a lot of strings attached. Although the government said it won’t cap salaries, firms receiving bailout money are likely to be subject to limits on bonuses. The U.S. also is appointing a pay czar to keep watch over firms with a lot of federal funds.

Plus, the TARP funds are expensive. Banks pay a hefty dividend to their government shareholders since the bailout funds come in the form of preferred debt. It’s among the most costly ways to finance their operations.

But don’t expect big banks to stop feeding from the government trough. Remember, the TARP funds are only part of the federal aid they’ve been receiving. In fact, it’s a small portion of the help they’ve been getting from the U.S.—and the only one that comes with such onerous restrictions.

For one, banks are aggressively issuing debt guaranteed by the Federal Deposit Insurance Corp., the banking regulator. Since late last year, banks have issued more than $200 billion in such bonds, according to research firm Dealogic. The rates on the government-backed bonds are much cheaper than could get by selling bonds on their own.

The big banks returning the TARP money show no signs of giving up this perk. Goldman has $21 billion of such debt; JPMorgan Chase $40 billion; Morgan Stanley $23 billion. (JPMorgan and Morgan Stanley did say they wouldn't issue any additional bonds backed by the FDIC. And JPMorgan recently sold corporate bonds without the U.S. backing.)

Banks also are benefitting from ultralow interest rates, engineered by the Federal Reserve. The Fed has cut the banks’ borrowing cost to the bone. That means the banks can borrow money for essentially nothing and lend it out on much higher rates. The difference—or the spread—is one big reason why banks reported such strong profits in the first quarter.

Considering all the forms of government aid, the real question is whether banks are healthy enough to stand on their own. Sure, some of the balance sheet muscle to pay back the TARP funds. But that’s just a fraction of their full financial aid package. The banks—and the financial systems—likely would look a whole lot shakier without Uncle Sam propping them up in other ways.

With Theo Francis

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