Sunday, April 12, 2009

Regyulators and the Effing banks




WASHINGTON — As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages.

President Obama emerged from a meeting with his senior economic advisers on Friday to say “what you’re starting to see is glimmers of hope across the economy.” But there were also signs of growing tensions between the White House and the nation’s banks over the next phase of the financial rescue.

Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money.

Jamie Dimon, the chief executive of JPMorgan Chase, and two other executives of large banks raised the issue with Mr. Obama and the Treasury secretary, Timothy F. Geithner, at a meeting two weeks ago.

“This is a source of considerable consternation,” said Camden R. Fine, who attended the White House meeting as president of the Independent Community Bankers, a trade group of 5,000 mostly smaller institutions, many of which are complaining about the repayment requirements.

Meanwhile, the Obama administration wants weaker banks to move more quickly to relieve their balance sheets of the toxic assets, the home loans and mortgage bonds that nobody wants to buy right now. But the banks are resisting because they would have to book big losses.

Finally, there is increasing anxiety in the industry that the administration could use the stress tests of the 19 biggest banks, due to be completed in the next three weeks, to insist on management changes, just as it did with General Motors when officials forced the resignation of its chief executive after examining that company’s books.

Senior officials, recognizing that the next few weeks could prove pivotal for both the industry and the bailout effort, are moving ahead with major plans.

You will be seeing additional actions by the administration,” Mr. Obama said after the meeting Friday, when the officials discussed the bank stress tests and the new $500 billion to $1 trillion plan that will use public subsidies to encourage private investors to buy mortgage assets.

Attending the session were Mr. Geithner; Sheila C. Bair, the head of the Federal Deposit Insurance CorporationLawrence H. Summers, the chairman of the National Economic Council; and other top regulators.

The tension between the industry and the administration is rising as the government’s bailout fund is dwindling, putting the administration in a bind. It is all but certain to need to seek more money from Congress, which wants to see results from existing programs first.

The fund is down to its final $134 billion, according to Treasury officials, and is expected to face new requests for money in the coming weeks to aid tottering banks, the auto industry and possibly insurance companies.

“Between now and Memorial Day we’re going to know a whole lot more about the degree of trouble the banks are in,” said Senator Charles E. Schumer, a New York Democrat who is vice chairman of the Joint Economic Committee. “At the same time, we will begin to have a good initial reading as to how well the administration’s programs are working.”

This month, the nation’s largest banks began announcing their latest quarterly earnings. Some, like Wells Fargo, have released results early to trumpet their profitable first quarter — and possibly to give them leverage in coming negotiations with their regulator.

The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities.

Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses.

Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them.

Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.

“The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”

The stress tests of the banks are aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected.

Government officials do not plan to disclose the results for individual banks but may reveal broad results for the entire industry at the end of the month.

If the test indicates that the losses would leave a bank with too little capital, the bank will have six months to either raise extra money from private investors or get money from the government. Executives at some banks are worried that regulators will start demanding changes in management and strategy, possibly forcing them to merge with stronger institutions.

Treasury officials said they understood that banks had valid reasons for placing higher values on their mortgages than investors, and said they were hoping to avoid major conflicts.

Facing a host of government restrictions — from how much they pay executives to how many foreign citizens they employ — some small banks have returned the bailout money, and some larger ones, including Goldman Sachs, Wells Fargo and Northern Trust, have said they want to do so as quickly as possible.

On Friday, Sun Bancorp of Vineland, N.J., became the sixth bank to exit the program, returning $89.3 million just three months after it received its loan.

Regulators are reluctant to approve the early repayments until banks can show that they have the capital to withstand further erosion in the economy and will not curtail their lending.

Both large and small banks have pressed the Obama administration to make it less costly for them to exit the bailout program by waiving the right to exercise stock warrants the banks had to grant the government in exchange for the loans. At a meeting last month, the chiefs of three of the largest banks separately asked Mr. Obama to direct the Treasury not to exercise the warrants, Mr. Fine said.

Douglas Leech, the founder and chief executive of Centra Bank, a small West Virginia bank that participated in the capital assistance program but returned the money after the government imposed new conditions, said he complained strongly about the Treasury Department’s decision to demand repayment of the warrants. That effectively raised the interest rate he paid on a $15 million loan to an annual rate of about 60 percent, he said.

“What they did is wrong and fundamentally un-American,” he said. “Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.”

Stephanie Cutter, a spokeswoman at the Treasury Department, said it did not comment about the participation of specific banks in the plan or their efforts to exit the program.



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