Can US banks repay loans? Fears it could threaten recovery

May 17th, 2009 - 2:46 pm ICT by IANS  

Barack Obama By Chris Cermak
Washington, May 17 (DPA) US banks declaring their readiness to pay back government loans would usually be considered a good sign, but the depth of the global financial crisis has left some experts wary that such actions could stall the country’s possible turnaround.

About a dozen smaller banks have already repaid government loans, but the long-running debate gathered steam this week as some of Wall Street’s top institutions began making similar noises.

Four major financial firms - BB&T, US Bancorp, Capital One and New York Mellon - said they would be raising money in a bid to pay back the government. Similar promises were made last week by Goldman Sachs and JPMorgan Chase.

Their pledges came after the government’s much-awaited “stress tests” - a review by regulators of the country’s top 19 banks - found the industry to be in a better position than many thought.

Ten banks were told last week to raise a combined $75 billion in extra capital - about half the amount that most analysts had predicted - and the other nine were effectively declared healthy.

The promise of quick pay-backs is being touted as a sign that some measure of stability has returned to the US financial sector - and by extension the wider global economy - after its worst crisis since the Great Depression.

Financial firms around the world have already lost more than $1 trillion from their exposure to mortgage debt amid a massive US housing downturn, and dozens of banks have been forced into bankruptcy.

After a near collapse of Wall Street in September, the fact that some banks are getting ready to emerge from under the government’s wing does bode well for the wider industry, according to Scott Sprinzen of Standard & Poor’s, a market research firm.

“In terms of the big picture, I think it’s a good development,” Sprinzen said in an interview.

But President Barack Obama’s administration has taken these offers with a mix of hope and skepticism: pleased that the US Treasury might soon replenish its coffers but wary of whether banks are truly stable enough to pay back the emergency loans.

About $600 billion have been loaned out to financial firms and US carmakers over the last six months, leaving some $100 billion unspent from a rescue package that was hastily approved by Congress in October.

Treasury Secretary Timothy Geithner this week said he hoped to funnel some of the repaid loans back into smaller community banks that are still struggling.

But the Treasury Department is also placing strict conditions on banks that believe they no longer need support, such as a “proven” ability to raise long-term debt without the help of government guarantees.

The conditions are designed to avoid the embarassing and damaging prospect of a bank returning - hat-in-hand - a few months down the road. That would not only destroy the government’s credibility but could again destabilise the entire system.

Further, Obama doesn’t want banks to repay the government at the expense of issuing loans to consumers, businesses and potential home buyers - credit that is the lifeblood of the US economy and that has been sorely lacking in the aftermath of last year’s meltdown. The drastic decline in credit availability since September has helped plunge the world into its first recession since World War II.

Financial firms might also be motivated by something other than stability: Banks have been forced to limit executive salaries and bonuses to participate in the lending programme, which they argue has prompted a flood of top-notch executives to seek work abroad.

New documents released this week suggest Wall Street may have been reluctant to accept the government’s support - and conditions - even at the height of the financial crisis.

Scott Talbot of the Financial Services Roundtable, a Wall Street lobby group, admitted there may have been some “arm-twisting” by the government at the start of the crisis.

With things looking up, some of those same banks are now hoping to “remove the political overhang,” he said.

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