Big banks apply to pay back US$45b aid

Goldman Sachs Group, JPMorgan Chase and Morgan Stanley have applied to repay the combined US$45 billion ($75.38 billion) they got in October from the United States Government's Troubled Asset Relief Programme, say people familiar with the matter.

The three New York-based banks need approval from the Federal Reserve, their primary supervisor, to return the money, according to the people, who requested anonymity because the application process isn't public.

Spokesmen for the three banks declined to comment, as did Calvin Mitchell, a spokesman for the Federal Reserve Bank of New York.

If approved, the refunds would be the biggest yet to the US$700 billion Tarp programme established by Congress last year during the investor furore that followed the bankruptcy of Lehman Brothers Holdings.

Banks are keen to repay the money to shake off restrictions on compensation and hiring that were imposed on Tarp recipients in February.

"It really is a way for them to break from the herd," said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which holds Goldman Sachs and JPMorgan shares among the US$13.8 billion it oversees. "It's a great way to attract customers, personnel, capital."

JPMorgan, Goldman Sachs, and Morgan Stanley were among nine banks that were persuaded in mid-October by then-Treasury Secretary Henry Paulson to accept the first US$125 billion of capital injections from the Tarp programme to help restore stability to the financial markets.

The refunds would be the first by the biggest banks that participated in the programme.

As of May 15, 14 of the smaller banks that received capital under the programme had already repaid it, according to data compiled by Bloomberg.

The 19 biggest banks were waiting for the conclusion this month of so-called stress tests to determine whether they would need more capital to withstand a further deterioration of the economy.

Goldman Sachs and JPMorgan, the fifth- and second-biggest US banks by assets, were found not to need any more money.

Morgan Stanley, the sixth-biggest bank, raised US$4.57 billion by selling stock this month, exceeding the US$1.8 billion in additional capital the regulators said the bank might require.

Treasury Secretary Timothy Geithner said last month that he would welcome firms returning Tarp funds as long as their regulators signed off.

Geithner added that regulators would consider whether banks had enough capital to keep lending and whether the financial system as a whole could supply the credit needed to ensure an economic recovery.

While executives at Goldman Sachs and JPMorgan have expressed a desire to repay their Tarp money for months, Morgan Stanley chairman and chief executive John Mack told employees on March 30 that he thought it was "the wrong time" to repay the money.

Morgan Stanley, which reported a first-quarter loss, also slashed its quarterly dividend 81 per cent to US5c. On May 8, when the company sold stock, it also sold US$4 billion of debt that didn't carry a Government guarantee.

Selling non-guaranteed debt is a prerequisite for repaying Tarp money.

The banks will also have to decide whether to try to buy back the warrants that the Government received as part of the Tarp investments. The warrants, which could convert into stock if not repurchased, would add to the cost of repayment.

JPMorgan, which has US$25 billion of Tarp money, would need to pay about US$1.13 billion to buy back the warrants, according to a May 14 estimate by David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller.

Morgan Stanley's warrants would cost US$770 million and Goldman Sachs's would cost US$685 million, Trone estimated, using the Black-Scholes option-pricing model.

- BLOOMBERG