By Glenn Somerville
WASHINGTON (Reuters) - The U.S. Treasury Department said on Tuesday that 10 of the nation's biggest banks were approved to pay back a combined $68 billion of taxpayer money pumped into them last year to combat the credit crisis.
Many banks had chafed at restrictions on executive pay that accompanied the capital injections. Permitting some to repay money to the government's Troubled Asset Relief Program, or TARP, effectively initiates a process of separating stronger banks from weaker ones as the financial sector heals.
Treasury didn't name the banks, but all quickly stepped forward to say they were cleared to return money the government had pumped into them to try to ensure the banking system was well capitalized.
American Express Co, Bank of New York Mellon Corp, BB&T Corp, Capital One Financial Corp,Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley, Northern Trust Corp, State Street Corp and U.S. Bancorp all said they had won approval.
In contrast, neither Bank of America Corp or Citigroup Inc, which each took $45 billion from the government, received a green light to pay back bailout money.
The government is in the process of taking as much as a 34 percent equity stake in Citigroup, while Bank of America has indicated it would like to begin repayment later this year.
Stocks initially gained following the Treasury announcement but quickly fell back on concerns the money could be better served by lending to boost the economy.
"Partly what that's telling you us that banks are spending all their money paying back the government and not doing what the money was intended to do, which was to stimulate the economy and lend that money," said Marc Pado, a market strategist with Cantor Fitzgerald & Co of San Francisco.
Others, though, saw the government's decision as a positive since it was announced after bank regulators had determined banks' had met criteria for repaying, including a proviso that they have enough capital to support lending.
"People should be pretty comfortable that now the government is allowing these banks to pay the TARP money back, they fully believe that the worst is behind us," said William Lefkowitz, an options strategist with VFinance Investment.
CHAFING OVER PAY RESTRICTIONS
Treasury Secretary Timothy Geithner told Congress the return of the $68 billion by banks should provide "some modest encouragement" to lawmakers that Treasury will not have to ask for more taxpayer money to get through the current crisis.
Many banks remain on government life support, which makes them subject to restrictions not only on executive pay, but on dividend payments and share repurchases as well.
Others complained they did not need the help and were being put at a competitive disadvantage by the tight restrictions.
Treasury is expected to outline new rules on Wednesday for compensation for top earners at firms still being supported by taxpayer funds, sources have said. Those rules will detail how restrictions Congress has put in place will be applied. In addition, U.S. officials are eyeing ways to influence compensation practices across the entire financial industry.
When the government invested funds in banks, it received dividend-paying preferred shares. The repayments that were approved on Tuesday will go toward repurchasing those shares.
U.S. regulators put the 19 largest U.S. banks through "stress tests" to determine how much capital they might need to withstand a worsening recession. Ten of those banks were told to raise more capital, and regulators waited for their plans to do so before approving any bailout repayments.
Geithner heads for Italy later this week to join fellow finance chiefs from the Group of Eight -- the United States, Britain, Canada, France, Germany, Italy, Japan and Russia -- and some analysts expect him to use the occasion to urge Europe to "stress test" its own banks.
"Geithner thinks most of his work with U.S. banks is done, and he's demanding European regulators should redo their bank stress test," said Christopher Low, chief economist for FRN Financial in New York.
BEEFING UP THE BAILOUT FUND
Treasury said that banks repaying bailout funds get the right to repurchase warrants that the government holds in their firms at fair market value, and many of the approved banks said they intended to do so. The warrants give the government the right to buy common stock at a predetermined price for up to 10 years and were intended to give taxpayers a chance to share in the profits of healthy banks.
On Tuesday, the head of a U.S. financial bailout panel, Elizabeth Warren, pledged to analyze the warrant valuation methods used in the transactions in the panel's next report in July.
Banks are eager to escape Treasury's influence, and Geithner acknowledged on Tuesday that some were reluctant to join in a program to unload toxic assets from their books by selling them off to public-private funds if it meant giving the government a say in their hiring and pay strategies.
"In my judgment ... these funds still are an important part of the necessary framework of tools to help get our country through this crisis, and I believe it is important that we go ahead and put them in place, even if participation is somewhat more limited than we would have expected," he said.
Geithner has said that money paid back into the government's $700 billion financial rescue fund by healthy banks can be reused to help smaller banks, including those that have already gotten one bailout. More than 600 banks across the country have received funds from the program.
After doling out an additional $30 billion for General Motors Corp, the Treasury's unallocated financial rescue funds had dwindled to about $54 billion, assuming other programs get fully funded.
As a condition of being allowed to repay, banks had to show they could raise money on their own from the private sector both by selling stock and by issuing debt without the help of Federal Deposit Insurance Corp guarantees. The Federal Reserve also had to agree that their capital levels were adequate to support continued lending.
(Editing by Padraic Cassidy)
