NEW YORK -- Bank of America's surprise move to pay back $45 billion in federal bailout money ratchets up pressure on rivals Wells Fargo and Citigroup to get out from under the government's thumb. But don't expect it to happen anytime soon.
That's because many banks, including Citi and Wells Fargo, still face big losses on loans as people fall behind on bills -- losses that could further erode their capital and put them in danger.
Moreover, the government may be reluctant to let them repay until they're confident that no further assistance will be needed. If the economy were to seriously weaken again, the government could be forced to inject more money into big banks.
Bank of America Corp. said Wednesday that it will use available cash and raise $18.8 billion in capital to repay the money, which it received during the height of the credit crisis last year. It would become the first of seven companies that received "exceptional" government assistance -- bailout funds beyond the initial injections from the Troubled Asset Relief Program -- to repay taxpayers in full.
In doing so, Bank of America would join JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group as large banks that have cut ties with the government -- and broken free of limits on executive compensation and other restrictions. While those banks also have had steep loan losses, they've been able to offset much of the damage with strong profits in their trading divisions.
Bank of America in particular has been aided by profit from its wealth management business, which includes the bank's Merrill Lynch division.
The TARP repayment helps the Charlotte, N.C., bank's efforts to recruit a successor to CEO Kenneth D. Lewis, who announced last fall that he planned to retire on Dec. 31.
But it also widens the competitive gap between banks that have repaid TARP funds and those that haven't, said Douglas J. Elliott, a former investment banker at J.P. Morgan who is now a fellow at the Brookings Institution.
Treasury has spent about $450 billion under the TARP program, including around $290 billion poured into banks. As of Oct. 31, nearly 50 financial companies have returned a total of $72.3 billion in bailout money. They also have paid the Treasury $7 billion in dividends.
Like other big banks, Citigroup Inc. and Wells Fargo & Co. have been beset by losses on loans from mortgages to credit cards as a growing number of consumers struggle to pay off debt. Citigroup reported $8 billion in loan losses in the third quarter compared with $5.1 billion for Wells Fargo.
Citigroup has received $45 billion in federal aid and guarantees to protect against losses on more than $300 billion in risky assets. In return, the government got a 34 percent ownership stake in the banking giant.
Wells Fargo has received $25 billion in aid. Neither bank has given a timetable for repaying taxpayers.
The Treasury Department can negotiate a price for the warrants with Bank of America or put them up for auction. This week Treasury is auctioning warrants of Virginia-based Capital One Financial Corp., and it said it also will auction warrants for JPMorgan Chase & Co. and TCF Financial Corp. Proceeds from the sale will give taxpayers an additional return beyond the dividend payments already received.
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