Four small banks this week repaid millions of dollars they received from the Treasury Department under the $700 billion financial system bailout. They were the first in a long line of banks hoping to escape the increasingly tough restrictions the government has placed on the program known as TARP.
It's a sign of how far we've come since last fall, when frozen credit markets led Treasury to give the banks billions of dollars in an effort to get lending moving again. Banks initially saw it as a stamp of approval from the government, a chance to lend a hand to the economic recovery effort and a low-cost way to bolster balance sheets.
Since then, the public has been outraged to learn that Wall Street executives continue to lead lavish lifestyles while many Americans worry about lost jobs and dwindling retirement accounts. That's led Congress to restrict pay packages, bonuses and dividend payouts for banks that took TARP money.
Those limitations — and a growing fear of guilt by association — have led many banks to wonder whether taking the money was worth the hassle.
Here are some questions and answers about why the banks are returning the money and whether the trend will continue.
Q: Who returned the money, and how much did they give back?
A: Signature Bank, Old National Bancorp, Iberiabank and Bank of Marin Bancorp returned a total of $338 million, plus five percent interest.
Q: If they didn't need the money, why did they take it?
A: Unlike some bailouts, this was a program designed for healthy banks that could survive without government help. Treasury hoped that putting more money in the hands of responsible lenders would help get credit markets moving as they identified qualified borrowers. And some banks thought customers would appreciate their pitching in to help rescue the economy.
Industry groups like the American Bankers Association complained that regulators forced some banks to participate against their will. Now that 186 institutions have publicly turned down the money, according to the research firm Keefe, Bruyette & Woods, it seems clear they were making their own decisions.
Q: What made them reconsider?
A: Months of news reports about lavish spending on parties, perks and planes spurred Congress to place conditions on banks that took money. Rules about employee compensation, bonuses and dividend payouts rankled banks, as did laws making it harder for banks to hire foreign workers.
These changes made it harder for some banks to retain workers, said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents large financial firms. He said one of his members is losing 500 employees a week and is having trouble replacing them.
"The restrictions and threat of future restrictions have created a chilling effect on rank and file employees," Talbott said.
Q: How could Congress change the rules after the banks had taken the money?
A: Treasury's standard agreement included a section allowing Congress to impose conditions retroactively. That led some banks not to apply for the money in the first place, said bank consultant Bert Ely.
Q: Shouldn't restrictions on pay and dividends help improve the public image of banks participating in the program?
A: Not enough. Most people don't understand the difference between small, healthy banks — which are very likely to repay the government at some point — and companies like American International Group Inc. that needed billions of government dollars to stay afloat.
"It marks them with a scarlet letter that's getting brighter red every day," Ely said of the small banks. "They want to demonstrate they're strong enough that they don't need it."
Q: Weren't they supposed to keep the money long enough that it could help the economy?
A: Originally, banks that wanted to repay early had to raise money from the private sector. Congress softened that rule while attaching more strings to the loans — though banks still need regulators' approval before they can return the money.
Q: Does that mean the program failed?
A: The banks that repaid Treasury first probably didn't lend the money out — meaning that $338 million probably didn't fulfill the program's aim. But it is a tiny fraction of the $199 billion Treasury has paid out so far, so it's far too early to say whether the capital injections did their job.
Q: Are any other banks planning to return the money?
A: Dozens of banks already have said they want to return the money. Since many are private companies and don't have to disclose their financial plans in regulatory filings, it is hard to come up with an exact figure. But Keefe, Bruyette & Woods identified six companies that have filed to repay, five that said publicly that they intend to do so and seven that were in a position to buy out Treasury's stake.
Q: What about the big banks?
A: Several of the biggest bailout recipients — including JPMorgan Chase & Co., Wells Fargo & Co., Morgan Stanley and Goldman Sachs — have said they want to repay the government as soon as possible.
After news of a cushy golf outing provoked congressional outrage, Northern Trust Corp., too, said it would return more than $1.5 billion "as quickly as prudently possible."
But Talbott said it may take them two or three years to follow through, since the banks already have lent out or invested the money.