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Stress tests behind them, banks move to pay back TARP funds

Some firms, including Morgan Stanley, race to prove they can fund themselves by turning to private investors.

By Staff writer / May 8, 2009

Capital One is among US firms that, according to the stress tests, do not have to raise more capital.

Mark Lennihan/AP

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Regulatory “stress tests” at 19 major banks have set the stage for the strongest banks to distinguish themselves from weaker ones, by returning government rescue funds.

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The goal is simple: Bankers want to be free to run their own business without extra government oversight and the stigma that comes from being labeled as a recipient of funds from the so-called TARP (Troubled Asset Relief Program).

But where many financial firms want to pay the money back, not all have the means. What comes after the stress tests is a race by banks to prove they can fund themselves by turning to private investors.

Firms including JPMorgan Chase, Goldman Sachs, Morgan Stanley, American Express, and Bank of New York Mellon are among those now trying to move down the path to freedom from TARP.

Even banks that are being asked to raise their cushion of capital, as a result of the stress test, are angling to do so in a manner that doesn’t tether them more closely to the government. Bank of America, for example, needs to raise $34 billion in fresh capital, and it's planning to do that in a way that hastens the day when it can exit from TARP.

The moves would be good news in the view of most US taxpayers, who don’t want to fund Wall Street bailouts. A revival of marketplace funding for banks would also represent an important step toward normal functioning of credit markets – and the notion that firms should rise or fall on their merits.

Banks that are unable to win the confidence of the marketplace will remain tied closely to government support.

“Those banks which can end their dependence on federal guarantees will be the visible winners in the post stress test market,” says banking analyst Christopher Whalen of Institutional Risk Analytics, in a report issued Friday. The market value of firms “will reflect this divergence between zombies and viable private banks.”

The US Treasury does not use the word “zombie.” It has framed the stress review as a way of ensuring that all 19 firms have plenty of capital to survive and keep lending, even if the recession proves worse than anticipated.

The intensive review, conducted by several agencies including the Federal Reserve, showed that some financial firms are in much better shape than others. Regulators called for 10 banks to raise about $75 billion collectively in new capital, while nine were deemed well-capitalized to handle a tough economy through this year and next.