Big banks cast away their crutches

New York : It was less of a goodbye kiss and more of a farewell hand-off in the face. Thirteen months after getting government cash from the Troubled Asset Relief Programme, America's megabanks have stampeded to repay it before the new year, desperate to escape the stigma and meddling it has brought.

On December 9 Bank of America (BofA) said it had repaid the $45 billion (Dh165 billion) of preferred stock owned by the state and sold $19 billion of new ordinary shares. Citigroup and Wells Fargo announced similar plans on December 14. (JPMorgan Chase, the other megabank, repaid in June.)

In total this month the government should get $90 billion of preferred stock repaid, while the banks will raise some $50 billion of common equity to boost their capital.

The state will tear up its loss-sharing agreement with Citi. It also intends to sell its $25 billion of ordinary shares in the bank within a year, although plans to flog $5 billion-worth were put on ice after Citi's shares dipped too low for the Treasury's taste.

For taxpayers relief at being repaid should be tempered by the fact they are still on the hook for these too-big-to-fail firms.

Regulation could help. The House of Representatives approved a bill on December 11 that avoids immediate surgery but would allow supervisors to beat up banks that pose a "grave threat.

‘Haircut'

The bill also says creditors must take a "haircut" of up to 10 per cent if a bank fails. But this is tepid stuff: as soon as creditors sense a failure is imminent, they will refuse to roll their loans over, starting a run. The Senate is still ruminating on its own bill. Can the public at least be sure the banks are healthy?

Huge progress has been made. Combined bad-debt reserves for the four megabanks stand at 4.3 per cent of loans, or $130 billion. The next line of defence, core capital, has reached $400 billion.

Yet as students of Japan's zombie banks know, nasties may lurk in the megabanks' $7.4 trillion of assets The biggest worry is the banks are making profits largely because their funding costs are at rock bottom. America's banks are nearly free of state ownership, but may still be addicted to near-free funding.