Banks will rue hurried repayments

This is a fool's rush. America's largest banks are tripping over themselves to get out of the clutches of the government.

Bank of America Corp, Wells Fargo & Co and Citigroup Inc this month sold or planned to sell almost $50 billion (Dh183 billion) in equity. The money will be used to help repay $90 billion the banks got in rescue funds from the US Treasury Department after the subprime mortgage disaster. What a waste.

Banks should have added the new funds to their capital. With stronger balance sheets, they could lend more to US businesses — something they were supposed to do with the taxpayers' money and haven't. What's more, they would have more in reserve for the next spectacular failure by their trading desks.

In their hurry to pay back the government, the banks ignore the possibility that the economy might slip back into recession, further ravaging their profits. If they have a real need to raise capital in 2010, they might not find the markets as willing as they have been this year.

Stigma

It's amazing how much investors already have sunk into the banks, considering how the companies' stock sales this year have diluted their earnings per share.

Bank of America, the nation's largest bank by deposits, has almost doubled its shares outstanding, to 9.9 billion from 5 billion at the end of 2008. Whoever succeeds the harried Kenneth Lewis as chief executive at the Charlotte, North Carolina-based bank will have to work twice as hard to increase profit per share.

Wells Fargo, based in San Francisco and ranked No 4 in deposits, now has 5.1 billion shares against 4.2 billion at the end of last year. Like Bank of America, it sold shares earlier this year after government "stress tests" found its capital wanting.

Weighted against this dilution, the banks' reasons for a fast repayment of money they got under the Troubled Asset Relief Programme look weak: We need to get rid of government pay restrictions to keep our valued employees from being poached by banks that have already repaid the government. Sorry, but rivals stole employees — often whole teams, when these people were being paid at record levels.

We can't resume the hefty cash bonuses we paid in the good old days with the government looking over our shoulder. Goldman Sachs Group Inc, even after shedding government oversight by repaying its TARP money, has begun shifting bonuses to restricted stock, from cash.

We need to get rid of the stigma of having the government involved in our business. Do these companies really think that repaying bailout money will make investors and the public forget their reckless trading almost ruined the world economy?

The banks should concentrate on becoming better-financed institutions.

— Bloomberg