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Big Banks Ready to Repay the Bailout Money

After months of severe economic downturn, lay-offs, and high foreclosure rate, it hardly seems possible but a significant number of US banks will pay back the bailout money they previously received from the government. After regaining some level of financial stability and some of their old swagger, the nation’s largest banks now want to pay back billions of dollars back to the taxpayers.

Very few people in Washington and perhaps those from the financial industry themselves expected such a quick turnabout. Most legislators believed that banking institutions will need to rely on the government’s help for years because the subprime crisis and their other troublesome assets were dragging them down. But now, a number of banks say they will repay the government by year’s end.

Two weeks after the stress test results came out, several banks including JP Morgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York Mellon, and US Bancorp, and State Street have talked with regulators about repaying part of the $700 billion rescue package they received. Regulators are trying to identity when the banks should be allowed to return the bailout money and whether such measure will leave these institutions vulnerable in case another crisis occurs in the near future.

A few details have emerged about these developments. For example, it is believed that regulators will not let any major bank repay first because it will give some institutions “bragging rights”. Instead, the Federal Reserve will organize the banks into a group that is ready to pay first. The Treasury Department will be assigned to handle the repayments.

For many ordinary Americans, the repayment scheme is a welcome development. After several months of multi-billion dollar bailouts that are given to the financial industry, auto industry, and other industries, the breathing space this will allow is good for the economy. However, it is also important to recognize that repayment the bailout now carries some risks.

Right now, many major banks have plugged crippling losses but the industry is still vulnerable. The continuing troubles in real estate as well as the high number of credit card defaults will surely be felt by the banks. In addition, if the government allows the banks to pay back the bailout money so soon, they will cede authority over the same institutions that caused the economic crisis.

GMAC LLC Changes Its Name to Ally Bank

Wanting to leave its own problems behind, auto and mortgage-financing firm GMAC LLC has dropped its own name and re-launched itself as Ally Bank. The company has been suffering from billions of dollars in losses since the mortgage crisis hit. Currently, it has an $11.5 billion in capital shortfall.

The bank’s chief marketing officer, Sanjay Gupta, has revealed that the company wanted to new name that will eliminate the baggage that most banks have to deal with after they received billions in bailout money. Last December, GMAC received $6 billion in bailout money including $5 billion from the Trouble Asset Relief Program.

Plugging the Capital Shortfall

“Ally” was selected as the new name because of its implications that the bank is a friend and a trusted partner for consumer’s banking needs. Gupta said that, it contains the “attributes we are trying to convey”. GMAC LLC expects that this move will help them gain more customers. The new image is expected to attract retail depositors which are a crucial funding source with today’s credit squeeze.

The improved bank deposits will help fill the gaping $11.5 billion capital hole as was revealed in the stress test results. Nineteen banks took the so-called stress test and ten banks, including GMAC, were told to raise their capital. Despite all strategies on the contrary though, many experts still believe that the company will need another bailout in order to survive.

Attracting Retail Deposits

Long before GMAC LLC decided to rename itself as Ally Bank, it was already offering above-industry average industry yields for consumers. A lot of lenders have tried this strategy since the financial crisis hit in 2007. Ally Bank will offer a 2.8 percent rate on a one-year certificate of deposit even if the industry average is around 2.29 percent.

This strategy appeared to work. The bank’s deposit showed a significant increase during the first quarter. It experienced 16.5 percent improvement to $22.5 billion which is broken down as $11 billion in retail deposits, $9.5 billion in brokered deposits, and $2 billion in other types of deposits. In addition, Ally Bank expects more federal funding because of its status as the preferred lender for vehicles made by the now-bankrupt Chrysler LLC.

Oversight Structure will become Sticker for Banks

With the result of the bank stress test finally over, the Obama administration is shifting its attention away from the major banks and into the government’s own oversight structure. According to Treasury Secretary Tim Geithner, he and President Obama want the nation to have “more simplified, consolidated oversight structure.”

Regulators are discussing the substantial changes that need to be made in the regulatory system. Geithner and the Treasury will unveil a new proposal that aims to overall the entire banking industry. This is to prevent similar financial crisis in the future.

Despite the lofty intentions of the government, there are many questions surrounding the so-called resolution authority. Essentially, this is the creation of a single but powerful agency that monitors and assesses the risks that the financial system decides to take and deal with.

Already, the concept of consolidating all agencies involved in regulatory duties has been talked about but it remains a sensitive topic. Consolidating would mean that the existing power structure will be extensively replaced. Some agencies will overlap and will need to fold under larger ones. There are only a few agencies with major supervising roles right now including the Federal Reserve, the Securities and Exchange Commission, and the Federal Deposit Insurance Corp.

Many other agencies play more specific roles. Among these agencies are the US Commodities Future Trading Commission, Office of the Comptroller of the Currency, and the Office of Thrift Supervision among others. Because of its bad decision making in the past, the Office of Thrift Supervision is being scrutinized. It was in charge of supervising IndyMac, American International Group (AIG), and Washington Mutual which are renowned institutions that have contributed greatly to the financial disaster right now.

Geithner also revealed another plan. Previously, only major US banks have gained access to the bailout money because they were “too big to fail”. Now, the Treasury Secretary plans to give these dollars to smaller banks that need help. Even banking institutions with under $500 million in assets can apply for the Troubled Asset Relief Program (TARP) if they’re struggling with their losses. Some of the money returned by the big banks will be used for the TARP.

Stress Test Results Officially Announced

After weeks of speculations and leakage, it is finally confirmed: some of the nation’s largest banks need additional capital. Federal regulators finally announced last May 7 that 10 out of the 19 banks that underwent the stress test “failed” it.

Leading the pack is Bank of America which needs an additional $33.5 billion. Meanwhile, Wells Fargo needs $13.7 and it is closely followed by GMAC LLC which needs $11.5 billion. Citigroup and Morgan Stanley need $5.5 billion and $1.8 billion respectively. Among the banks that were given a clean bill of health are JP Morgan Chase, Goldman Sachs, US Bancorp, Bank of NY Mellon, and MetLife.

In spite of the vulnerable state the banks are still in, the government is confident about the financial industry. The Obama administration believes that even if the banks are not totally out of the woods yet, it is fast getting there. Almost half of the banks that have taken the stress test passed them. Even those that didn’t were actually in better financial shape that people originally thought.

Fed Chairman Ben Bernanke expected the report to restore investor confidence. And indeed, his projection proved to be accurate. Markets have improved steadily since the results were announced with rising share prices, better liquidity, and other signs of a stabilizing market. Regulators were also happy that capital marketers were willing to fill in the holes the stress test revealed at the banks.

The stress test showed that some of the major banks required a $74.6 worth of additional capital to ensure that they can withstand worst-case scenarios. Both Morgan Stanley and Wells Fargo sold over $15 billion worth of bonds and shares the following day. On the other hand, Bank of America said that it planned to sell 1.25 billion shares when they saw that investors were positive about their relatively small shortfall.

The Obama administration is pleased with this development. This is because if the banks are able to raise the necessary capital halfway by next week, the administration would not need to ask Congress for more bailout money.