Jumping Through The TARP Hoops

Goldman Sachs (GS), JP Morgan Chase (JPM), Morgan Stanley (MS) and American Express (APX) are “champing at the bit” to repay funds received from the Troubled Asset Relief Program (TARP), in order to avoid tighter regulations associated with these funds (i.e compensation limitations) and as a way to signal to investors the company’s financial strength. The government will receive repayment, but there are some caveats.

First and foremost, no institution will be allowed to repay TARP until 10 of the 19 biggest banks present plans to boost their capital under the government’s stress tests - by early June 2009. These institutions will have to pass another stress test, as well as issue non-government guaranteed debt, thereby demonstrate the ability to self-fund in the market. Then, if the regulators will certify that an institution is sound without government help, groupings will be permitted to repay TARP funds.

Going forward, the Treasury will announce a process for auctioning off the warrants it received when it provided the TARP funds. The financial institutions will have basically the right of first refusal before the Treasury goes through an auction process. The auction process is expected to take several several months as not flood the market with these warrants.

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