Bank of America's surprise move to pay back $45 billion in federal bailout money ratchets up pressure on rivals Wells Fargo (NYSE: WF) and Citigroup (NYSE: C) to get out from under the government's control, according to Associated Press.
Wells Fargo "will work closely with our regulators to determine the appropriate time to repay the government's investment ... while maintaining strong capital levels," spokeswoman Julia Tunis Bernard said.
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Citigroup declined to comment.
Appearing Thursday on Capitol Hill, Federal Reserve Chairman Ben Bernanke said regulators decided it was "safe and reasonable and appropriate" for Bank of America (NYSE: BAC) to repay its bailout funds.
The bank has paid $2.54 billion to the government so far in dividends on the TARP money. The bank said it is not yet exercising its right to repurchase warrants that the government received in return for the bailout money. Warrants are financial instruments that allow the holder to buy stock in the future at a fixed price.
The Treasury Department can negotiate a price for the warrants with Bank of America or put them up for auction. Treasury this week is auctioning warrants of Capital One Financial Corp., and said it also will auction warrants for JPMorgan Chase & Co. and TCF Financial Corp. Proceeds from the sale will give taxpayers an additional return beyond the dividend payments already received.
Based on Bank of America's current stock price, the government could receive anywhere between $943 million and $2.5 billion for its warrants, said Linus Wilson, finance professor at the University of Louisiana.
Speaking to lawmakers, Bernanke said the TARP program had "mostly served its purpose" in stabilizing the U.S. banking system and that the time had come "to think about unwinding that program."
However, there are plenty of obstacles to discourage the government from doing that, financial experts say. For starters, loan losses at commercial banks are growing as rising unemployment pushes more home and business owners into default.
Moody's Investors Service said this week that U.S. banks have so far only recognized 40 percent of the loan losses they will take between 2008 and 2010. Moody's estimates that total loan losses will reach $536 billion for the three-year period ending in 2010.
Another factor that could weigh on the TARP's future is its ultimate cost to taxpayers. Treasury has spent about $450 billion under the TARP program, including around $290 billion poured into banks. As of Oct. 31, nearly 50 financial companies have returned a total of $72.3 billion in bailout money. They have also paid the Treasury $7 billion in dividends.
Bernanke on Thursday predicted the government would eventually come "close to break even" on its bank investments.
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