World Economic

The race to repay federal bailout money could end up reducing the amount taxpayers eventually get back.

Some banks that want out of the Troubled Asset Relief Program may be allowed to buy back the government’s investments at below-market prices. That could cut into taxpayers’ potential profits by billions of dollars.

Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. have notified federal regulators of their interest in returning their shares. Returning the money would let banks avoid restrictions on executive pay and hiring.

Approval for big banks to repay TARP funds could start in June, a Fed official said on condition of anonymity because the applications are being reviewed.

But before big banks can repay a penny and quit the bailout, they must agree to a price for the warrants the government received in return for the original loan. Those warrants gave the government the option to buy stock at a set price over 10 years.

Since the start, a key selling point for the bailout has been that, as the financial crisis eased and banks regained health, taxpayers would get to benefit from the stock gains.

Linus Wilson, a finance professor at the University of Louisiana at Lafayette, estimates that in all, the warrants in the roughly 570 banks that have received about $198 billion would be worth between $2 cheap business cards.4 billion and $10.9 billion.

If the government sells for less, "that’s definitely bad news for taxpayers," Wilson said. "We’d be better-served if the Treasury would hold out for a very good negotiated settlement or market the investments to third-party investors."

But others say the sooner the government gets out of the banking sector, the better. Banks that repay TARP funds but don’t buy back the government’s warrants could remain subject to restrictions on executive pay and hiring.

"I don’t think the banks are trying to shortchange taxpayers on the warrants," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "They just want to get the government out of their boardrooms."

Others say there’s another reason the government should hang onto its stakes: If the economy takes a turn for the worse, some banks "will be back" for more money, said Daniel Alpert, director of investment bank Westwood Capital.

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