U.S. Bancorp, BB&T Repay TARP Loans: What Happens Now?

As banks repay their TARP loans, the moment may mark the beginning of harder times for the financial services industry.

Wednesday, U.S. Bancorp and financial holding company BB&T both agreed to pay back their loans. U.S. Bancorp agreed to pay back $6.6 billion in loans, asking Treasury for permission to buy back a 10-year warrant for its common stock issued to the government as part of the original bailout. Meanwhile, BB&T agreed to repurchase $3.1 billion in preferred shares from Treasury, including a dividend payment of $13.9 million, in order to wrestle control back to the boardroom.

Goldman Sachs and Morgan Stanley are also expected to pay back their loans this week. Earlier, Goldman Sachs chief executive Lloyd Blankfein issued an apology to taxpayers and shareholders for having to accept the funds in the first place. In a sprawling letter noteworthy for its humility, Blankfein wrote:

While different institutions had different capital and liquidity needs, we recognize the important effect the government's actions had on the financial system as a whole. Financial markets and institutions still have many issues to work through, but, without question, the TARP program has played an important role in helping to stabilize the financial system. As part of that system, Goldman Sachs is grateful for the government's extraordinary efforts and the taxpayers' patience.

There was already some evidence for this Wednesday morning: while banks such as Citigroup and Bank of America were trading down more than 5 percent, shares in Morgan Stanley, Goldman Sachs, BB&T and U.S. Bancorp were lower by less than half that amount.

Then again, the stock market was still showing little love to the prompt payers.

In an ironic twist to the bailout tale, banks which continue to keep government loans on their books for a little while longer may find more popularity among shareholders and market counterparties than those which paid them off at the soonest point possible.

That's because while banks with government loans on their books may be perceived as being more secure counterparties, ones which have handed back government funding are arguably much riskier than they were while the U.S. government held a vested financial interest in them. Now that the government has got its money back, there is less incentive for it to save them should another credit crunch come back to bite them in their balance sheets.

Either way, allowing banks to pay back their funds at different times is a much riskier -- not to mention more chaotic -- strategy than bundling the payments up together at a future date towards the year end. Now that Treasury only owns interests in some banks, that creates a big conflict-of-interest problem over policymaking issues.

It's the same conflict of interest you might find in a scenario in which a government official personally works for one or two select U.S. banks. Just because Treasury is an institution, that doesn't mean it can't prioritize its own financial interests.