WASHINGTON — The Obama administration plans to announce as soon as today that some of the nation’s largest banks can repay billions in federal aid, but some officials caution that the show of progress is being underwritten by multiple layers of less-visible government support.
Through cheap loans, debt guarantees and a promise that big banks will not be allowed to fail, some experts say the government has created an artificial environment in which profits and stock prices have rebounded, helping banks in recent weeks to raise about $50 billion from private investors.
The money allows the strongest banks to return federal aid provided at the peak of the fall financial crisis, but few banks have expressed eagerness for the government to end the other forms of support, leaving some officials and experts worried that these programs will be habit- forming and more difficult to terminate.
As a result, the experts warn that the government’s relationship with the industry is entering a precarious new phase. As with mortgage giants Fannie Mae and Freddie Mac, the government will no longer share in the banks’ profits, but it still stands ready to absorb losses.
“It’s good from an individual-investor point of view; it’s great for the banks; but from a system point of view, it’s very dangerous,” said Simon Johnson, a Massachusetts Institute of Technology professor and former chief economist at the International Monetary Fund.
The Treasury Department has invested about $200 billion in more than 600 banks under its financial- rescue program to patch problems, facilitate mergers and provide support for new lending.
In recent months, more banks have sought permission to return the money, to avoid restrictions such as limits on executive pay and to show renewed strength. The administration has allowed about 20 smaller banks to do so. It now plans to announce a list of large banks that can join them. J.P. Morgan Chase, Goldman Sachs and American Express are among the firms that expect to be on it.
Officials say they are confident that the strongest banks no longer need the money, and they want to provide those banks with a public vote of confidence. The officials caution, however, that repayments should not be seen as evidence of economic recovery.
