JPMorgan Seeks Freedom from TARP Trap

JPMorgan Chase longs for the day it will be free of restrictions tied to the government's $25 billion bailout, which it expects to repay this month.
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Updated from 11:11 a.m. EDT

JPMorgan Chase's

(JPM) - Get Report

Chairman and CEO Jamie Dimon will be glad to be "free and clear" of restrictions tied to federal bailout money once its pays off the government's $25 billion investment later this month.

The New York financial institution launched a common stock offering on Tuesday to raise $5 billion, intended to satisfy requirements set by the

Federal Reserve

for companies hoping to repay capital investments made through the Troubled Asset Relief Program.

The company announced late Monday that it would offer stock in the open markets. Dimon seemed slightly exasperated on the company's conference call late Monday to discuss the equity offering and TARP repayment.

"We believe we met all the terms to get out of TARP. If we don't get out of TARP, we would be very surprised," he said. "We don't think we should be surprised."

JPMorgan priced 142 million shares of common stock at $35.25 a share on Tuesday, a 2.4% discount to Monday's closing price. Underwriters have the option to purchase an additional 21.3 million shares of common stock to cover overallotments, it added.

The company had previously raised $7.5 billion in non-guaranteed debt to satisfy another Fed requirement that banks that repay TARP must be able to access the long-term debt markets without federal guarantees.

JPMorgan Chase has not received formal approval to repay the funds, but expects to do so by the end of the month, it says.

Once the company repays the capital (which does not include warrants that the government holds on JPMorgan Chase) Dimon said the firm will be "free and clear, like a real American free citizen, corporate citizen, like we were in the past." He was referring to government restrictions on paying dividends, share repurchases and other limits the program placed on the banks.

JPMorgan was one of nine financial companies not required to raise money by the federal government after recent stress tests of the nation's 19 largest institutions. The company said it was raising the money "to satisfy a supervisory condition" for companies wanting to repay the government's preferred equity investments made through TARP.

Other companies that were not directed to raise capital, like

Goldman Sachs

(GS) - Get Report

, also have raised money to prove they could access equity capital markets.

American Express

(AXP) - Get Report

and

Morgan Stanley

(MS) - Get Report

also announced stock offerings late Monday and early Tuesday intended to raise money to help repay TARP.

JPMorgan said it expects to have Tier 1 capital of approximately $118 billion, or a ratio of 9.3%, and tangible common equity of approximately $93 billion, or 7.3%, at the end of the second quarter, after the capital raise and repayment of the TARP investment.

"JPMorgan Chase believes that redeeming the TARP preferred capital is in the best interests of the country and the company, and that these funds can be used by the government for other critical purposes," JPMorgan said in a press release on Monday. "JPMorgan Chase also reaffirms its commitment to continued robust lending to consumers, small businesses, non-profits, municipalities, corporations and others."

Richard Bove, an analyst at Rochdale Research, says that since JPMorgan Chase has beaten peers to repay TARP "

this may give it the title of the safest bank in America."

Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone says that while the common stock offering will be dilutive to shareholders, "TARP repayment removes restrictions on share repurchases," among other things. "

Thus the company could offset the dilution impact by repurchasing shares," according to a note.

JPMorgan Chase's capital ratios "may be the new targets for banks that seek to repay TARP," Deutsche Bank analyst Matt O'Connor writes in a note. But some banks are unlikely to be able to maintain a Tier 1 ratio above 9.1% if they repay TARP, O'Connor writes.

Under O'Connor's coverage list, seven banks including

Bank of America

(BAC) - Get Report

,

Fifth Third Bancorp

(FITB) - Get Report

,

PNC Financial Services

(PNC) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

M&T Bank

(MTB) - Get Report

,

US Bancorp

(USB) - Get Report

and

Zions

(ZION) - Get Report

, would need to raise a total of $50 billion in order to fully repay TARP, according to the analyst.

Morgan Stanley on Tuesday priced an offering to sell 80.2 million shares of common stock to the public at $27.44 per share for total gross proceeds of approximately $2.2 billion.

American Express

moved a step closer toward repaying government funds on Monday, saying it has begun an offering of up to $575 million worth of stock.

JPMorgan shares were closed down 4.5% to $34.50 on Tuesday.