Banks trying to pay back TARP money. It's all about risk and reward...

...and taking advantage of anomalies in the market. Sort of like arbitrage.

Recent articles report that the banks are now trying to arrange money to pay back TARP fund and the warrants. Here's one of them from Yahoo!/New York Times.

From the government's perspective, they were the lender of last resort during the liquidity crisis. This involves higher risk than usual and they should be (as investors) rewarded. Assuming the economy recovers, their warrants (think of them as long-term options) could be worth a lot more. This would be their reward for taking on the additional risk when no one else was investing in the banks. Being such a large investor in the whole financial system, they could enact changes (legislative, monetary policy, etc) that could benefit the banks and ultimately themselves since they are investors. The government may not mind having the banks pay back their TARP funds (including the warrants) as long as they receive some benefit for their short-term investments.

From the banks perspective, they probably see a promising risk and reward profile to pay off the TARP funds now. They probably are forecasting an increase in stock share prices over the next 10 years and would like to basically invest in themselves (or their own shares via the warratns) and effectively initiate a stock re-purchase program. This would decrease the outstanding common stock and eventually make each share worth more since it represents a larger percentage of ownership.