Regulators are expected this week to let some of the nation’s 19 largest banks repay some or all of their federal bailout money, but could be letting them fly out of the government’s arms too soon.

With the economy still heading south, government officials have long expressed resistance to allowing banks to quickly repay money doled out from the $700 billion Troubled Asset Relief Program. The fear is those same banks could eventually need to return for more aid, only to have lawmakers turn their backs.

Nevertheless, JPMorgan Chase & Co Chief Executive Jamie Dimon and other big banks are campaigning to shake off the government once and for all. They are assuming they have enough capital to withstand a deep recession. Some analysts worry those banks are wrong.

"If you’re a bank regulator and are serving the public interest, you have no interest in having banks repay TARP," said Christopher Whalen, managing director of Institutional Risk Analytics of Torrance, California.

"For investors, the scary thing would be a repeat of a scenario we had in the first quarter," he added. "You could see banks getting restructured by the FDIC, rather than simply having the courtesy of the government pouring in more."

In late September, Congress reluctantly gave the Treasury Department the $700 billion to buy toxic assets from troubled banks. But the money has been used instead to bolster capital, and that has frustrated lawmakers and their constituents.

On May 7, regulators released results of "stress tests" on 19 large financial institutions to see what capital buffers they might need.

Several were found healthier than others, and JPMorgan, American Express Co, Bank of New York Mellon Corp , BB&T Corp, Goldman Sachs Group Inc, Morgan Stanley, State Street Corp and U.S. Bancorp have signaled their intent to repay more than $63 billion of bailout money.

‘DEAR TIMMY’

According to the Treasury Department, more than 600 lenders took money from TARP, and 20 have paid some or all of it back. Some lenders are hedging their bets.

"I don’t want to misbehave and act foolishly by paying it off hastily," said Gerald Lipkin, chief executive of Wayne, New Jersey’s Valley National Bancorp, a $14.4 billion-asset lender repaying $75 million of its $300 million infusion.

Lipkin said if the economy shows more signs of improvement, the bank could pay off its money by year end. But if Valley guessed wrong, he said, "we would be forced to go to the common equity market and probably dilute our shareholders much more."

Accepting TARP aid was once seen as a sign that recipients were worthy of getting taxpayer money to help spur lending.

But TARP is now widely viewed as an albatross, a sign that banks are too weak to make it on their own. It also limits banks’ ability to pay their best employees and set dividends.

"Dear Timmy, we are happy to be able to pay back the $25 billion you lent us," Dimon said on Monday, reading at a conference from a mock letter to Treasury Secretary Timothy Geithner. Dimon in April called TARP money a "scarlet letter."

Simon Johnson, a former International Monetary Fund chief economist, said if the 19 banks were really annoyed at bailout costs, they would lean far less on programs to stimulate the economy, including programs to sell federally guaranteed debt and have the Federal Reserve take on troubled assets.

"The way to get yourself into trouble is to convince yourself that there is no trouble," Johnson said. "These companies might need these investments. There are signs down the road in the global economy that are not looking good."

PICKETS

It does not look great now either.

While May job losses were far less than economists expected, the nation’s unemployment rate rose to 9.4 percent. That’s already above the 8.9 percent that regulators assumed for 2009 in the "adverse" scenario used in the stress tests.

Even if banks repay TARP money, regulators can maintain a hold through the warrants they have to buy common stock. Banks would push to pay low prices to buy back these warrants, but regulators — with taxpayer money in play — might push back.

"It creates uncertainty about how effectively the banks can function if the government still retains ties," said Chris Armbruster, senior analyst at Al Frank Asset Management in Laguna Beach, California.

Lipkin still believes his bank did "the right thing’ in taking TARP money, though it already had plenty of capital.

"My shareholders are all on my case," he said. "I had people picketing my house, literally, because I was part of this bailout."