Paying Off One Handout With Another

A year ago the Treasury Department bragged about an analysis that claimed the government’s massive bank bailout in response to the 2008 financial crisis (TARP) would actually end up turning a $24 million profit.

At the time, Treasury Secretary Timothy Geithner said that while the government’s overriding objective was to “break the back of the financial crisis and save American jobs,” it didn’t hurt that the TARP investments in U.S. banks “delivered a significant profit for taxpayers.”

But TARP watchdogs disagree.   A report by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) estimates TARP’s losses at $60 billion.  “Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost),” and the SIG makes the point that nothing has really changed, no lessons have been learned, and this poses the possibility “of rushing out another massive bailout of the financial industry, i.e., TARP 2.0.”

The focus of the Wall Street Journal’s story on the TARP report is that 351 small banks still owe a total of $15 billion in TARP funds and these banks’ prospects for raising the money to payoff the government is dim.   This is significant because the cost of TARP money increases from 5% to 9% after five years.

However, many of the small banks that did manage to pay back the TARP capital, did so with funds from the Small Business Lending Fund, a pool of $4 billion made available by the Small Business Jobs Act of 2010.  Of course this Department of Treasury program was created to stimulate small business lending.  But the pricing of funds, looks like just an opportunity for the banks to buy time with the hopes that the capital markets will eventually be friendlier.  In other words another bail out.  According to the Treasury website,

The initial rate payable on SBLF capital is, at most, five percent, and the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding).

Treasury received 935 applications for SBLF money and funded 332 institutions.  Of those 332 institutions, 137 banks used the SBLF funds to pay back the TARP money they owed.  There were a few relatively large institutions that used the SBLF exit strategy.  For instance, Western Alliance Bancorporation, a nearly $7 billion bank holding company traded on the NYSE, paid off $140 million in TARP plus a little more for warrants with complete funding from SBLF.

The SBLF program was closed on September 27 of last year and at that time 390 banks still owed TARP.  Of those 390, 178 had applied for SBLF but were turned down.  Many of these banks were turned down because they were delinquent on their TARP payments.

The report concluded that SBLF “culled a large number of the healthier community banks from TARP, leaving less-healthy banks in TARP that had less capital, had missed dividends, or, in many cases, were subject to enforcement actions by their regulators.”

Of the remaining 351 banks in TARP, a full 46% or 163 of them were delinquent on their payments to the Treasury.  Of the 163, the vast majority, 116, had missed five or more payments.

So the “healthy” banks were able to secure a new bail out from Uncle Sam, to pay off the old bail out money, while the unhealthy banks, many that can’t pay the 5% coupons, will be expected to pay 9%.

SIGTARP knows these banks can’t make it without more government help and has recommended that possibly Treasury should renegotiate the TARP terms or that a clear TARP exit path be developed (presumably like SBLF).

Only a Treasury Secretary could call this a successful, profitable operation.

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