Three TARP Banks Already Classified as Deadbeats? Uh-Oh

The Wall Street Journal reports that three banks that received TARP funds have stopped paying the required dividends to the Treasury. The Treasury says a “number” of banks have not been making their payments.

From the WSJ:

Pacific Capital Bancorp (PCBC), a Santa Barbara, Calif., lender that got $180.6 million from the Treasury Department in November, has since posted net losses of $49.7 million. Pacific Capital said Monday that it suspended dividend payments on its common and preferred stock as part of a wider effort to save about $8 million per quarter. A bank spokeswoman confirmed that the U.S.’s preferred shares are included in the dividend freeze.

Seacoast Banking Corp. (SBCF) of Florida, of Stuart, Fla., and Midwest Banc Holdings Inc. (MBHI), of Melrose Park, Ill., have also halted their TARP-related dividends, citing the banking industry’s turmoil and a desire to fortify their balance sheets.

Treasury spokeswoman Meg Reilly said Monday that “a number of banks” that got taxpayer-funded capital under TARP are no longer paying dividends to the government. “Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base.”

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week.

“Here the government has given the banks money at great terms, but the fact that they can’t keep up with it is worrisome,” said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. “It tells you of the deep problems of community and regional banks.”

The banks are not technically in default as they are allowed to miss up to six payments before default occurs. Still, it raises some troubling questions.

For instance, this money was only distributed late last year. Did the Treasury totally botch their due diligence with regard to the banks selected to receive the money or have the smaller regional and community banks deteriorated much more quickly than anyone anticipated? Given the lack of transparency in the disbursement of TARP funds, the question of political influence affecting the choices of recipients also raises its ugly head. Clearly something has gone badly wrong.

Let’s give Treasury the benefit of the doubt and assume that they did reasonable due diligence and doled out the money to banks that were in fairly decent shape. If that’s the case and a number of these institutions are now in such dire shape that they can’t make their payments then one would assume that the banking system, at least the small regional and community banking system, is deteriorating rapidly.

That’s certainly at odds with the party line out of Washington. The meme that you are all familiar with is that the financial part of the crisis is past and now we just need the general economy to get back on its feet. Maybe that is true as it pertains to the large banks but this information certainly raises some questions about part of the system. It also makes me a bit queasy about the big banks.

Comments

[Dave Wrixon:]

Anyone that thinks things are fixed is clueless.

Seems that the banks in the most trouble are in bad Real Estate areas.

The basic problem is that whilst the Government allowed the banks to disguise the impact of their toxic assets on their balance sheets, they are still there and they are still toxic. Indeed, they are probably getting increasingly more toxic.

Jun 23 05:44 AM

[Trading Alpha:]

One only needs to follow the Case Shiller index which continues to decline at 2% per month. Measuring residential real estate values, this index is central to the balance sheet health of both the banks and American households as I have posted in my recent articles.

One more thing. Let's not give the Treasury the benefit of the doubt. They already missed this issue once - what credibility do they have that they have quickly fixed that which they did not see coming?

Jun 23 07:12 AM

[levin70:]

Tom:

What about mis-management at the three banks in question? Why is that not listed as a possibility? It may not be that the world is falling apart for small and regional banks, it could be that for the three banks in question, that they have made bad lending decisions and now see the fruit of their mis-management come home to roost.

You've jumped to a conclusion that small and regional banks are in trouble (all of them) based on the results of three small banks.

Thats the equivalent of me picking three pink sheet stocks that I think will go down 20% and saying that I thought the entire US stock mareket would have to go down also as a result. Its simply not a valid argument.

Regards

Jun 23 02:53 PM

[Tom Lindmark:]

Levin,

I don't think I said that all of the community banks were in trouble. I did say that the system would seem to be deteriorating given that there appears to be a problem with some banks repaying their TARP funds. Note that this money was doled out only late last year. Also note that while the WSJ article only names three banks, the Treasury said a number of banks were not paying the required dividends.

The pink sheets would include a universe of diverse companies from which drawing any conclusions on a small sample would be an error. However, we have not only the evidence of three seemingly healthy banks but the Treasury's assertion of a number of others having problems servicing their debt but the constant drumbeat of FDIC closings to give us some idea of the problems in banking. Unlike the pink sheets this is a homogeneous group of companies and it's logical to assume that the problems of a few could quite easily be spread throughout the industry.

On Jun 23 02:53 PM levin70 wrote:

> Tom:
>
> What about mis-management at the three banks in question? Why is
> that not listed as a possibility? It may not be that the world is
> falling apart for small and regional banks, it could be that for
> the three banks in question, that they have made bad lending decisions
> and now see the fruit of their mis-management come home to roost.
>
>
> You've jumped to a conclusion that small and regional banks are in
> trouble (all of them) based on the results of three small banks.
>
>
> Thats the equivalent of me picking three pink sheet stocks that I
> think will go down 20% and saying that I thought the entire US stock
> mareket would have to go down also as a result. Its simply not a
> valid argument.
>
> Regards

Jun 23 03:20 PM

[BPYHO:]

Interesting article. I know they say dont go LONG on 3x ETFs but I am long on FAZ. Definitely dont think the worst is over (although I wish it were) and FAZ is my insurance for the rest of the money I have in the market...

Jun 23 04:53 PM

[Daniel Herkes:]

On Jun 23 07:19 PM tr34 wrote:

Money doesn’t grow on trees . . .

Well, unless of course, it is paper money. Paper is also a carbohydrate.

Jun 23 08:49 PM

[U Dontknow ...:]

Any bank that stops paying TARP principal and interest should be shut down immediately.

Why throw good money after bad by keeping the worst run banks going?

Jun 23 09:49 PM

[Hillsfar:]

I'm not giving the Treasury any benefit of doubt. We know they didn't do their due diligence because it was painfully obvious from the very beginning. They had no real plan and they won't get the majority of their money back. That means we, the taxpayers, won't get the majority of our money back.

Jun 23 10:17 PM

[Moon Kil Woong:]

Trust me, anyone who would give money to Fannie Mae, freddie Mac, AIG, and Citibank obviously doesn't care much about the money they loaned. That's why bailout is often closest associated with giveaway. The recent defaults are a minor note on an encyclopedia of horrible government "investments".

Due dilligence. Don't make me laugh.

Jun 24 03:34 AM

[robert.b.fe...:]

There was no due dilligence. They (the FED) broakered (forced) deals to prevent failures then forced healthy institutions to accept TARP funds to disguise which banks were really in trouble. No surprise that the worst of the lot is still in trouble. When the thrifts collapsed in the 80s FBI agents marched the culprits away in shackles. now they get bonuses on the tax payer's dime 50% pay raises to ensure they have no incentive to do the right thing and a ride to a resort on a gulf stream for a stress relief retreat. Is it too late to become a banker? How about becoming a Uigher I hear Bermuda ia nice this time of year.

Jun 24 10:57 AM

[dcb:]

More proof that we are throwing good money after bad. Which is exactly what the industry wants, in unlimited quantities. Any real effective solution would drop the market, so it is easy to determine if a solution would actually be effective. If it doesn't drop the market it isn't an effective solution,

Limit leverage, close down insolvent institutions (in an organized manner), align shareholder interests with pay structure. The most simple thing to do is gut leverage. no margin calls, and very low systemic risk. Of course this gets rid of outsize returns and minimizes bonus. Therefore it aint going to happen

Jun 24 12:24 PM

[James Quinn:]

The bank fraud will be revealed soon.

theburningplatform.com...

Jun 24 02:06 PM

[Jonas Zamora:]

Somehow, I doubt that the government looked carefully at every bank that got TARP money. Heck, a majority of the Democrats did not even read the budget proposal for the stimulus package and still approved it.

Jun 24 02:21 PM