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With all the hoopla this past week about the big banks repaying their TARP loans you would tend to think that the program is, if not winding down, then in a collect the interest and wait for repayment mode. If that’s the case, they you’re thinking if wrong.

The WSJ reports that the Treasury is busier than ever dolling out money to banks. This time they aren’t shoveling it out the door in chunks of billions of dollars, rather they’re spooning it out to the nation’s community banks.

In contrast to Wall Street firms like J.P. Morgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE:GS) and American Express Co. (NYSE:AXP) that returned $68.25 billion in one day this month to escape TARP and all the strings that were attached, a steady stream of small banks still is lining up for government money.

Since May 31, 20 small banks have received a total of $164.1 million in taxpayer-funded capital, according to the Treasury’s latest available figures. Half of those banks got the money in the same week that 10 big financial institutions gave theirs back.

Analysts see no end in sight to the trend. The recession and borrowers are squeezing most of the 8,200 federally insured commercial banks and savings institutions in the U.S., so even a dollop of TARP funds could make a difference. Some banks are turning to the government to fill a void left by investors who are leery about pouring money into the sector, despite the rebound by bank stocks since early March.

Meanwhile, the rules and stigma of TARP that turned some executives such as J.P. Morgan Chairman and CEO James Dimon against the program are irrelevant to small institutions.

Their employees usually don’t fly on corporate jets or collect hefty bonuses that trigger outrage from taxpayers, customers and Congress. And curbs on dividend payments are a modest price to pay for greater assurance that the banks can plow ahead with their core mission to gather local deposits, lend them nearby and support local charities, some recent TARP recipients said.

Maybe I’m missing the point, but TARP always seemed to me to have evolved into a program to recapitalize big banks. in essence to create the fiction that they were properly capitalized and hope that the banks would be able to repay the funds through earnings and a benevolent capital market. In fact, that appears to be happening.

In effect, it was a ruse intended to buy time and hope things went our way so we wouldn’t have to figure out how to avoid getting stuck with a bill that was unaffordable. When it comes to the smaller banks, I don’t see the same dynamic. Maybe their earnings over some protracted period of time will enable them to pay off their TARP loans but it’s questionable as to just how soon any of them will be able to raise new capital. It might be a long time.

This just seems to be a program that’s going to create a new class of zombies for no good reason. Resolving small banks is one of the few things the government has done well in this crisis. What’s the point in keeping the dead walking?

Source: Zombie Community Banks Still Lining Up for TARP Funds