Even as more firms try to feed at the trough of subsidized government capital, it seems clear that a lot of the banks that have received government capital were not worth the risk. My updated paper “TARP’s Deadbeat Banks,” which was reported in the Washington Post last Thursday, lists eighty-two banks that failed to make their dividend or interest payments to taxpayers. This is up from the fifty-six banks missing dividend and interest payments in November.
In February 2010, five banks skipped their subordinated debt interest payments and seventy-seven banks failed to pay preferred stock dividends. Three of the banks that missed their preferred dividends were restructured in Federal Deposit Insurance Corporation (FDIC) receivership or Chapter 11 bankruptcy, in the case of CIT Group (CIT).
After six missed dividends, the U.S. Treasury starts appointing board members. No bank has reached that point yet because the program is not quite a year and a half old, but Saigon National Bank of California has missed five dividends in a row. Tim Geither or a representative may soon get the honor of sitting on that bank’s board. Ironically, there is even less penalty if you are one of the five banks skipping subordinated debt payments. Those banks have to skip twenty-one quarterly interest payments before they are considered in default of their obligations to taxpayers.
The Capital Purchas Program (CPP) for “healthy banks” is showing a profit, because the big banks cannot take the stigma of the Troubled Asset Relief Program (TARP), and they are running for the exits. Yet, one-eighth of the banks remaining in the “healthy bank program are behind in their payments. This should make us skeptical of the U.S. Treasury’s efforts to pass TARP 2.0 for small banks, offering even more heavily subsidized capital than TARP 1.0.
The Number of TARP Deadbeats Continues to Climb
The vertical axis on right and the line graph tracks the number of banks skipping dividends and interest. The bar graph and the vertical axis on the left measures the total taxpayer funds in millions invested in the banks skipping dividend or interest payments in each quarter beginning in May 2009.
Disclosure: I only hold long positions in broad based index funds. I do not have any positions in individual securities in the companies mentioned.