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TARP Revisited: Banks "Too Large to Fail"- A Red Herring

© Elliott R. Morss

October 2012

Introduction

Remember the Troubled Asset Relief Program (TARP)? Initiated in 2008 to bail out the US financial system, it is still around. In this, my fifth review of the program, I note that most of the money lent out has been paid back. And with the capital, interest, dividends, and warrants paid back, at least the bank-bailout part of TARP will do more than break even.

However, a number of problems remain. Of the 753 banks that originally borrowed from TARP, 319 have not yet paid the Treasury back. Why not? Remember that all banks are now paying 9% for TARP money. Banks in good shape can borrow at much lower rates. Draw your own conclusions. But it gets worse: 242 banks have missed scheduled dividend/interest payments to TARP. And there are 43 banks that have missed 10 or more scheduled payments.

I start with an overall status report on TARP. I follow with a more detailed review of the banks that still owe TARP money. I conclude with why the "too big to fail" concern is a red herring.

TARP In Sum

There are plenty of reports on TARP. The U.S. Treasury has to make monthly reports to Congress. The Office of Management and Budget (OMB) must make semi-annual reports, and the Congressional Budget Office (CBO) must make an assessment of each OMB report within 45 days of its issuance. Table 1 is the most recent summary from the Treasury.

There will be no further disbursements from the bank support part of TARP. As Table 1 suggests, Treasury estimates that overall, the bank support program will make almost $15 billion. However, that part of the program going to smaller banks is projected to lose nearly $3 billion.

The Congressional Budget Office estimates that $431 billion of the $700 billion initially authorized for the TARP will ultimately be disbursed, including $14 billion in additional projected disbursements (mortgage programs - $11 billion and the Public-Private Investment Program (PPIP) - $3 billion). The CBO's estimated final cost for TARP is lower than Treasury's - $24 billion.

Table 1. - TARP Summary (bil. U.S.$)

Disbursed as of

Balance as of

Final

Program

Commitment

end Sept., 2012

end Sept., 2012

TARP Cost

Bank Support

250.47

245.47

9.24

14.68

Capital Purchase Program

204.9

204.9

8.67

14.57

Banks w/assets > $10 Bil.

190.33

190.33

3.25

17.53

Banks w/assets < $10 bil.

14.57

14.57

5.42

-2.96

Other

45.57

40.57

0.57

0.11

Credit Market Programs

23.46

19.09

8.9

3.67

Housing Programs

45.59

5.54

n.a.

-45.59

AIG

67.84

67.84

6.73

-2.94

Automotive Financing

79.69

79.69

37.24

-25.05

Total

467.05

412.09

62.11

-55.23

Source: U.S. Treasury

Of course, running a program as large and as complex as TARP is costly. By the end of July, direct hires had cost $99 million, and contracts with financial and legal firms have been $713 million.

AIG

At one point, the U.S. government had committed $180+ billion to bailing out AIG. Why such concern for an insurance company? The concern had nothing to do with saving the insurance industry or AIG in particular. Rather, AIG had foolishly insured large amounts of risky "financial paper" that equally foolish banks had generated. If AIG had failed, the banking crisis would have been much worse. The U.S. Treasury estimates AIG support will end up costing $3 billion, OMB estimates $22 billion, and the CBO estimates $11 billion.

But note: at the time banks were trying to collect on their losses from AIG, its staff was telling Treasury Secretary Paulson that they could probably negotiate payments down to 60 cents on the dollar. Why? Because AIG was effectively bankrupt. Paulson said no -- pay them the full amounts. Why? One can only speculate. But that decision meant AIG paid banks $43.6 billion on insurance claims, including $12.9 billion to Goldman Sachs. That would have been $26.2 billion at the 60% payout rate, for a savings of $17.4 billion.

Automotive Industry

TARP paid out almost $80 billion to GM, Chrysler, and their financing entities. CBO estimates the total cost will be $20 billion, while Treasury estimates $25 billion. The government retains about 33 percent of GM's equity. The Treasury has no remaining investment in Chrysler, having sold all of its shares on July 21, 2011 for $560 million. TARP provided $19 billion to GM's financing arm -- GMAC (General Motors Acceptance Corporation) -- now Ally Bank. It now owns 74% of Ally's equity.

TARP Banks

By State

Data on banks that still owe TARP money are presented in Table 2. They are ranked by the total owed as a percent of the state's total deposits. Puerto Rico leads all states by far. Beyond that, all regions are represented, except the Northeast and the West.

Table 2. - Outstanding TARP Balances, by State

TARP Balances/

TARP Balances

State

Deposit Ratio

(mil. U.S.$)

Puerto Rico

2.50%

1,335

Georgia

0.69%

1,276

Missouri

0.46%

655

Michigan

0.39%

649

Idaho

0.22%

42

Arkansas

0.17%

93

Illinois

0.17%

652

North Dakota

0.15%

31

Wisconsin

0.14%

188

Kentucky

0.14%

96

South Carolina

0.13%

89

Tennessee

0.11%

135

Virginia

0.11%

271

Maryland

0.09%

108

North Carolina

0.08%

284

Sources: U.S. Treasury and FDIC

Banks with Largest Outstanding TARP Balances

As mentioned earlier, 319 banks still own TARP money. And of that number, 303 have not even started to repay their debts. The 10 banks with the largest debts to Treasury are given in Table 3. The banks in bold have also missed interest payments on their debts.

Table 3. - Banks with Largest TARP Debts (in millions U.S.$)

Bank

City

State

TARP Debt

Synovus Financial Corp. (NYSE:SNV)

Columbus

GA

968

Popular, Inc. (NASDAQ:BPOP)

San Juan

PR

935

First BanCorp (NYSE:FBP)

San Juan

PR

424

Citizens Republic Bancorp, Inc. (NASDAQ:CRBC)

Flint

MI

300

UCBH Holdings, Inc. (OTCPK:UCBHQ)

San Francisco

CA

299

First Banks, Inc.

Clayton

MO

295

New York Private Bank & Trust Corporation

New York

NY

267

Flagstar Bancorp, Inc. (NYSE:FBC)

Troy

MI

267

Cathay General Bancorp (NASDAQ:CATY)

Los Angeles

CA

258

PrivateBancorp, Inc. (NASDAQ:PVTB)

Chicago

IL

244

Source: TARP, Oct. 17, 2012 report

Banks That Have Missed Interest/Dividend Payments

Every bank that has borrowed from TARP has an agreed-upon schedule for interest or dividend payments. A total of 242 banks have missed scheduled payments. The 15 banks with the largest outstanding balances of missed payments are presented in Table 4, along with the banks that have missed 11 or more scheduled payments.

Table 4. - Banks with the Largest and Most Missed Payments (in thous. US$)

Missed

No. of

Bank

Borrowings

Payments

Misses

First Banks, Inc.

295,400

48,298

12

Citizens Republic Bancorp, Inc.

300,000

37,500

10

Dickinson Financial Corporation II

146,053

23,880

12

Anchor BanCorp Wisconsin, Inc. (NASDAQ:ABCW)

110,000

18,104

13

Independent Bank Corporation (NASDAQ:IBCP)

72,000

7,742

9

U.S. Century Bank

50,236

6,845

10

Flagstar Bancorp, Inc.

266,657

6,666

2

Old Second Bancorp, Inc. (NASDAQ:OSBC)

73,000

6,388

7

Premierwest Bancorp (NASDAQ:PRWT)

41,400

5,693

11

Metropolitan Bank Group, Inc (Archer Bank)

71,526

5,036

5

Centrue Financial Corporation (NASDAQ:TRUE)

32,668

4,900

12

Bridgeview Bancorp, Inc.

38,000

4,660

9

Royal Bancshares of Pennsylvania, Inc. (NASDAQ:RBPAA)

30,407

4,561

12

First Place Financial Corp. (OTC:FPFC)

72,927

4,558

5

First Security Group, Inc. (NASDAQ:FSGI)

33,000

4,125

10

Rogers Bancshares, Inc.

25,000

3,747

11

Blue Valley Ban Corp (OTCQB:BVBC)

21,750

3,534

13

FC Holdings, Inc.

21,042

3,154

11

Pacific City Financial Corporation (OTCQB:PFCF)

16,200

2,649

12

Northern States Financial Corporation (OTCQB:NSFC)

17,211

2,367

11

OneUnited Bank

12,063

1,960

13

Ridgestone Financial Services, Inc.

10,900

1,634

11

United American Bank (OTCQB:UABK)

8,700

1,534

13

Syringa Bancorp (OTCPK:SGBP)

8,000

1,199

11

Idaho Bancorp (IDBC.OB)

6,900

1,128

12

Citizens Commerce Bancshares, Inc.

6,300

944

11

Rising Sun Bancorp (OTCQB:RSAM)

5,983

897

11

Georgia Primary Bank

4,500

745

12

Premier Service Bank (OTCQB:PSBK)

4,000

651

12

Pathway Bancorp

3,727

558

11

Lone Star Bank

3,072

548

13

Grand Mountain Bancshares, Inc.

3,076

496

12

Omega Capital Corp.

2,816

422

11

Saigon National Bank (OTCQB:SAGN)

1,549

286

14

Source: U.S. Treasury

Conclusions

It is notable that this list includes large and small banks. Small banks gambled with depositors' money as did large. Probably a good idea to avoid these banks, both as a depositor and investor.

Why Banks "Too Big To Fail" Is a Red Herring

There has been considerable talk and writing about down-sizing the largest banks. But this TARP review indicates it is not only the largest banks that gamble with depositors' money. Many small banks do as well. The primary objective of bank reform should be to protect depositors' money. Let's focus on this objective. In order to protect deposits, no bank, large or small, should be allowed to engage in risky business dealings. What should this mean? As I have written earlier, limit Federal (FDIC) bank insurance to those that:

  • Manage their own loans, and
  • Earn less than 10% of their income from trading

Bankers' incentives change when, instead of managing their own loans and being dependent on repayments for survival, they sell them off for a commission. Trading is too dangerous for depository institutions, and no amount of bank regulation can deal with this.

Source: TARP Revisited: Banks 'Too Large To Fail' - A Red Herring