Advice for Cash-Strapped Companies: Buy a Bank

Includes: AIG, HIG, LNC
by: Between The Numbers

The recent TARP audit highlighted a range of concerns and abuses sure to stem from a ill-conceived Trillion Dollar program. One interesting highlight: The audit also noted that the CPP investments in two insurance companies highlight an incongruity in the CPP program design. Hartford (NYSE:HIG) and Lincoln (NYSE:LNC) were able to obtain CPP funds by buying small thrift savings institutions and becoming thrift/savings and loan holding companies, thereby meeting the technical criteria for receipt of CPP funds.

The amount of CPP funds provided, however, was then determined by the assets of the holding company (i.e., the parent insurance company), not just the assets of the much smaller qualifying thrifts. In the case of Lincoln, for example, the company was able to obtain $950 million in TARP funds after it acquired a thrift that, on its own, would have been able to obtain at most $350,000 (if it would have qualified for CPP funding at all).

Moreover, in using TARP funds, there was no requirement that TARP funding be used in connection with the subsidiary thrifts’ activities. As it happened, the insurance companies reported that they used little (in the case of Hartford) or no (in the case of Lincoln) TARP funds in connection with the subsidiary thrifts’ activities but rather used the vast bulk of the funds to support their insurance businesses.

Stated another way, simply by purchasing comparatively tiny thrifts, Hartford and Lincoln — companies whose primary businesses (unlike other CPP participants) have little to do with lending to consumers and businesses — gained access to more than $4.3 billion in taxpayer funds, an amount that is many multiples of the thrifts’ total assets.

I expect to see many different non-financial companies purchasing small banks to try to get some of the government bailout money still sloshing through the system. A larger, more creative company might even try to get access to the Fed discount window - we know for a fact that the privacy of the transaction will be maintained and lots of bad decisions can be papered over with 0% loans.

Disclosure: No positions