Small banks lag in repaying Treasury for bailout funds
Thursday, March 18, 2010
The Treasury Department invested in large and small banks during the financial crisis. So far, the big bets are paying off better than the smaller ones.
While the largest banks have borne the brunt of criticism for their role in triggering the crisis, they were among the quickest to give back their federal bailout funds. Sales of the warrants that these firms were required to hand over to the federal government as a condition of the aid also proved lucrative for the Treasury.
But hundreds of community banks have yet to return their bailouts. More than 10 percent of the 700 banks that got federal bailouts and are still holding the money even failed to pay the government a quarterly dividend in February. The list of 82 delinquent banks is significantly longer than the 55 banks that failed to make payments in November, according to an analysis by Linus Wilson, a finance professor at the University of Louisiana at Lafayette.
Wilson calculated that the missed payments totaled $78.1 million in February and that banks now have missed a total of $205 million in dividend payments to the government.
Many of the community banks still holding aid from the Troubled Assets Relief Program are struggling with losses on real estate development loans.
"The ones that are still in TARP are not as healthy as the ones that left," Wilson said. He added that the missed payments suggested the government "probably extended TARP too far, and did not do a lot of due diligence."
Most banks that got federal aid agreed to pay the government a 5 percent dividend in quarterly installments. In some cases, banks that missed payments must make them up later, but other banks were not required to do so.
Thirteen banks have now missed four dividend payments, including OneUnited Bank of Massachusetts, which got government aid after Rep. Barney Frank (D-Mass.) inserted language into the bailout bill that effectively directed Treasury to give the bank special consideration.
The list of banks missing payments for the first time included South Financial Group of South Carolina and Citizens Republic of Michigan, both of which rank among the nation's 100 largest banks, with about $12 billion in assets each.
Meanwhile, the largest nine banks, including Goldman Sachs, J.P. Morgan, Citigroup and Bank of America, have repaid their aid. Treasury is now focused on selling their warrants, which are contracts that allow the holder to buy more of a company's shares in the future at a fixed price. The goal of requiring the warrants was to ensure that taxpayers would see a return once the banks recovered.
Initially the agency tussled with some of the big banks over what price the firms would pay to buy back the warrants. In J.P. Morgan's case, the two sides could not agree on a price last year, so a public auction of the warrants was used instead.
Before the bidding, some Treasury officials were worried whether the process would fetch a high enough price. But the results and an internal analysis conducted by Alan Krueger, assistant secretary for economic policy, confirmed Treasury's faith in the auctions. Krueger said his work demonstrated that the auctions weren't being manipulated -- no single bidder had a significant impact on the final price, for instance.
So far the government has received more than $3.5 billion from selling the warrants, including $950.3 million from J.P. Morgan and $1.54 billion from Bank of America.