Small banks are big problem in government bailout program

By David Cho
Washington Post Staff Writer
Monday, June 14, 2010

The Treasury Department's financial bailout has a growing problem on its hands, and this time, it has nothing to do with Wall Street.

A new report from the agency shows that community banks continue to plague the program. A total of 101 bailed-out banks -- nearly all are small -- have missed paying the government a dividend, which was a condition of taking the aid. That number is up 25 percent since February and has nearly doubled since November.

The rising number of "deadbeat" banks, as they are known, could force Treasury to become more deeply entangled in the affairs of small financial firms that are troubled. The bailout legislation gives Treasury the right to appoint members to the boards of banks that miss six dividend payments.

So far only one firm, Saigon National Bank in Southern California, has missed that many payments. Eight others have missed five payments and 16 have missed four. Most banks that received federal aid agreed to pay the government a 5 percent dividend every three months upon taking funds from the Troubled Assets Relief Program.

Treasury officials declined to answer questions about whether they were preparing to make board appointments.

While big Wall Street banks have been sharply criticized by politicians and ordinary Americans for taking federal bailouts, they have quickly repaid that money with interest and billions of dollars in additional compensation.

Meanwhile, hundreds of small institutions have not yet returned their aid. Nearly one in seven banks that took aid also have failed to issue the required dividend to the government. The missed payments have cost taxpayers $233 million, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette.

During the crisis, Treasury pledged to give aid only to banks that were in relatively good shape and needed help to get through the financial turmoil. But the growing list of delinquent banks shows "the investments that were made were not in healthy banks," Wilson said. Many of these firms can't make their dividend payments because they are struggling with losses on real estate development loans.

Wilson and other financial analysts say the trend of missed dividends raises questions about whether Congress should approve an Obama administration proposal to spend another $30 billion to aid banks that lend to small businesses. Advocates of the new spending say it is necessary to help small-business lenders since these institutions don't have as many funding sources as big banks and are therefore more vulnerable in recessions. The proposal may come up for a vote in the House as soon as this week, Democratic aides said.

Treasury officials say the small-business measure in the House would require regulators to review the applications of banks and ensure that only viable lenders get the money. But back in 2008, the TARP program established a similar process that proved vulnerable to lobbying.

Rep. Barney Frank (D-Mass.), for instance, inserted language into the TARP legislation that effectively directed Treasury to give OneUnited Bank of Massachusetts special consideration. The bank has now missed paying five dividends.

In addition, said Rep. Nydia M. Velázquez (D-N.Y.), chairwoman of the House Small Business Committee: "Previous attempts that simply gave banks money and trusted they would lend have fallen far short of meeting small-business credit needs. That is why we must make sure this proposal has strong small-business protections, so that we actually see capital end up in the hand of entrepreneurs."

Treasury officials said the TARP program has been well administered. On Friday, the Treasury lowered its estimates of the ultimate cost of the TARP bailout to $105.4 billion, $10 billion lower than what was published in President Obama's budget in February. The biggest piece of that expense will come from the aid sent to the nation's automakers, not banks. Last August, the administration had estimated the cost of TARP would be $341 billion.

"TARP repayments have continued to exceed expectations, substantially reducing the projected cost of this program to taxpayers," said Assistant Secretary for Financial Stability Herbert M. Allison Jr. in a statement. "TARP is achieving its intended objectives: stabilizing our financial system and laying the groundwork for economic recovery."

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