An Imbalanced TARP Equation

Of late, it’s been mostly good news for the Troubled Asset Relief Program (TARP). The big banks have paid the government back (with interest). Even AIG announced that banks have agreed to lend it more than $4 billion to pay the Fed back for bailing it out back in September 2008. But it’s a different story for community lenders.

The Washington Post reported on Tuesday that the Obama administration is monitoring the board meetings of some 20 banks that received aid through TARP and have been unable to make their scheduled repayments to the government. So far, there are some 132 “deadbeat” lenders that have missed at least one of these dividend payments in the last quarter. Another seven have failed altogether, resulting in a total loss for the government. From the Post

Banks are required to make quarterly dividend payments to the Treasury Department in exchange for taking aid from the Troubled Assets Relief Program…David Miller, Treasury’s chief investment officer for TARP, said the department has already dispatched officials to monitor some of the boards and may begin the board nomination process for others in the beginning of the new year. He declined to be more specific about which banks would be scrutinized and added that no final decisions have been made.

In many cases, banks are delaying their dividend payments until their balance sheets are in order, Miller said (that’s the defense being proffered by OneUnited, the Boston Bank at the center of the ethics probe of California Democratic Rep. Maxine Waters). Fortunately, the profits generated from helping the big banks will make up for any losses suffered by smaller ones. But that doesn’t ease concerns over the strength of the banks that Treasury invested in to begin with—a full fifth of which haven’t been making their dividend payments on time.

When President George W. Bush signed TARP into law, neither lawmakers, economists, nor financial experts knew how soon the government would get its money back. “[W]hen you include the fact that it almost certainly saved the banking system and softened the recession,” Kevin Drum wrote of TARP, “it may boast the biggest bang for the buck of any bill ever passed by Congress.” From the perspective of the big banks who boast high-profile clients and even bigger balance sheets, that certainly seems to have been the case. But community lenders, whose balance sheets have been corroded by bad mortgages and defaulting commercial loans, are destined to remain tangled in TARP for some time.


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