Comments on: Inside a not-bailed-out bank

By: AABender1

AABender1 — Sat, 24 Apr 2010 23:44:44 +0000

Felix:
I am not sure that the majority of banks who formally applied for TARP received TARP. But even if that were true, banks were advised privately whether or not to apply. All TARP applications were pre-screened by the bank’s primary regulator; that regulator actively and systematically advised banks whether or not their applications would be successful. One obvious “don’t bother” whisper was to banks on the FDIC’s problem bank list. And there were other “don’t bother” categories including banks in certain market areas with significant real estate price declines–Arizona, Nevada, Florida. I am not placing a value judgment here. The regulators were trying to be stewards of taxpayer funds and didn’t want to give TARP to bank that might fail.

What is clear here is that the criteria for a small bank to receive TARP was “absence of regulatory blowback risk,” i.e. the regulators picked only the banks that really didn’t need the capital now or in the foreseeable future. This was not a bailout. In contrast, the large bank qualifications for TARP were based on an almost diametrically opposed concept–the pressing need for capital now in order to be bailed out from receivership.

So to my earlier comment: If only the best small banks got TARP, how could it be that ANY of those “best of the best” small banks can’t now pay their TARP dividend? I think that there are several possible answers here: (i)misrepresentation of books and records during the TARP process (like Park Avenue Bank and UCBH); (ii)relatively lenient bank examiners, or(iii)some significant post-TARP event like unexpected CRE/SFR declines, unnoticed internal control failures or the like.

So…not getting TARP was a common occurrence (90% of the banks didn’t get TARP). However, the bank that now can’t pay its TARP dividends is flying a blazing red flag of something terribly wrong.

By: Felix Salmon

Felix Salmon — Wed, 24 Mar 2010 01:13:56 +0000

AABender, the overwhelming majority of banks who applied for TARP funds got them. Not all banks did so, of course, but that’s another question: it’s far from clear whether many or indeed any banks refrained from applying just because they thought they’d be rejected.

By: Lilguy

Lilguy — Tue, 23 Mar 2010 13:20:43 +0000

The bank’s activity was criminal, but the auto dealer’s was really stupid. Why would any business make its continued existence dependent on a single source of supply or finance? Your just looking for trouble if you do that, although not usually of the criminal type.

By: Mega

Mega — Mon, 22 Mar 2010 17:56:49 +0000

This belongs in “Oddly Enough.”

Truly outrageous in its shameless criminality, but not very discussion-worthy in and of itself.

By: AABender1

AABender1 — Mon, 22 Mar 2010 16:36:23 +0000

A couple of quick clarifications:

First, less than 10% of U.S. banks received TARP, so Park Avenue Bank’s rejection was the norm not the exception.

Second, as noted earlier in the “too puny to succeed” post, TARP money for small community banks was based on the ability to repay (i.e. on CAMELS and regulatory reputation) and not on need or distress. TARP was kind of like that old bank loan maxim–”banks only give loans to those that can prove that they don’t need them.”

To wit, the small bank TARP approval process included a joint regulatory commission (OCC, OTS, FDIC) that reviewed all applications and then made recommendations to Treasury, who could reject the recommendation for any reason. So there was probably a reduced incidence of regulatory forum shopping.

So, unlike the large company or large bank TARP, small bank TARP was not even close to a “bailout.” Community banks with excess capital got more capital.

Which raises two different but interesting questions:(i) Why was there a public policy that vocally condemned “too big to fail” but provided “bailout” funds exclusively for “too big to fail” institutions, thus pro-actively compounding the problem in several different ways? and (ii)Given the significant regulatory filter, how did even one small bank defer/default on TARP payments?