TARP was in a groove but it’s now turning into a bad ’80s remix.
After a string of profitable paybacks from Goldman Sachs, JPMorgan and 59 others, the list of deadbeats is growing. In May, 91 banks missed their dividend payments to taxpayers, up from 55 in November. With hundreds of banks still trapped in the $700 billion bailout program, it’s growing reminiscent of the savings and loan crisis.
Back in the late 1980s, the Fed routinely lent to insolvent institutions, compounding the losses. Reforms were passed in 1991 to prevent it from happening again. Yet after losing $2.6 billion of bailout cash in the failures of CIT, Pacific Coast National Bancorp and UCBH Holdings, Treasury looks poised to lose still more, some in banks that should never have been given money in the first place. About $3.5 billion is tied up in the 91 current delinquents.
Part of the problem is conflicting goals. Some lenders, like Saigon National, want to pay back TARP, but their primary regulator — in Saigon’s case the Office of the Comptroller of the Currency — won’t let them. Concerned with balance sheet soundness, the regulators are rightly focused on forcing banks to hold more capital.
Taxpayers, however, shouldn’t be the ones supplying the stockpiles. Treasury said TARP was intended for viable institutions. If after nearly two years since TARP was set up, banks can’t find private capital, it suggests they probably weren’t healthy enough to be rescued in the first place.
Two big banks already look like serious zombies. Pacific Capital Bancorp, with $7.4 billion of assets, and Anchor Bancorp Wisconsin with $4.5 billion, have each missed five dividend payments and appear incapable of surviving without taxpayer cash.
Anchor Bancorp’s tangible common equity, a key capital measure, is negative, meaning TARP money is propping up the bank. Meanwhile, Pacific Capital is having trouble completing a private capital hike. Even if it comes off, Treasury will be forced to write down a substantial portion of the investment.
It’s time to let the terminally ill ones go — and face the reality, however belatedly, that some TARP banks are beyond saving.