A senior executive of a regional bank recently expressed to me his exasperation with the federal government's handling of the Capital Purchase Program (now renamed the Capital Assistance Program) portion of the Troubled Asset Relief Program in the typically blunt fashion of a Texan.
"I realize it's politically incorrect to use the word "retarded," but that sure as hell describes the government's job so far. If they set out to deliberately screw the thing up they couldn't have done a better job of it."
His ire was directed at the fact that the government solicited healthy banks to participate in the CPP program. The government encouraged banks to take the additional capital to shore up their balance sheets so that they would feel comfortable enough with their excess capital cushion that they'd take the risk of future deterioration of existing asset values and lend to business and consumer borrowers who were screaming "Show Me The Money!" Those banks who took the money are now being painted by other banks who did not take the money as being somehow "irresponsible." Simultaneously, public posturing by Congressional hypocrites in response to press reports that some large banks who participated in the program (or other forms of assistance) have been paying big bonuses to executives and/or spending lavishly on marketing trips has prodded the Obama administration, including "The Change We Have Been Waiting For," to make noises about how it will put the clamps on all banks who take "bailout" money. Frankly, many banks who took the money feel like they've been "screwed," and not in the pleasant sense of that word.
Bankers are increasingly asking themselves whether taking government funds is a good deal — and coming up with more reasons not to.
Restrictions on pay and dividends are one thing, but healthy banks are more troubled by the change they perceive in the Treasury Department's Capital Assistance Program. What was billed last fall as a way to spur healthy banks to lend more is now seen as assistance for weak banks.
"The complete spirit of this deal changed," said Blake Chatelain, the president and chief executive of Red River Bancshares Inc. in Alexandria, La. "Every bank's concern was that the public would understand it was for healthy banks to improve the economy. Along the way the entire spirit of the deal changed to, if you are taking the money from the government then you did something wrong and we are going to control you."
The $5.4 billion-asset Iberiabank Corp. in Lafayette, La., is the first banking company in the country to announce it is giving back the money it received from the Treasury.
"We have gotten the message that if you took" government funds "you are open to all kinds of changes to the way you do business," said Daryl G. Byrd, Iberia's CEO. "We don't think that would be good for our shareholders or the community we serve."
Chicago's Northern Trust Corp. on Friday sent Rep. Barney Frank a letter saying it would repay its $1.6 billion after a storm of negative publicity this week tied to the sponsorship of a golf tournament.
Rusty Cloutier, the president and CEO of the $1 billion-asset MidSouth Bancorp Inc. in Lafayette, said he is meeting with government officials in Washington next week and plans to pose one question: "Do they really want the community banks to be partners with them to help solve the problem they've got, or is this money just for bad banks?"
Depending on the answer, his company might return the $20 million in government capital it received, he said. "My bank is saying, 'Look, if you-all are saying this is for troubled banks, that's not us. We're in good shape.' So if that's the message, we'll just send them a check."
Even JPMorgan Chase's Jamie Dimon, a favorite of the Obama administration and a smart cookie, wishes that he'd never sold his soul to "Dark Knight" Paulson, according to some press reports. Unfortunately for Jamie and his little brothers in the banking biz, TARP appears that it might be the federal government's version of The Hotel California: you can check in, but you can never check out.
Lawmakers removed one obstacle last week by eliminating a requirement that firms raise a corresponding amount of private capital before repaying Troubled Asset Relief Program funds. But other issues remain.
Under the law, bankers must first consult with their federal regulators before repaying money, and observers say winning approval is likely to be tough in the current environment. Regulators want banks to have more capital right now — not less.
"They have to prove to their regulators they are financially sound without Tarp, and given how conservative regulators are these days, that's not going to be the easiest thing," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC.
The Obama administration opposed the provision in the economic stimulus, arguing that it would undermine the law's goals. Also, the law does say the Treasury Department must first write regulations outlining how bankers may repay Tarp — and it would not be the first time an administration delayed writing rules it did not support.
"Some banks have already said they want to repay the government ASAP," an administration official said on the condition of anonymity. "This could have the unintended consequence of firms choosing not to participate in ways that would be helpful to getting credit flowing, including homeowners, auto loans, and small businesses."
Allowing some institutions to repay Tarp funds early could create problems for the companies that do not.
For example, if JPMorgan Chase paid back its money early, but Citigroup Inc. and Bank of America Corp. did not, that could create more problems for those two firms.
"For those that can afford to buy back, does that mean you are healthy?" asked Lisa Andrews, a special counsel at Kelley Drye & Warren LLP.
"What does that mean for those that can't?"
The Treasury may also make bankers wait until regulators complete their stress tests of the largest institutions.
The banks "are all going to be on the sidelines getting ready for the Treasury's stress tests," said Brian Klock, senior vice president of equity research in the San Francisco office of KBW Inc.'s Keefe, Bruyette & Woods Inc.
"I don't expect to see a rush of banks that are going to do this until then."
Mr. Weissman agreed with that prediction. "The worst concern from a regulatory standpoint is a large bank gave back the money but failed the stress test," he said.
Banking companies, especially large ones, may also want to wait and see what the government does to help remove toxic assets from their books. The Obama administration has said it wants to start a public-private fund to purchase illiquid assets.
"It will be difficult to figure out how many assets the banks can afford to put off their balance sheet," said Tom Parliament, the president of Parliament Consulting Services Inc.
"Until it becomes clear how much capital they need, they will hold on to it."
[...]
"You may go through a lot of pain and suffering to get out of Tarp," said V. Gerald Comizio, a partner in the corporate department at Paul, Hastings, Janofsky & Walker LLP.
So, as "TARP Remorse" begins to sink in, banks who feel it will find themselves increasingly embittered as regulators make public noises as to how the banks should submit detailed reports about how they're using the money to make loans to "credit-worthy" borrowers, all the while putting the screws to banks behind the scenes to tighten up their underwriting standards and deny credit to small business borrowers, many of whom have paid their operating lines on time but don't meet the new restrictive "debt service coverage" requirements that business bankers tell me they are being encouraged to apply going forward. As the economy continues to crater and the public blames banks (and everyone other than itself) for the mess we'll be mired in for some time to come, look for many of those banks who foolishly believed the Feds when they said "We're from the government; we're here to help," look for the first opportunity to "bail out" of CPP, CAP, CRAP or whatever other anagram is used to refer to the brier patch they've jumped into. More expensive private equity infusions will look a lot less expensive than they did last fall.
I think the "success" of the CPP/CAP will be but one more reason to encourage the average voter to adopt the following slogan for the 2010 congressional elections: "Throw out ALL the bums!"
