What TARP Means for Your Bank
If someone offered you hundreds of millions of dollars, you’d probably take it and run (and by you, I mean me). However, if that someone offering is Uncle Sam, and you’re a bank, AND the money has certain strings attached, then you may have a few reservations.
I raise this hypothetical because at present, the U.S. Treasury has approved some 300 banks to receive funds through its TARP Capital Purchase Program (aka the “CPP”). TARP, which stands for Troubled Asset Relief Program, was originally intended to allow the government to eliminate so-called “bad” debt from bank's balance sheets. TARP’s rules quickly changed to let the government simply infuse capital through CPP.
Quite a few financial institutions, despite having originally applied for the money, are turning around and saying, “Yeah, actually, no thanks.” In some cases, banks say they’re fine on their own two feet. Some also cite unfavorable terms. And, oh geez, what will our customers will think of us?
The No Thanks Banks
New York Community Bancorp (Stock Quote: NYB), a Westbury, N.Y.-based lender, turned down close to $600 million from the CPP, just before announcing a 52% jump in fourth quarter profit to $102 million. The bank applied for the money just to have the option, but then realized it could actually survive without it.
“We believe we are well positioned to pursue our business model and to grow our earnings without accepting capital infusion from the U.S. Treasury,” says Ilene Angarola, director of investor relations.
Neighboring bank Smithtown Bancorp (Stock Quote: SMTB) shrugged off federal money too, also citing its financial strength, in addition to certain unfavorable rules tied to the program. For example, banks that accept CPP funds must limit dividend payments, worker bonuses and executive pay. There’s also criticism that the language in the CPP program is vague, and perhaps leaves the door open for more government control down the road for banks that take the cash.
“There has been some lack of clarity…a lack of parameters…that’s caused concern among [banks] as to what are they really agreeing to,” says Peter Garuccio of the American Bankers Association.
Damned If You Do, Damned If You Don’t
When you hear your bank has rejected government money, it may feel reassuring as a customer, thinking that your lender doesn’t need a bailout. It comes across as a vote of confidence. Remember, however, that things change, and bypassing the funds now doesn’t necessarily mean that they won’t be on bended knee down the road.
“Some of [these banks] will look back and say we should have taken the money. Right now, in this whole financial services sector, there is nobody who knows what is going to happen next week, next quarter or next year,” says Bill Bartmann, the former CEO of Commercial Financial Services and author of the upcoming book Bailout Riches.
