Banking Law

Bailing Out On The Bailout

Yesterday's The Wall Street Journal documented the most detailed evidence to date that many community banks who don't need the government's TARP money are backing away from participating in the Capital Purchase Program, primarily because their "fear of the unknown" is being tipped into near paranoia by the fatal combination of (1) Section 5.3 of the Securities Purchase agreement (first discussed here), which gives the Treasury Department the unfettered right to change the deal terms based upon future changes to federal law, and (2) the saber-rattling coming out of many prominent federal legislators and a certain federal banking regulator (whose name rhymes with "Bear") that further changes to the deal are coming, changes that will make the acceptance of TARP funds a Faustian bargain.

At least 50 banks that qualified for aid have rejected the Treasury's funds, say government officials, bank executives and the Government Accountability Office, who cite the prospect of new strings as a factor.

Those that withdrew include many of the small, healthy banks that were supposed to be at the heart of the government's plan to restart lending. Many stepped back in the past several weeks amid suggestions by lawmakers and the Obama administration that they'll toughen terms of the aid.

Although reporter Deborah Solomon validly asserts that these rejections are evidence of "push back" against increasing federal control, I think that it's also evidence of a basic lack of trust in the good faith of the federal government in not screwing the entire banking industry, and especially the community banking segment of that industry, out of a fatal brew composed of equal parts political calculation, hubris, venality, personal agenda-pushing, and an overwhelming case of dumb-ass. When community bankers think of the federal government, including (or perhaps, especially) the federal banking regulators, Billy Joel's "A Matter of Trust" is not the song that pops into their heads. Hall & Oates' "Maneater" is more likely.

"There is a provision that allows the government to unilaterally change the rules and that is of great concern to us," said Rick Adams, executive vice president at United Bankshares Inc. of Charleston, W.Va. "There's a big fear of the unknown."

On Tuesday, United Bankshares said it was declining $197.3 million from the government because of restrictions on dividend payments, dilution to earnings and "uncertainty surrounding future requirements of the program."

[...]

The potential strings helped persuade American River Bankshares of Sacramento, Calif., to forgo the $6 million it was eligible to receive.

David Taber, American River's chief executive, said the bank didn't need the money but applied for a modest amount since the Treasury was looking to infuse healthy banks with funds. Mr. Taber said rumblings from Washington about more conditions, coupled with the ability of the Treasury to change the terms, caused bank officials to reject the money earlier this month.

Solomon also speculates that some banks applied for the funds as a public relations ploy. When the Treasury approved them for the capital injection, they could issue a press release rejecting it "to show investors that they don't need the money." The GAO also said some banks rejected the capital because they didn't like the closing costs. Although I wouldn't doubt that a few banks rejected funds for these reasons, most decided that they just couldn't bear to dance with the bear.

I think Ken Joyce, whose bank decided against even applying for TARP funds, speaks for most bankers who decided (as the Journal's headline put it) "Thanks, but no thanks."

One small bank, Rurban Financial Corp. in Defiance, Ohio, chose not to apply for funds in part over concerns that the government could prevent it from acquiring other banks. CEO Ken Joyce said the bank was interested in obtaining "cheap capital" but worried about government intrusion.

"The winning issue was concern over the unknown," Mr. Joyce said. "Life in a regulated environment is not fun and to put another layer on top of that didn't seem smart."

Full post as published by Bank Lawyers Blog on February 01, 2009 (boomark / email).