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34 Banks Miss TARP Dividends and Almost No One Notices

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I will confess I missed a post opportunity Thursday AM, when an alert reader sent a link to a USA Today story, “34 banks don’t pay their quarterly TARP dividends, ” but I decided to return to it precisely because it has gotten little attention:

The U.S. taxpayers’ investments in smaller banks are increasingly at risk.

In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury’s judgment in approving these banks as “healthy,” a necessary step for them to get TARP funding.

“The banks are not paying their dividends because they are worried about preserving capital,” says Eric Fitzwater, associate director of research at SNL Financial.

Of the 34 miscreants, two are pretty large, namely AIG and CIT, But the next on the list is First Bancorp, which received a mere $400 million from the TARP. Probably more important than the number is the trend, since the number of institutions that skipped dividends nearly doubled. In a supposedly improving economy and with a steep yield curve (at least until very recently), things appear to be getting worse rather than better.

I didn’t post on this because I assumed the MSM would be all over it. So I am pretty surprised to see it has gotten very little coverage. The usual suspects (Bloomberg, Financial Times, Wall Street Journal, New York Times) were silent. Huffington Post linked to the USA Today story. Reuters featured it only via Rolfe Winkler, who had some useful commentary:

When stronger banks including Goldman Sachs, Morgan Stanley and American Express repurchased warrants at modest premiums after paying back TARP, most news reports suggested that taxpayers were profiting from the bailout. But those reports didn’t tell the whole story.

For one, they ignored adverse selection, the propensity for the best borrowers to exit the program first, leaving Treasury holding the poorest performing investments. According to the latest data from Treasury, 42 banks have paid back some or all of the cash they got from TARP’s Capital Purchase Program, $70.7 billion in total. But more than 600 banks remain in the CPP program. Together, they still owe $134 billion.

And this excludes other TARP bailout programs that are likely to cost billions. The automotive industry owes TARP $80 billion. And AIG owes TARP $69.8 billion. Much of that isn’t coming back.

It’s also myopic to view TARP in isolation. Take Citigroup. After converting its preferred equity investment to 7.7 billion common shares at $3.25, Treasury is showing a paper profit of $11 billion. Sounds great, right?

But Citigroup’s common equity would long ago have fallen to zero if other bailouts, in particular FDIC’s debt guarantee program, weren’t insulating shareholders from losses.

Citigroup is the only large bank still using the FDIC’s program. Two weeks ago, the bank sold another $5 billion worth of guaranteed debt, bringing its total issued under the program to $49.6 billion.

The bottom line is that the government still stands behind the banking sector. While the cost of this “no more Lehmans” policy may not be known for years, our experience with Fannie Mae and Freddie Mac tells us that such implicit guarantees ultimately prove very expensive. The fact that more banks are falling behind on dividend payments reminds us the tab is growing.

Is this mere oversight? Financial crisis fatigue? Nary a bad word will be said about the TARP? Hard to say….

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8 comments

  1. Richard Kline

    Eric Fitzwalter: “The banks are not paying their dividends because they are worried about preserving capital.”

    Here, let’s translate this bankerese. ‘The banks are not paying their dividends because _their continuing losses far exceed the regulatory forebearance which nominally is accounted as their reserve capital_.” The ‘green manure’ recovery supposedly underway produced by printing up bales o’ bills jiffyquick and mulching them on the beds of the bankers’ rosebushes has purches much ink and many politicians but nothing in the way of actual real economic output, to say nothing of ‘growth.’ There are just sooo many loses _still_ in the pipeline, it is, to me, an example in stress-induced hallucination that anyone even thinks these banks are saveable to say nothing of sound.

    —And even with all that fakery, these dead banks _still_ couldn’t come up with a few hundred million to make the fraud talk like it means it. *hmmph* But looking at Congress and the US Executive, it’s clear that ‘failure to comply’ has no price, so why bother? I mean the public, they don’t have a vote in this, am I right?

  2. Hugh

    The whole financial sector is bankrupt. Banks, investment banks, hedge funds, private equity, pensions, bonds, insurance, it is all paper chasing itself. It is all bad debt that all are trying desperately to ignore. We don’t have just one emperor with new clothes we have a whole kingdom that is naked.

  3. Joseph j7uy5

    The Pew Research Center’s Project for Excellence in Journalism recently published a report:

    http://www.journalism.org/analysis_report/covering_great_recession

    This report shows that the media are tapering off in their coverage of the financial crisis: “Once the economic situation showed some signs of improvement—and the political fights over legislative action subsided—media coverage began to diminish.”

    The report shows clearly that journalists takes their cues from politicians. Reality, it seems, is not what drives the news. Journalists, even the ethical ones, try to report what is salient. Unfortunately, their primary index of salience is the degree of political buzz that the subject engenders.

  4. Jane Quatam

    Its not news most journalist report,its economic propaganda. The real truth lies where it always has waiting to be discovered and dissemenated.

    It seems the entire world economy is just a dream and if we all awaken it will melt away. They must keep us asleep for if we awaken the world they exist in will perish.

    Where is our refuge? The world will always go on, but this particular incarnation seems to be about finished, what rises from the ashes?

    It seems no matter how large the cracks and fractures in our institutions become, the camera stays firmly pointed at the facade. Its really just a matter of time now, a few months a year perhaps and the real nature of our dilemma will become more apparent to those who know rest their heads firmly in the sand.

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