TARP Double Standard: Credit Unions and Development Financial Institutions Get Short End of Stick

With Obama’s popularity ratings plunging, one would think an obvious step would be for the Administration to move forward with measures that have good PR value and carry little political and budget risk. Yet, as Marshall Auerback noted, the Obama Administration is increasingly all hat, no cattle, making lofty popular sounding promises and not following through. Last week’s object lesson was a show of a new, tough posture toward banks on 60 Minutes, which followed up by a tame meeting at the White House with the perps, with one participant describing the session as a “PR stunt”.

A longer time frame version of the same pattern appears to be underway with an initiative Obama announced October 21 to support lending to small businesses. Consider this component:

The Treasury also is looking at ways to expand its Community Development Financial Institutions program to promote small business lending, according to the administration statement.

Some credit unions also will be eligible for capital assistance under the administration’s new plan, the first time those institutions have had access to the bank rescue funds, according to the fact sheet.

Credit unions that qualify as community development financial institutions will be able to apply for capital injections in the form of subordinated debt.

Technically, this statement has proven to be accurate. The Treasury not only was “looking at ways” to help Community Development Financial Institutions and credit unions, it appear to still largely be looking, as in not acting.

By way of background, CDFI banks and credit unions are dedicated to serving low and moderate income communities and showed credit losses that were generally no worse, and often more favorable than financial institutions that had on average more affluent customers. The reason? They did old-fashioned credit screening. And more so than large banks,

But as the crisis has become more severe, unemployment has generally hit lower-income communities harder than higher income ones. So CDFIs have been showing higher loss rates recently than they have historically, more comparable to those of other financial institutions.

Only 26 of the 64 CDFI banks have been approved to date, because the regulatory agencies imposed unrealistically high “viability” standards. By contrast, consider Fed Chairman Ben Bernanke’s justification of the original TARP funding in response to a questionnaire from Senator Bunning:

When the first nine large banks received the initial 125 billion TARP dollars, Secretary Paulson and you said those nine banks were healthy. Do you now agree with the TARP Inspector General’s finding that Citigroup and Bank of America should not have been considered healthy by you and Secretary Paulson?

On October 14, 2008, the Federal Reserve joined in a press release with Treasury and the FDIC to announce a number of steps to address the financial crisis, including announcing the implementation of the Capital Purchase Program (“CPP”). The first nine banks to receive CPP funds were selected because of their importance to the financial system at large. In fact, the SIGTARP report notes that approximately 75 percent of all assets held by U.S.-owned banks were held by these nine institutions. In addition, these first nine institutions were considered to be viable, though some were financially stronger than others. The press release referred to these nine systemically important institutions as “healthy” to indicate that these institutions were viable and were not receiving government funds because they were in imminent danger of failure.

Yves here. So you can see, the “banks were healthy” is now revealed to have mean “we thought the banks were not going to drop dead in the next 24 hours”. So why is a much tougher standard being applied to CDFI and credit unions? The obvious answer appears to be that they don’t wield sufficient political clout.

Maximizing the number of CDFI banks and credit unions participating is critical to serving credit starved and distressed communities and getting the economy moving. Small business, job creation and neighborhood restoration are important to recovery of our economy.

Now before you argue that this is putting taxpayer dollars at risk again, consider: the amount under discussion is chump change, and these banks really do lend, rather than throw money at the top brass. At 5% of risk weighted assets, the total investment in CDFI banks would be less than $600 million and less than $213 million for the credit unions (but likely significantly lower). Treasury would be making a total of $813 million in investments — that total is less than each of 31 individual financial service companies got under the TARP Capital Purchase Program.

So this is a comparatively cheap way for the Obama administration to do something to help battered communities (or cynically, blunt criticism that it is favoring well connected banksters at the expense of real people). Yet Treasury is dragging its feet. What gives?

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  1. Advocatus Diaboli

    Banksters own the legislature, executive and judiciary. Unless people realize that the old model of banking is predatory and outdated, this will go on.

    The only good news is that this cannot go on for more than a few years, because of circumstances and changes beyond their control.

  2. attempter

    This is yet another piece of evidence which must be compiled and taught in community workshops:

    1. The system, the federal government, the big banks, have no morality and no community, have unilaterally broken any social contract they ever had with Americans, so individuals should not feel any obligations toward these, for example where it comes to things like walking away from mortgages.

    2. Community and real social and contractual bonds can be rebuilt only from the bottom up.

    1. Doug Terpstra

      Excellent points. As top down fraud grows obvious moral hazard trickle down is inevitable (and necessary). Then as diseased crowns and deadwood are culled and burned, regeneration can grow from the roots.

  3. ndk

    Yet Treasury is dragging its feet. What gives?

    From my depressingly comprehensive experience coping with governments and their decision structures, I would imagine this requires fairly high level sign-off and energy, but the time and attention for that is sorely lacking due to understaffing and other priorities.

    I don’t see an ulterior motive here. I just see the good guys getting lost in the fray. This is one of the many, many drawbacks that arise from excessive centralization of power and decision-making.

    1. Doug Terpstra

      Bureaucratic inertia seems a likely hurdle, which TBTF banks kick aside. Also, where creditworthy borrowers and ventures are now extremely scarce, I wonder if “unrealistically high ‘viability’ standards” for CDFIs are not less a problem than unrealistically LOW standards for the TBTFs, delaying the credit contraction and deleveraging necessary to reach sound economic bedrock. Too much credit shoveled into inscrutable TBTFs, with unsustainable asset and commodity reflation is scarier. I don’t understand how a problem of too much debt can be solved with more debt.

      1. Skippy

        Ya gotta love a paradigm were prime dealers/IBs who’s function seems to be: facilitation/creation of Debt = proto currency so the Government can sell bonds/treasury’s = print dollars in order to pay the interest on its debt/activity’s (with nary a thought to the principle, example for home owners/public debtors *I might add*) unless they can juggle inflation of currency(cheep debt reduction) along with vaporous asset bubbles in a combative global forex/commodity/trade balance market (drowning man syndrome lol) and to *fix it all* the little people must further en-debt them selves against all good manner of prudent thought (kids its now ok to do debt drugs now/again…rofl).

        When in reality all assets must reflect the facts of their reduction post bubble [wtf? free markets] or as a matter of fact the little people must destroy debt to get their houses in order, although this kills the governments ability to financially function muhahahahahahah!

        The ultimate catch 22 don’t ya think!

        Skippy..just had Xmas drinks with family+ and chatted up Sydney clan member, man of 35 years experience in a very profitable endeavor and his view points left me gutted ie: the Market is God, every thing is a commodity to be bought and sold, which always works out for everyones benefit, I know economics for I read John Maynard Keynes!

        PS He said if Tiger has the money he should be able to do what he likes with it Cha Ching[!] its exciting!

        PSS does not know what the Fed does, Treasury, whom Timmah, Ben, Larry, et al are or what they do with regrets to the reserve currency and thinks the British move on taxing the financial sector is intervention of the worst kind arggh!!!!!!!

        PSSS Thank Yves & Co for infecting my already fragile mind after the stuff I’ve seen[!] why, why, why must we persist with this blatant lunacy!!!!!!! Why does every one need a monetary mental penis extension to feel good about them selves!!!!

        Dave R. work for food and would love to grow things that need tender loving care that put silly thoughts in monkeys brains in modicum if consumed correctly whilst viewing the night sky from under their leaves…..I know you have done such and respect that, ex plow jockey myself.

  4. Stephen V.

    There is a whole other story here, not covered in the MSM and I gather that the NCUA is prob. ok with that.


    CORPORATE (as opposed to their small natural-person CU’s) have evaporated over $1bn through investing CDS and other derivative crap. I volunteer for a local $38m CU and thanks to NCUA’s *Stabilization Program* we will pay out over $.5m when all is said & done. Corporates have a legitimate role performing reasonably priced data processing for their CU shareholders.
    NCUA is proud of the fact that they haven’t had to take any gov. handouts BUT I still think they don’t get it.
    These new Reg’s. still rely on the so-called *Nationally Recognized Statistically Rating Org’s.*
    YOU KNOW THE ONES: FITCH, MOODY’S ET AL. The guys that gave AAA to anyone who would pay their fee. These same people who are untouched by any new Fed. regulations. These ratings give the Auditors the due diligence out & allow them to say *not my job* when it comes to evaluating the crap.–both on and off balance sheet.
    The mystery to me is I don’t see the natural person CU’s banging on the Corporates for the highest imaginable rate of return (a la the Madoff so-called victims).
    So what gives?

    Their new Reg’s (this is what NCUA does

  5. Blurtman

    Do CDFI banks and credit unions have substabtial sums of other people’s money in uninsured wealth management accounts? Didn’t think so.

  6. Matt Davis

    As a strong supporter of credit unions, their independence from banks, and their ability to take care of their own problems, I’m glad TARP was never used for credit unions. We don’t need a bail out, and shouldn’t ask for one.

  7. TC

    All things point to a growing fear a run on Treasury is imminent. What you call a “PR stunt” in last week’s meeting with bankers might rather be seen an ultimatum in these, the end days of an era when the financial system has operated for decades on the mantra “inflate or die.” Having propped banks through a period of crisis, Treasury appears to be laying down the gauntlet. Now it is up to banks to get with the program they clearly own. Hence, the year-end rush to exit TARP. (One wonders how many times the phrase “Department of Justice” was used to help motivate action. A whole lot of equity was floated in no time at all! Go figure.)

    There is no way government can fully substitute for the securitization market whose end came by way of profligacy the shadow banking system promoted to the point of profound crisis, and whose odds of being resurrected via a global carbon casino have been buried in Copenhagen.

    Again, too, this matter of “all talk and no action” coming from Treasury suggests insiders are well-aware a run on Treasury is a very real risk.

  8. DCer

    Great post here. CDFI banks/credit unions (and CDBIs (banks that have metrics like a CDFI but are not certified by Treasury – see NCIF’s SPM database)) are exactly the kind of institutions we should support if we are interested in creating jobs in LMI areas.

    I found it a bit odd that you did not mention Shorebank considering they are by far the largest (and oldest) CDFI bank which is currently under FDIC C&D order (the BHC is $2bn in assets I believe) and need to raise some serious Tier 1 fast (TARP is the likely the only source interested enough and large enough to step in). It will be interesting to see if they waive the viability criteria for CDFI banks since when Barney Frank waived some TARP requirements for CDFI banks on first go round of TARP for CDFI banks he took lots of flak since OneUnited (possibly the least respectable CDFI bank out there) was the main/obvious beneficiary. Would Obama take the same flak for supporting Shorebank (in his backyard – South Chicago)?

    The Treasury/CDFI Fund may have focused its efforts more on supporting CDFI loan funds which are able to do higher risk lending (which maybe is more helpful in these times). However, injecting equity/sub-debt into unregulated CDFIs is often only leveraged 2-3x where a CDFI bank would leverage the funds 10-13x.

    I would expect to see more TARP funds used on CDFI banks in the near future.

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