98 TARP Bank Recipients May Still Fail

The headlines are all a buzz over this Wall Street Journal article, declaring bailed out banks may fail. These 98 banks have received $4.2 billion in TARP funds, a token amount in comparison to the Banksters.

In Q2 2010, the number of TARP recipient banks who would fail anyway was 86. That said, every Friday at business close we get more bank failures. The tally for 2010 alone being 157.

Calculated Risk runs the unofficial problem bank list, currently outlining 919 problem banks. Most of these of the list did not get TARP funds.

There are also reports of the FDIC selling failed banks assets to TARP recipient banks, for pennies on the dollar and holds large amounts of seized failed bank assets.

The FDIC closed on the sale of $279 million of assets from nine failed bank receiverships. The winning bidder of the asset pool was Cache Valley Bank, Logan, Utah, with a purchase price of 22.2% of the unpaid principal balance of $279 million. The failed bank assets will be placed into a newly formed limited liability company (LLC) with the FDIC retaining a 60% stake and the balance owned by Cache Valley Bank.

The FDIC offered 1:1 leverage financing to the LLC with a 0% interest rate. The LLC will issue a Purchase Money Note in the amount of $30.6 million to the FDIC which will be repaid from disposition proceeds of the failed bank assets. Cache Valley will service, manage and ultimately dispose of the failed bank assets held by the LLC.

The $279 million of failed bank assets consist of 761 distressed residential acquisition and development loans. 81% of the collateral backing the failed bank assets are located in Arizona, Utah, Nevada and California and more than 50% of the portfolio is delinquent.

These 98 TARP recipients are small banks with $439 million in assets on average or $43 billion, according to the Wall Street Journal. By comparison, the 3 largest banks in the United States have about $6 trillion in assets. Another writer questioned the story on the Wall Street Journal's criteria to determine failing banks.

Taking a closer look at the analysis, though, I’m not sure the Wall Street Journal’s findings are as striking as they look at first glance. In explaining its methodology, WSJ says it considered a bank troubled if it met one of three criteria:

  • A total risk-based capital ratio below the 10 percent level that regulators typically consider well-capitalized;
  • A tier 1 capital ratio, another important measure, that’s below 6 percent;
  • “An enforcement order from regulators, issued since the 2007 beginning of the financial crisis, requiring the bank to monitor or boost its capital levels.”

The first two criteria are a given. Every quarter, I’m going over bank financial reports filed with the U.S. Federal Deposit Insurance Corp., and producing a list of Twin Cities-based banks with total risk-based capital ratios below 10 percent. (None of the banks on my “fallen into risky territory" list took TARP funds.)

It’s the third criteria that’s tricky. This year alone, I’ve written about more than a dozen cases of the Minnesota Department of Commerce and FDIC hitting banks with consent orders that included capital ratio requirements. Some of the banks were financially troubled. Others, though, were not; the orders seemed to be more of a precaution.

I must also comment that the headline is a bit sensational. The real story is the FDIC bank failures, and for every one of those closings, more fire sale mergers and acquisitions are happening.

To have smaller TARP recipient banks fail should be no surprise considering the weekly roundup and slaughter of small banks by the FDIC. TARP seems to have not done much but give the Banksters, i.e. Goldman Sachs, JP Morgan Chase, Wells Fargo, Bank of America, more power, now really too big to fail, versus just to big to fail previously. Oh yeah, TARP funds saved the U.S. auto industry, which ain't too shabby.

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