In what any sensible person knew would eventually happen the moment the program was announced, Banks are now scrambling to return bailout funds.

A growing number of healthy bank chains across the country are bailing out of the $700-billion federal banking bailout program, saying it has tarnished the reputation of banks that took the money and tangled them in unwieldy regulations.

When the program began last fall, it was billed by then-Treasury Secretary Henry M. Paulson as an investment in strong banks to make them even stronger.

But not long after the program began, it became clear that the bulk of early funding was going to a handful of financially crippled giants such as Bank of America Corp., Merrill Lynch & Co., American International Group Inc. and Citigroup Corp.

“It was supposed to be a badge of honor if you were able to get this money, but now it’s a badge of honor if you didn’t take it, with all the bad publicity it has attracted,” said Alan Rothenberg, chairman of 1st Century Bank in Century City.

Rothenberg’s bank took a look at the Treasury program and decided to avoid it.

More than 100 banks were approved by federal regulators to get money under the Troubled Asset Relief Program, or TARP, and then backed out before getting any, a senior Treasury official disclosed.

But a growing number of banks that have received the money now want to give it back.

“The TARP money is tainted and we don’t want it,” said Jason Korstange, a spokesman for Minnesota-based TCF Financial Corp., which received $361 million and announced this month that it wanted to pay it back. “The perception is that any bank that took this money is weak. Well, that isn’t our case. We were asked to take this money.”

The bank issued a toughly worded statement earlier this year, saying that the money had put the financially strong banking chain at a “competitive disadvantage” and that the bank now believed it was “in the best interest of shareholders” to return it.

Chicago-based Northern Trust Corp., which took $1.5 billion, seems even more anxious for a quick exit. It found itself the object of national ridicule several weeks ago when it put on a golf tournament for its well-heeled customers at the Riviera Country Club in Pacific Palisades.

Frank, one of the toughest critics of the banks, was caught up in his own bank bailout controversy when he inserted legislation to assure TARP money for a bank in his own district. He defended that action by saying the bank was a victim of the credit meltdown, not a cause of it.

After the initial program was enacted, Congress went back and added provisions that covered executive compensation, financial disclosure requirements and conditions on acquisitions and mergers, Abernathy said.

“It was not popular when it was born and it didn’t get any more popular as time went by,” he said. “They added so many strings to it that it is pretty much unworkable.”

“The real issue was the clause that the government could change any of the terms,” he said. “It was so open-ended.”

The real issue is TARP was fatally flawed from the beginning. Interest rates on the loans started at 5% and rising to 9% after 5 years. What bank can profitably make use of funds at that rate in this environment? The correct answer is none, at least without taking undue risk.

Bazooka Theory Revisited

Flashback October 15 2008: In Compelling Banks To Lend At Bazooka Point I stated “Someone needs to tell Paulson to go to hell but no one at the table had enough courage to do it [refuse the money].”

Now that Paulson is gone, banks are doing the sensible thing, returning the money. And so another Bazooka Point policy has failed.

Does anyone recall the original Bazooka theory? If not, here it is: “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” Paulson said at a July 15 Senate Banking Committee hearing.

So much for Bazooka Theory.

Mike “Mish” Shedlock
Click Here
To Scroll Thru My Recent Post List