Political Influence Saves Troubled Bank – Case Of Central Pacific Financial

Troubled Bank Gets US TARP Funds After Senator Intervenes

Many US officials at the Treasury and Federal Reserve have criticized Japan’s policy of propping up Zombie banks and therefore prolonging their banking crisis.  The theory was that the weakest banks made the worst lending  decisions and should be allowed to fail instead of being subsidized with taxpayer dollars.  Consider the case of Central Pacific Financial of Hawaii.
After Call From Senator’s Office, Small Hawaii Bank Got U.S. Aid

Sen. Daniel K. Inouye‘s staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.

The bank, Central Pacific Financial, was an unlikely candidate for a program designed by the Treasury Department to bolster healthy banks. The firm’s losses were depleting its capital reserves. Its primary regulator, the Federal Deposit Insurance Corp., already had decided that it didn’t meet the criteria for receiving a favorable recommendation and had forwarded the application to a council that reviewed marginal cases, according to agency documents.

Even if Inouye were directly involved, it would not violate the rules the Senate sets for itself, experts said.

Inouye reported ownership of Central Pacific shares worth $350,000 to $700,000, some held by his wife, at the end of 2007. The shares represented at least two-thirds of Inouye’s total reported assets.

Central Pacific is Hawaii’s fourth-largest bank, holding about 15 percent of the state’s deposits. In recent years, it increasingly used the money to make loans in California, funding several large residential developments. By last year, the bank was facing the consequences of California’s collapsing housing market. In July , Central Pacific reported a quarterly loss of $146 million, matching its total profit in the previous three years.

The bank faced long odds. More than 1,600 banks submitted applications to the FDIC in the three months after the program was announced, according to a report by the FDIC’s inspector general’s office. The agency forwarded 408 applications to Treasury, which approved only 267, or roughly 16 percent of the total.

Central Pacific’s situation was even bleaker because it was in trouble with the FDIC. Regulators had raised concerns about the bank earlier in the year.

In late November, still waiting for an answer, the bank’s government-affairs officer called Inouye’s office to ask that it check on the status of the application, according to Rosen.

One day after the bank’s request, an Inouye aide called the FDIC’s regional office in San Francisco, which regulates Central Pacific. Inouye said in a statement that the staffer, Van Luong, “simply left a voicemail message seeking to clarify whether Central Pacific Bank’s application for TARP funds had actually been received by the FDIC.” The statement said that the bank was soon notified that the application had been received, “and that closed the matter.”

Such contacts by members and their staff do not violate the rules Congress has established to govern itself. “Congress has never been willing to adopt strong conflict-of-interest rules for its members, but for the most part, has left it up to each member to decide for themselves whether they have a potential conflict of interest,” said Fred Wertheimer, president of Democracy 21, a watchdog group.

Two weeks after the inquiry from Inouye’s office, Central Pacific announced that the Treasury would inject $135 million.

Despite an obvious conflict of interest, the Senator from Hawaii broke no rules since there are no rules governing “conflict of interest” situations.  Taxpayer money was used to prop up a bank that made horrendous lending decisions, lost hundreds of millions of dollars, was capital depleted and prior to the Senator’s call did not qualify for TARP funds under the FDIC’s own guidelines.

The fact that a large portion of the Senator’s wealth was invested in Central Pacific makes this case of political interference at taxpayers expense even more odious.  If the financial condition of Central Pacific was so troubled that neither private investors nor the FDIC would lend more funds to the bank, why should tax dollars be used to bail out private investors in Central Pacific who made a poor investment decision?   How many additional hundreds of millions of taxpayer dollars will be necessary to save Senator’s Inouye’s $700,000 investment in Central Pacific?

Central Pacific is certainly not big enough to fall into the “too big to fail” category.  This is one troubled bank that should have been closed.

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