How Many Times Can A Failed Bank Be Rescued?

TARP Funds Fail To Save Some Banks

Most of the headline news on the banking industry centers on the largest banks paying back TARP funds previously received from the US Government.  Less focus is being given to the numerous smaller banks in the country that received TARP money but apparently need additional bailout funds as mounting loan losses deplete capital.

Consider three banks that previously received TARP funds but cannot afford to pay the Government the dividends owed for the TARP capital infusions.

Three Banks Suspend TARP Dividends – WSJ

Pacific Capital Bancorp, a Santa Barbara, Calif., lender that got $180.6 million from the Treasury Department in November, has since posted net losses of $49.7 million. Pacific Capital said Monday that it suspended dividend payments on its common and preferred stock as part of a wider effort to save about $8 million per quarter. A bank spokeswoman confirmed that the U.S.’s preferred shares are included in the dividend freeze.

Seacoast Banking Corp. of Florida, of Stuart, Fla., and Midwest Banc Holdings Inc., of Melrose Park, Ill., have also halted their TARP-related dividends, citing the banking industry’s turmoil and a desire to fortify their balance sheets.

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week. The halted dividends also raise questions about the Treasury’s assertions that the capital infusions represented sound taxpayer investments because they were only going to healthy institutions.

“Here the government has given the banks money at great terms, but the fact that they can’t keep up with it is worrisome,” said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. “It tells you of the deep problems of community and regional banks.”

Gerard Cassidy, a banking analyst at RBC Capital Markets, said he was surprised that some TARP recipients “already are in such difficult financial situations” that they are no longer making dividend payments. “It goes to show you that the due diligence performed by the Treasury was not sufficient.”

Mounting loan losses at many smaller banks across the country indicate that the banking crisis is far from over.  Many of the weaker banks are apparently being allowed to stay open by the FDIC based on “hope” that the economy will improve and asset values stabilize.  Most of the banks finally closed by the FDIC this year probably should have been closed much sooner based on their depleted capital, large loan losses and poor lending policies.  When the FDIC completes the hiring of new staff needed to handle the crush of failing banks, expect to see many more bank closures this year.