Is TARP Working or Not?

Posted on Tuesday, January 4, 2011

WASHINGTON, DC-New figures released by the Treasury Department and analyzed by such media outlets as the Washington Post and the Wall Street Journal suggest that TARP -the widely-criticized government bailout of the US financial system in 2008-is not working as well as intended. Nineteen financial institutions that received assistance from the bailout have missed six or more dividend payments [] required under the program, the Washington Post reports. Last quarter that number was seven. Furthermore, the number of banks that failed to make at least one of these payments reached 132 as of 4Q10.
The Wall Street Journal found, after analyzing Treasury Department data, that 98 US banks which participated in TARP are showing signs they are in jeopardy of failin []g. This is up from 86 in the second quarter 2010. These 98 institutions received more than $4.2 billion in TARP funding.
But before critics of the program get out their pitchforks and torches, an analysis by Linus Wilson, assistant professor of finance at the University of Louisiana at Lafayette, should be considered. Wilson, who has been tracking the government bailout programs of TARP and PPIP, tells that while the number of banks that have missed their dividend payments to TARP is up this quarter, it is not by a huge amount,.
More significantly, he believes the number of banks missing payments will start to slow as the Treasury Department picks up its restructuring activities of failed and failing banks. "What Treasury has been doing for the last several months is restructuring these banks with private equity investments or selling them through merger agreements-and accepting less than par, perhaps 20%." He points to Sterling Bank in Washington as an example of a bank undergoing a structuring. "All of these banks will be moved off of the deadbeat list because they are being written off, essentially." Treasury will step up these activities in 2011, Wilson predicts.
Another reason why Wilson foresees a drop-off in banks that fail to make dividend payments is the recent roll out of the Small Business Lending Fund. This gives community banks that are struggling more attractive finance options than TARP. Granted, it is only available to banks that are not behind on their dividend payments, but it will keep more community banks from slipping into that category as they transfer into this program, he says.
By Erika Morphy

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