The WSJ reports today that nearly 100 U.S. banks that got TARP funds from the federal government in Q4 2008 are in danger of going bankrupt.

So far, 7 bailout recipients have failed, resulting in more than $2.7 billion in lost TARP funds. The balance of the remaining potential failures relatively small banks — the median size was $439 million in assets, and the median TARP infusion was $10 million apiece:

“Nearly 100 U.S. banks that got bailout funds from the federal government show signs they are in jeopardy of failing.

The total, based on an analysis of third-quarter financial results by The Wall Street Journal, is up from 86 in the second quarter, reflecting eroding capital levels, a pileup of bad loans and warnings from regulators. The 98 banks in shaky condition got more than $4.2 billion in infusions from the Treasury Department under the Troubled Asset Relief Program.

When TARP was created in the heat of the financial crisis, government officials said it would help only healthy banks. The depth of today’s problems for some of the institutions, however, suggests that a number of them were in parlous shape from the beginning.”

There are many many reasons not to bail out failed banks: Moral Hazard, rewarding the incompetent, thwarting legitimate competition, reducing incentives to be risk averse. We can add another to the list: Throwing away billions of dollars . . .

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Source:
Bailed-Out Banks Slip Toward Failure
Number of Shaky Lenders Rises to 98 as Bad Loans Pile Up; Smaller Institutions Hit Hardest
MICHAEL RAPOPORT
WSJ, DECEMBER 26, 2010
http://online.wsj.com/article/SB10001424052970203568004576044014219791114.html

Category: Bailouts, Credit, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Going Bankrupt: 100 Bailed Out Banks”

  1. Marcus says:

    Why are so many bank failures in Georgia? What structural problems do the good-ole-boys have in that State, which has caused such a disproportionate number of failures?

  2. ftobin says:

    Important information that would help the reader is the number of banks that got loans, the total size of the amount of loans under TARP, and the estimated cost of not having distributed TARP funds at the time.

  3. ftobin
    We’ve shown that information many times previously (I cant write a complete book for each post!)

    For those of you who may have missed those posts, see these two as examples:

    -Bailout Recipients
    -Which Banks Got Fed Loans During the Meltdown?

    As to the estimates of the alternative, that raises more questions:

    -Whose estimates would you like to use?
    -What were those people’s track records prior to the crisis? Did thy forsee, anticipate, warn about it in advance?
    -Is there any reason to rely on such estimates?

    The burden of demonstrating why the rules of capitalism get suspended and temporarily replaced with socialism for bankers when they get into trouble is on those arguing for such socialism.

    I don’t believe they made their case . . .

  4. machinehead says:

    The real tragedy is not the bankrupt minnows loaded with underwater residential loans in speculative areas.

    No, the truly gigantic policy error was saving the Too Big To Fail braindead dinosaurs Bank of America, Citibank and JP Morgan Chase.

    These hideous montrosities should have been busted into pieces with a blood-flecked meat ax, and their thousands of branches auctioned off to competent local and regional bankers — which actually do exist in this country.

    Subsidizing the stupid to compete against the competent — as the bailout did — is an immense tragedy. But incompetent politicians feel most comfortable with their commercially incompetent pals.

  5. Tarkus says:

    machinehead Says:
    December 27th, 2010 at 8:20 am

    Subsidizing the stupid to compete against the competent — as the bailout did — is an immense tragedy. But incompetent politicians feel most comfortable with their commercially incompetent pals.

    —————————————-

    It’s not incompetence at all. That’s the retreaded excuse to escape accountability and everyone knows it. It’s overused.

    The successful advertising is conflating the banking SYSTEM with the individual BANKS. The individual banks should be broken up to preserve and save the banking SYSTEM, which is currently still insolvent and not fulfilling the purpose of banking.

  6. ByteMe says:

    Marcus,

    The reason for so many failures in Georgia is that we have a lot of “community banks” — banks with usually less than 5 branches and in mostly smaller towns — which made a lot of bets on local real estate and don’t have a bigger parent company with deeper pockets to protect them. Both commercial and residential real estate tanked at the same time here, so they didn’t have enough diversification to withstand the write-down of assets.

    What’s not surprising is that many of these failed banks also had directors who are state legislators serving on the banking committee that writes the rules to regulate state banks.

  7. rktbrkr says:

    We know more about these smallish banks on the brink than we do about the current state of affairs at the TBTF who are sitting on a couple million foreclosures. I guess we’ll find out late some Sunday night when Ben and Tim release a PR describing some precautionary loans & guarantees made to the normal too big suspects.

  8. Frank Tobin says:

    Thank you for the links, Barry. As to the first two questions, I did try to do some searching for the numbers, but couldn’t find anything that the gave relevant totals. I was just trying to point out that as a reader, I didn’t have a good feeling if 100 banks is a big or small number compared to the total number of recipients (about 950 according to your link), or if the $4.2 billion was a significant part of TARP outlays ($600 billion). I don’t trust the WSJ to not give inflammatory numbers that might be large in absolute terms but small in relative terms.

    As to the alternate, I will only defer to your expertise.

  9. Bill W says:

    “…government officials said it would help only healthy banks…”

    Do healthy banks need bailouts? What a silly statement. Is it a good or bad thing that they never meant it?

  10. cognos says:

    BR –

    You are wierd on this “bank bailout” issue.

    1) These bailouts were massively profitable for the US Govt and taxpayer. Almost all TARP monies were paid back. The govt got 5% pref interest (versus 0% borrowing cost) PLUS warrants that typically made IRRs 15% or higher. The total profit is $50B+. Programs like PPIP and TALF worked even better.

    ~~~
    BR: 1) This is a false statement.

    So far, 938 Recipients have had $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned.

    If you think “less than half” somehow equals “almost all,” you need to take 3rd grade math again.
    ~~~

    2) Turns out the “Mark-to-Market” fiasco is about absurdly LOW marks in the crisis. Some bonds that were “marked” at $3 in the crisis today are worth PAR! Seriously, from 3 back to 100. Overall, returns to HY and distressed from Jan 2009 or Mar 2009 are in EXCESS of 100% as a basket. What was so important about those “marks”? Why dont you acknowledge that — IF a loan is going to end up paying 100% — then why mark-to-market at $5? Its stupid. Its bad regulators and bad regulation. It is a system that cannot ever survive.

    ~~~
    BR: Banks ALWAYS had the option of moving this paper to a “Held to maturity” account — but then they would not have been able to mark it up when the market was rising. They want a non-symmetrical ratchet approach — market to market when it s above PAR, but mark to model when its below par. What fool would ever fall sucker to that? (Oh, sorry, my bad).
    ~~~

    3) Why dont you understand the whole point of “regulators” and “regulation” is that there IS “systematic risk”? A bank run, can happen, basically did happen. And it is easily solved by having the US govt and Federal Reserve play the role of “lender of last resort”. This is OK. Its still capitalism. Its not really a bailout and it has nothing what so ever to do with “socialism”. And its definately for the benefit of all.

    ~~~
    BR: Taking insolvent banks on the verge of failure and giving them billions of dollars is not a bailout? ? My bad (again) . . .

    ~~~

    4) What would you have liked to see done differently? (An effective argument can be made that the “bailout” or “lender of last resort” role could’ve been played from the bottom up. A restructuring of many home loans made during the crisis could been done through the individual borrower / tax payer channel. I can understand a populist argument here. Though this would’ve benefitted most those citizens who made the biggest mistakes and borrowed the most against the worst priced houses. Plus it probably would have “cost” much, much more. It was not done, most likely simply because it is a bigger logistical hassle and no one had the vision.). That said, “bankrupting” more banks or people just seems stupid. That doesnt help anyone. And would just magnify the problem. That is the exact road to the great depression, massive deflation, etc. Why cause that outcome (on principle)… it is completely useless and unnecessary. Save the system, back to work.

    ~~~
    BR: Banks should have gotten the GM treatment: Prepacked bankruptcy, sell off the bad debts for 15 cents on the dollar, fire senior management, wipe out shareholders, re-privatize the new well-captialized entitiy with a clean balance sheet. Seel everything to the market, give the balance to the bond holders.
    ~~~

    5) Finally, lets say the economy and market continue to recover. GDP growth in 2011 beats expectations and job growth returns in at least a moderate amount. Will you then acknowledge… this was an adequate handling of the crisis? That the measures taken, for the most part… worked? When would you acknowlege that?
    ~~~

    BR: What would have happened had this been handled correctly/better? What is the outcome of the counter-factual?

  11. cthwaites says:

    “The burden of demonstrating….is on those arguing for such socialism”

    Agree…and Diamon/Vikram et al are notably silent on the matter. Even the repayment by C against its $130bn loss is touted as “profit” for the taxpayer….thus ignoring all concepts of CAPM and the exposed risk. When I’m asked about when it’s time to get back into financials (and I admit I’ve missed a few rallies) is when a) the market realizes that normalized non-leveraged ROE for the banks is about 300bp over the GT10 and b) when they change the management responsible for the mess in the first place.

  12. me says:

    We did not capitalize the banks hence they are still bankrupt. They haven’t recognized their losses yet and just shovelled the baoilout into bonuses. As long as the same quacks are running the system it is still broken. Read Gordon Brown’s tome.

  13. mathman says:

    Let’s hear it for fractional reserve banking!:

    http://www.lewrockwell.com/orig9/polleit3.1.1.html

  14. Marcus says:

    @ByteMe

    Thanks ByteMe for insight on Georgia banking.

    I have been tracking banks in trouble for 3-4 years and noticed that Georgia seemed to corner the market on weak, small banks. I sent emails to expat friends several times, to move their money from X-Y-Z Georgia bank, which had hit the in-trouble list.

    Barry did not address the issue of small banks and their value to the local communities they serve. One tragedy of so many bank failures is the loss of banking options.

    In addition to bad loans caused by the real estate bust, I would like to know how many institutions were compromised by holding “safe” derivatives, the CDOs of 2007, crippled by those AAA rated losses.

    I’m a fan of supporting the local economy over mega-multinational’s profit line. Local banks are just one example of our local economies being attacked, in this case by TBTF, the Fed-supported big banks. Local banks and credit unions are an antidote for TBTF. They need to be protected, especially from the best Congress money can buy.

    Some of us are fighting back with our wallets. Local farmers markets as an example keep local agriculture in place. Here in central North Carolina in the past 10 years, we have developed several dozen dairies specializing in locally made cheese. Fresh cheese of all kinds. Every college town has a local hors oeuvre that is served at faulty parties. A favorite of the UNC crowd here in Chapel Hill is to fill peppadew sweet peppers with local goat cheese and use a toothpick to pick up the messy things. (Try it with your own goat cheese for a holiday taste treat). Yummmmm!

    We have 45 new microbrewers in the State, most started within the last decade or so. Try the UNC hors oeuvre with some of your own local goat cheese, with your local microbrew, and feel good about reversing the multinational trend (sorry InBev).

    Every week I run into a former small business owner, or their former employee, who lost his/her small business in the last decade to Wal-Mart, CVS, Home Depot and the rest. Have you priced a simple kids toy at Wal-Mart lately? Try to find one under $20. Who in Washington is representing those lost jobs?

    We need to encourage small banks (maybe not the Georgia model), and recycle revenues into our local economies wherever possible.

    That’s My New Years Wish

  15. Marcus says:

    Oops! I know it’s hors d’oeuvre.

    That was just slip of the keyboard.

  16. DeDude says:

    I have always agreed that we should have gone Swedish with our Banks (but with the idiotic Soc!alsmeophobia in this country that option didn’t stand a chance).

    If the total loss on the $550Billion dispersed ends up being $7Billion (if only those listed as in jeopardy of failure, ends up failing), then the financial cost will easily be covered by the $50B of revenue collected so far. But exactly how are they defining “jeopardy of failure” and did they examine all entities receiving TARP or only the banks.

    What worries me is that we still have $330billion outstanding. About $230B of that are Fannie, Freddie, GM and AIG. That leaves about $100B with banks and financial institutions. I do not understand why ANY bank would still borrow on TARP conditions. If they have not yet paid back, does that mean they cannot get money cheaper anywhere else – and what does that say about their potential for failing.

  17. I am just curious, if a bank who received Tarp (our taxes) money in period T+0 goes under, who pays back the Tarp money? Tax payers in period T+1? Seriously, how will this unfold and who will assume the liabilites of the failed bank(s)? For example, would/are the Tarp funds qualify as a libability; as I recall, some banks were incentivized to repay Tarp funds — some took this opportunity, and perhaps others did not.