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« Blog Talk Radio | Main | You're So Vain, You Prob'ly Think This Post Is About You »

Nice Little Bank You Got There

Initially, I was in favor of the TARP. I believed it was necessary and useful to buy up distressed assets quickly, and provide reassurance to bank shareholders and managers. I still believe that had that been done, we could have avoided what we seem to be headed for - a replay at some level of 1930-31, with all its economic and financial uncertainty, with the Fed doing the right things, and the rest of the government making the same mistakes, that dwarf the Fed's ability to respond.

Let's just say that isn't how things have turned out. Instead, we've gotten an object lesson in what happens when you go into business with the government.

What happens is that the government may hold some of the shares, but it holds all of the cards. The government receives shares and/or preferred stock for its investment - often non entirely voluntary on the part of the banks. And then it proceeds to behave as though it were the only shareholder.

Executive pay is only the most obvious example. The Mugging of Bank of America, forcing it to swallow Merrill at its original price, is another:

In other words, the feds believe that the way to calm financial markets is to force the nation's largest, and a heretofore healthy, bank to swallow toxic assets it didn't want. In return, yesterday the Treasury agreed to invest $20 billion in BofA, for which the government will receive preferred shares paying 8%. Treasury, the FDIC and the Fed will also partially insure $118 billion in troubled assets -- mostly Merrill's. In return for this downside protection, BofA will have to render unto Caesar another $4 billion of preferred stock plus warrants.

These preferreds will also pay 8%, but private shareholders are not so fortunate. The agreement limits quarterly common stock dividends to a penny a share.

Other healthy banks, state and regional banks who weren't in trouble to begin with, were, ah, encouraged to take money they probably didn't need, money that's turning out to be expensive in more ways than one:

Bankers' Bank of the West

At year-end 2008, Bankers' Bank of the West had a risk-based capital ratio of 12.4 percent, high enough to be considered very well capitalized.


The bank issued the government preferred stock that pays 5 percent interest, plus another batch of preferred stock, equal to 5 percent of the amount requested, that pays 9 percent.


"It's extremely expensive capital, but we did this as a good-faith investment for our banks," Mitchell said. "The government will do very well on this program."

So the bank is over-paying for capital it doesn't need and can't invest, setting up trouble down the line. Thanks, Uncle Sam.

First Western

"For a growth company like us to raise new equity, people are looking for 15 percent to 20 percent returns over time," Wylie said. "To get preferred stock from this program is an inexpensive form of capital."

First Western's assets nearly doubled in 2008 to about $450 million. At the same time, its capital ratio was above 10 percent, Wylie said.

"We were encouraged by the regulators to do it, so we asked our investment bankers and lawyers whether we should take it because of the possible stigma," Wylie said. "They said, 'You're already a kind of partner with government because you're highly regulated.' (emphasis added -ed.)

All banks are highly regulated. That doesn't mean they're in business with the government. This is also an admission that there aren't enough high-growth areas to invest in right now, and not for the foreseeable future, either. If you could get 15-20% in this environment, wouldn't you invest in these guys? Of course you would.

CoBiz Financial

CoBiz Financial, the parent company of Colorado Business Bank, struck a deal with the Treasury in November. For its $64.5 million, it issued preferred stock to the government that pays 5 percent for the first five years and 9 percent after. Because the bank has publicly traded stock, it also had to give the Treasury warrants to purchase 895,968 shares of CoBiz common stock at an exercise price of $10.79 per share.


By the end of the third quarter, before the provision, Colorado Business Bank still had a risk- based capital ratio above 12 percent. It was 14.5 percent at Dec. 31.

"The thought was we would take advantage of (TARP) and shore up our capital base," said CoBiz CEO Lyne Andrich.

"In this environment, more capital is always better than less. We're going to use it for growth. We believe this environment creates a lot of opportunities for acquisitions, but we didn't take the capital primarily for that purpose."

Again, if growth opportunities were out there, the bank was well-enough capitalized to lend as it was. If they aren't, they're shoving government money at questionable investments. And if acquisitions are the best way to grow, that in and of itself will provide a better home for those banks' assets.

There are a lot of reasons why bank nationalization is scary. And right now, we seem to be getting them all, even without the nationalization.


Just think, we can call ourselves, the fascist states of America...has a nice ring to it don’t you think?

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