April 2009 Archives

April 30, 2009 2:36 PM

SEC To Review Public Disclosures By TARP Recipients

  by AVI KLEIN

The Securities and Exchange Commission has opened a review of public disclosures made by companies that received government bailout money.

Reuters reported that SEC chairman Mary Schapiro said her office was concerned about the quality of information that bailout recipients have been providing to investors.

The issue of disclosure to investors,  while important in even the best economic climate, has grown in importance since the economic collapse began last year, wiping out billions of dollars in equity.

Moreover, critics have raised questions about what the recipients of the money are doing with it. When it began, the government said the purpose of the $700 billion Troubled Asset Relief Program was to encourage lending by financial institutions.

Few of the banks that have received the money, however, have been willing to say how they are using it, while others have promised to return the money in order to avoid what they perceived as onerous regulations by the Treasury Department.

Questions about disclosure have also complicated Bank of America Corp.'s purchase of Merrill Lynch & Co. Critics, including New York Attorney General Andrew Cuomo, have said that senior officials in the Bush administration pressed Bank of America executives to minimize disclosure of losses at Merrill Lynch in order to make sure the deal went through.

In related developments, three U.S. senators introduced legislation this week to increase transparency in the bailout program.

The TARP Transparency Act, sponsored by Senators Mark R. Warner of Virginia, Mel Martinez of Florida and Sherrod Brown of Ohio, would create a single database to organize information about TARP recipients and contractors.

"Our legislation creates a database and auditing system that will collect and disclose this information in a consistent and standardized format," Warner said. "Greater TARP transparency will allow regulators to be more proactive in protecting the taxpayers' investment, and it will help us spot potential waste, fraud and abuse."
April 29, 2009 2:55 PM

Citigroup Seeks Treasury OK on Bonus Plans

  by AVI KLEIN

Citigroup Inc. has asked the Treasury Department for permission to pay special bonuses to key employees.

According to the Wall Street Journal, Citigroup Chief Executive Vikram Pandit told Treasury Secretary Timothy F. Geithner that the company faces an exodus of top-level talent if it is unable to meet their compensation expectations.

The payment of large bonuses to executives of companies that needed taxpayer money to survive has been a major source of controversy since the bailout began last year.

Under its proposed exception, Citigroup, which received $50 billion under the Troubled Asset Relief Program, would distribute retention bonuses in the form of stock rather than cash.

Although the company hasn't settled on a formal bonus plan, insiders say the general outline could involve stock awards that vest over three or more years. The bonuses "likely would be worth the equivalent of at least 50 percent of an employees cumulative pay over the past three years," the Journal reported.

In addition, Citigroup is looking at the possibility of spinning off a major subsidiary in order to avoid compensation limits on its personnel. Executives said that the company's main energy trading group, Phibro LLC, is under severe strain because of the pay restrictions, with employees threatening to join other firms.

Phibro, which was not involved in the securities derivatives trading that marred Citigroup's balance sheet starting last year, is widely considered one of Citigroup's best and most profitable units.
April 28, 2009 11:07 PM

Treasury completes 12 more TARP investments

  by CHRIS CAREY

The Treasury Department  has completed 12 more investments in U.S. banks, using nearly $122 million in taxpayer capital.

 

All but one of the banks were new to BailoutSleuth's running tally of institutions that have announced their participation in the $700 billion Troubled Asset Relief Program. The latest deals included the first closely held, S-corporation bank to be approved for government aid.

 

That bank, Frontier Bancshares Inc., of Austin, Texas, got $3 million. Many small town banks are structured as S-corporations, and those types of companies were not expressly provided for under the original TARP legislation approved by Congress last October.

 

Standard Bancshares Inc., of Hickory Hills, Ill., got the most money in the recently completed deals, selling $60 million in preferred stock to the government. The company said in its annual report to shareholders that its earnings fell to $5.67 million last year, from $17.6 million in 2007. It cited higher loan-loss provisions and losses on investment securities as major contributors to that decline.

 

Business Bancshares Inc., of Clayton, Mo., got $15.0 million in TARP money, while Peoples Bancorporation, of Easley, S.C., got $12.7 million.

 

Mackinac Financial Corp., based in Manistique, Mich, received $11.0 million in taxpayer capital. It reported profits of $1.87 million last year, down sharply from $10.2 million in 2007. The company, which operates mBank, would have been in the red without a $3.47 million gain from a legal settlement.

 

The other banks getting government money were:

 

York Traditions Bank (York, Pa.) -- $4.87 million

Grand Capital Corp. (Tulsa, Okla.) -- $4.0 million

Allied First Bancorp (Oswego, Ill.) -- $3.65 million

Oregon Bancorp ( Salem, Ore.) -- $3.22 million

Birmingham Bloomfield Bancshares Inc. (Birmingham, Mich.) -- $1.63 million

Vision Bank-Texas (Richardson, Texas) -- $1.5 million

Indiana Bank Corp. (Dana, Ind.) -- $1.31 million

April 28, 2009 3:29 PM

Inspector General Opens Six Bailout-Related Audits

  by AVI KLEIN

The inspector general overseeing the Troubled Asset Relief Program has launched six audits, looking into such matters as executive compensation at companies that got taxpayer capital and the role of external influences in awarding bailout money.

Neil M. Barofsky, the inspector general for TARP, announced the audits in a quarterly report to Congress last week. The office is one of a number of oversight bodies charged with ensuring that the $700 billion dedicated to the program is spent properly.

The six audits trace areas of growing public concern about the bailout. One of them, for instance, examines how TARP recipients are handling the question of executive compensation.

TARP rules limit the tax deductibility of executive compensation to $500,000 per employee, and impose restrictions on incentive compensation and "golden parachute'' payments for departing executives. These restrictions have been controversial and even prompted some banks to return the money rather than submit to them.

The inspector general's office also is investigating the handling of bonuses at American International Group Inc. After the federal government spent $152 billion bailing out the insurance giant, it announced that it was obligated to pay up to $1.2 billion in bonuses to its executives, some of whom were in the derivatives department that led to the company's near-collapse.

Critics also have raised questions about the effect of external influence on the awarding of bailout money, including pressure put on Treasury by members of Congress and certain industry officials. The inspector general's office said it was conducting an audit on that matter as well.

"This audit seeks to determine what procedures are in place to avoid undue outside influence on the process, whether there are any indications of any undue influence, and what actions might be needed to strengthen existing processes to avoid such undue influences in the future," the report said.

The two other audits under way concern an examination of how TARP recipients are spending the money, and a close look at the Treasury's decisions to bail out the first nine institutions to qualify for the program.

That audit, the inspector general's office said, evolved out of an examination of the review and approval process leading up to the decision early in the program to bail out Bank of America Corp. and support the bank's purchase of Merrill Lynch & Co.
April 28, 2009 12:41 PM

Treasury Rejected Oversight Suggestions

  by AVI KLEIN

The Treasury Department rejected a suggestion by the top watchdog overseeing the Troubled Asset Relief Program that it require participants to account for their use of taxpayer money through internal controls and sworn, periodic reports.

Neil M. Barfosky, special inspector general for the $700 billion TARP initiative, noted in his quarterly report to Congress last week that Treasury said it would not adopt those recommendations. In that report, he said that the possible expansion of TARP to include insurance companies made disclosure more important than ever.

"The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP," the report said.

The inspector general's office made a similar recommendation in a previous report. In the most recently released assessment, it said that Treasury had rejected its specific recommendations that all TARP recipients be required to:

  • Account for the use of TARP funds
  • Set up internal controls to comply with such accounting
  • Report periodically to Treasury on the results, with appropriate sworn certifications
So far, disclosure requirements have been limited to broad summaries of general lending activities that do not identify how the money received under TARP was spent.

Barofsky's office decided in January to seek more detailed information by surveying the 364 companies that had received funds through the end of that month.

"Although the results of the survey still need to be analyzed, one thing is clear: Treasury's arguments that such an accounting was impractical, impossible or a waste of time because of the inherent fungibility of money were unfounded,'' the report said.

"Banks generally provided a reasonable level of detail regarding their use of TARP funds, and, while the response quality was not uniform, some banks were able to provide detailed, at times even granular , descriptions of how they used taxpayer money.''

The inspector general's office also warned that the Term Asset-Backed Securities Loan Facility was vulnerable to fraud and offered a series of recommendations to prevent it.

Under the TALF program, the federal government lends money to investors who buy securities backed by consumer loans. How these securities should be valued is a critical and controversial question, because if the government lends money based on inflated values, it could lose money disproportionate to the risk if the loans fail.

To avoid the risk of fraud and self-dealing, the Treasury ought to require public disclosure of the borrowers posting the securitized collateral, the inspector general's office said. In addition, it recommended that Treasury conduct independent assessments of the values of the securities, rather than rely on the judgments of ratings agencies.

Those agencies have come under criticism in the last year because of their positive reviews of many of the mortgage-backed securities that contributed to the current economic downturn.

The inspector general's office also recommended that Treasury provide "clarity" on the question of executive pay for firms participating in the TALF program. The program has drawn fewer participants than expected, in part, some believe, because of concern that participation will make them vulnerable to limits on how much they can pay their top employees.
April 27, 2009 12:25 PM

Oversight Panel: Bailout Succeeding, Requires Flexibility

  by AVI KLEIN

The Treasury Department's efforts to contain the financial crisis have succeeded in preventing an economic meltdown, but it must maintain its flexibility in order to deal with the period ahead, a government oversight panel said.

In a quarterly report to Congress, the Financial Stability Oversight Board said that Treasury's actions under the Emergency Economic Stabilization Act had positive effect on short-term consumer lending and long-term mortgage markets.

So far, Treasury has committed up to $700 billion for a myriad of programs to inject capital into the banking system by guaranteeing loans, packaging toxic assets and buying banking stock. The Federal Reserve has contributed by keeping interest rates low .

Flexibility going forward will assure that these successes continue, the panel said. Critics have chastised the program as a handout to Wall Street bankers and have said that the numerous programs under the EESA umbrella suggest policy fecklessness.

The oversight board also reported that the government was in a position to take "substantial" ownership positions of some of the banks it bailed out under the Troubled Asset Relief Program.

But it said that Treasury was committed to "keeping the period of government ownership as temporary as possible" and would used "reasonable efforts" to sell at least 20 percent of any common equity it acquires each year.
April 25, 2009 10:04 AM

Regulators seize four more banks

  by CHRIS CAREY

Regulators took over four banks Friday, bringing the total number of failures this year to 29.

 

The California Department of Financial Institutions seized First Bank of Beverly Hills and appointed the Federal Deposit Insurance Corp. as receiver.  The FDIC decided to liquidate the one-branch bank, which had $1 billion in deposits and $1.5 billion in total assets.

 

First Bank was owned by Beverly Hills Bancorp Inc., a publicly traded company, and specialized in commercial and real estate lending. It announced earlier April 15 that a merger agreement designed to shore up the bank's finances had fallen through.

 

Earlier Friday, the Georgia Department of Banking and Finance closed American Southern Bank in Kennesaw, Ga., and appointed the FDIC as receiver. The FDIC enlisted Bank of North Georgia, to take over American Southern's lone office and some of its deposits.

 

American Southern opened in March 2005. It had $104.3 million in deposits and $112.3 million in assets. The FDIC said Bank of North Georgia, which is part of Synovus Financial Corp., would not assume $48.7 million in brokered deposits.

 

Elsewhere, the Office of Thrift Supervision seized First Bank of Idaho. It also turned the bank over to the FDIC, which arranged for U.S. Bancorp to take over the bank's seven branches and all of its deposits, excluding those from brokers.

 

First Bank of Idaho was based in Ketchum and had operations in Idaho and Wyoming. It had $374 million in deposits and $488.9 million in assets at the end of 2008. The FDIC said that U.S. Bancorp would not assume $112.8 million in brokered deposits.

 

The Office of Thrift Supervision had issued a cease-and-desist order on April 6 against First Bank and its owner, Sun Valley Bancorp, ordering them to raise additional capital and limit certain expenses.

 

The Michigan Office of Financial and Insurance Regulation seized Michigan Heritage Bank, of Farmington Hills, and appointed the FDIC as receiver. The FDIC arranged for Level One Bank, also of Farmington Hills, to take over Michigan Heritage's three branches, some of its deposits and about one fourth of its assets.

 

The closed bank had $151.7 million in deposits and $184.6 million in assets at the end of 2008. The FDIC said Level One Bank would not assume $50 million in brokered deposits.

 

Michigan Heritage had been operating since December under an agreement with the Federal Reserve and state banking regulators that called for the bank to take steps to improve its financial condition.

 

The FDIC said the latest bank failures would cost its insurance fund just under $700 million. The closing of First Bank of Beverly Hills accounted for the largest chunk of that total -- $394 million.

 

April 24, 2009 2:01 PM

American Express To Return TARP Funds

  by AVI KLEIN

Another leading financial institution plans to return the bailout money it received last year.

The American Express Co., which became a bank holding company in November in order to qualify for $3.4 billion in government funding, said in an earnings release that it plans to return the money as soon as possible.

"If permitted by our supervisors and if supported by the results of the stress assessment, we intend to repay the government investment of preferred shares and warrants," said Kenneth I. Chenault, chairman and chief executive.

The Treasury Department has said it is willing to accept the early return of bailout money by companies that can prove they are stable enough to survive without it.  For the past few months it has been conducting stress tests on the largest 19 institutions that got bailout money to examine how they might fare under worsening economic conditions.

The results are expected to be released today, though how much detail will be made public remains unknown.

American Express's desire to return the money marks a significant turnaround in corporate perceptions of the Troubled Asset Relief Program. When it began, American Express joined a number of other non-banking firms restructuring themselves or buying banks in order to qualify for the program.

At the time, the firms saw an opportunity to access inexpensive credit. Since then, many have struggled with public relations headaches and concern about regulations restricting executive pay.

The original agreements that the TARP recipients signed say that the preferred stock they issued to the government cannot be redeemed for three years.
April 24, 2009 8:47 AM

Treasury kept quiet about legal services contracts

  by CHRIS CAREY

Earlier this month, the Treasury Department quietly hired three law firms and a consulting firm for advice on restructurings and potential bankruptcies in the auto industry.

 

Treasury did not issue a press release announcing the hirings, even through the contracts with the law firms were among the biggest yet for work on the government's $700 billion Troubled Asset Relief Program. The deals drew scant coverage beyond trade publications. 

 

Cadwalader Wickersham & Taft LLP,  Sonnenschein Nath & Rosenthal  LLP and Haynes and Boone  LLP  got six-month contracts worth as much as $8.59 million each, or $25.8 million total.

 

Reports that the Treasury Department has directed Chrysler LLC to prepare a bankruptcy filing might explain what those firms have been doing for the past few weeks. But the lack of full disclosure about the contracts raises additional questions regarding the openness and transparency of the TARP initiative.

 

In addition to keeping the awards out of the spotlight, Treasury deleted the hourly rates it is paying the firms from copies of the contracts that it posted on its web site. In at least one instance, it also blacked out the names of key personnel on the assignments.

 

Treasury has routinely redacted that information from the public copies of its agreements with outside contractors on TARP. Without those details, it is impossible for the taxpayers who are paying for the TARP efforts to know whether they are getting a good deal.

 

However, the redactions in Treasury's agreement with Sonnenschein Nath failed to completely obscure the financial information. It appears to BailoutSleuth that the government is paying $645 an hour for the time of that firm's senior partners, and $355 an hour for its associates.

 

The contracts with all three law firms run from March 30 to Sept. 30. Two of the firms, Sonnenschein Nath and Cadwalader Wickersham,  already worked for Treasury under other TARP deals.

 

Treasury also hired Boston Consulting Group Inc. to analyze economic and competitive conditions in the auto industry -- including the relative strength of General Motors Corp. and Chrysler, and the government's options with respect to those firms. The six-month contract is worth a maximum of $2 million.

 

GM has received $13.4 billion in TARP aid since December, and is seeking an additional $5. Chrysler got $4 billion in loans, and has asked for an additional $500 million.

 

Chrysler is facing an April 30 deadline to complete a previously announced alliance with Fiat SpA, come to terms with its unions on concessions and get lenders to restructure its debt. If it meets those goals, it could get an additional $6 billion in government financing.

 

If it fails, the alternative is likely to be a reorganization through bankruptcy proceedings.

 

April 23, 2009 4:03 PM

Treasury Hires Three More Investment Firms for TARP Advice

  by AVI KLEIN

The Treasury Department has hired three more investment management firms to advise it on the bailout.

The three firms, AllianceBernstein LP, FSI Group, LLC, and Piedmont Investment Advisors, LLC, were selected from a pool of 200 applicants, each with over $2 billion in assets under management.

According to Treasury, the firms will assist in valuing the assets the government has received under the Troubled Asset Relief Program and advise Treasury on its overall investment policies.

The contracts with the firms were posted on the Treasury website.

According the government's deal with AllianceBernstein, the New York-based firm would receive $50,000 for each of the first 50 financial institutions whose stock and warrants it  analyzes, for a total of $2.5 million. It would receive $40,000 for each of the next 50 companies, and $30,000 for every one after that.

So far, 559 companies have received money under the TARP program.

AllianceBernstein also will receive $150,000 for each agent, or submanager, detailed by the Treasury to work under the firm's supervision, with a minimum payment of $1 million for the first six quarters of the contract. In addition, Treasury will pay the firm a $200,000 "data aggregation and reporting" fee.

The contracts with FSI Group and Piedmont include the same structured terms as that for AllianceBernstein, but without payments for submanagers or data aggregation and reporting.

FSI Group is based in Cincinnati. Piedmont has headquarters in Durham, N.C.
April 23, 2009 11:35 AM

Investment Advisor Pleads Guilty In First TARP-Related Fraud Case

  by AVI KLEIN

A Tennessee investment advisor has agreed to plead guilty to embezzling more than $10 million in what appears to be the first fraud case related to the bailout.

Gordon B. Grigg accepted responsibility for four counts of mail fraud and four counts of wire fraud. The crimes, which prosecutors said constituted a Ponzi scheme, involved the purported purchase of government debt instruments issued by the Troubled Asset Relief Program.

United States Attorney Ed Yarbrough and Neil M. Barofsky, the inspector general of the bailout program, made the announcement of the indictment and plea deal yesterday. Barofsky, in a report to Congress earlier this week, said his office had opened 20 criminal investigations involving the TARP program.
 
In a Ponzi scheme, the organizer offers investors large returns but typically does not invest the money he receives. Instead, he uses capital from later investors to pay off earlier ones, thus creating the illusion that his investments are successful.

According to prosecutors, Grigg held himself out as an investment advisor and personal coach, offering clients the chance to invest in "pooled client purchases of fixed-term certificates of deposit, private placements, corporate notes and debentures."

In the plea agreement, Grigg admitted that he solicited clients for his company, ProTrust Management Inc., by telling them he would place their money in government-backed commercial debt related to the bailout program.

Grigg "falsely represented to investors that he had already committed more than $5 million in ProTrust pooled client funds towards the purchase of TARP-guaranteed debt as part of a private placement partnership between ProTrust and the investment firms Berkshire Hathaway Inc. and Kohlberg Kravis Roberts & Co.," the Justice Department said.

In order to maintain the illusion, he used counterfeit corporate letterheads and the forged signatures of executives at the investment firms to create fictitious documents and correspondence that supported his claims.

Federal prosecutors said that Grigg's crimes date back to 1990.  According to the indictment, he solicited a total of approximately 60 people to invest $10.9 million dollars with him. Although he never invested the money as promised, he did return approximately $6.6 million to investors as supposed gains.

His profit, and the loss to the investors, totaled $4.9 million. He faces up to eight years in prison.
April 22, 2009 11:39 AM

Banks Lobbying Hard to Change TARP Redemption Rules

  by AVI KLEIN

Financial institutions that have received bailout money spent millions of dollars on lobbying in the first quarter of 2009, with much of that effort dedicated to making it easier for them to repay the money they received.

The nation's eight largest banks have spent approximately $5.5 million on lobbying so far this year, The Hill newspaper reported. All told, they have received $170 billion in taxpayer money. The spending is slightly up from the last quarter of 2008, but down 20 percent from before the economic crisis began.

According to disclosure forms filed with Congress, Citigroup Inc., which has received $45 billion from the government, spent $1.6 million lobbying in the first quarter of 2009. Bank of America Corp., which received $25 billion, spent $780,000 on lobbying.

Although banks have diverse interests on Capitol Hill, much of their recent lobbying efforts have focused on the issue of whether banks that got bailout money under the Troubled Asset Relief Program should be allowed to return it prematurely.

As BailoutSleuth has reported, a steady stream of banks have announced plans to give the money back, citing bad public relations and a desire to extricate themselves from tough regulations on matters like executive pay.

Under the laws governing the bailout, the Treasury Department has the right to refuse to accept the redemptions if it feels the bank would not be strong enough without the government money. Treasury is currently conducting "stress tests" on the 19 largest banks to see how they would fare in a more severe economic downturn.

Driving the lobbying efforts is concern about the redemption of stock warrants, the Wall Street Journal reported.  In addition to giving the Treasury large amounts of preferred stock, the publicly traded banks that got TARP money also issued warrants, or rights to buy common stock at a set price in the future.

But redeeming or terminating the warrants is proving difficult. Because of uncertainty in the banking sector, these warrants have little current value, but Treasury is unwilling to take them back at today's prices. Redeeming them at the prices Treasury demands could mean the equivalent of paying as much as 60 percent annual interest, the banking industry claims.

Old National Bancorp, of Evansville, Ind., got $100 million in TARP funds in December and return the money last month. The bank said it would take a charge of $2.6 million to account for the retirement of the 813,008 warrants it issued to the government in the deal.

In a letter to the Treasury last week, the American Bankers Association requested a rule change to permit withdraw from the program without having to pay "an onerous exit fee."

So far, however, Treasury has not given any indication it is willing to comply. Officials have said they view the ability to pay back the TARP funds without restriction as a sign of financial health.  Under this theory, a bank seeking to avoid paying for the warrants might be weaker than otherwise thought.
April 21, 2009 9:28 PM

Treasury completes more TARP deals

  by CHRIS CAREY

The Treasury Department said it completed investments in six more banks last week, using just under $41 million from the $700 billion Troubled Asset Relief Program.

 

The number of deals has been declining in recent weeks, as has the dollar amount invested.

 

Bank of the Carolinas Corp., based in Mocksville, N.C., got the biggest chunk of taxpayer capital in the latest round. It sold $13.2 million in preferred stock to the government.

 

Bank of the Carolinas lost $2.19 million last year, compared with a profit of $1.96 million in 2007. It added $4.78 million to its loan-loss reserves, more than eight times the amount it set aside in 2007.

 

The other five banks that got TARP money are privately held.

 

Penn Liberty Financial Corp., of Wayne, Pa., sold $9.96 million in stock to the government, while BNB Financial Services Corp., of New York, sold $7.5 million worth.

 

Tifton Banking Co., based in Tifton, Ga., received $3.8 million in TARP money.  Patterson Bancshares Inc., of Patterson, La., got $3.69 million, while Omega Capital Corp., of Lakewood, Colo., got $2.82 million. Omega is the parent company of Front Range Bank, which serves four communities in the Denver suburbs.

 

April 21, 2009 3:44 PM

US Bancorp Announces Plan to Return TARP Funds

  by AVI KLEIN

Another bank has decided to return bailout money to the Treasury Department.

Minnesota-based U.S. Bancorp announced that it is ready to repay the $6.6 billion it received last fall under the Troubled Asset Relief Program.

Chief Executive Richard Evans, in a quarterly earnings call, said that his goal was "to move this company back to independent status."

Banks that have accepting TARP money are subject to various additional regulations, including on executive compensation, and an increasing number of them are trying to return the money to avoid them.

U.S. Bancorp is among the 19 financial institutions currently undergoing stress tests by the Treasury Department. Mr. Evans, calling the tests a "proxy or the gateway to the question on TARP," said that if the results were positive, he intended to move forward and return the bailout money.

The Treasury is expected to release the results in late April or early May, though it remains unclear how much detail will be provided.
April 21, 2009 10:33 AM

TARP Inspector Opens 20 Criminal Investigations

  by AVI KLEIN

The Treasury Department has opened 20 criminal investigations into misuse of bailout money, and there is great risk of future fraud without better safeguards, government regulators said today.

Neil M. Barofsky, the department's special inspector general, said in a 250-page audit report.

Mr. Barofsky said his office would not provide details on the investigations unless charges are brought.

The Troubled Asset Relief Program, or TARP, involves 12 different programs and at least $3 billion in spending in the forms of loans, loan guarantees, mortgage modifications, and stock purchases. A number of government agencies are involved, including the Federal Deposit Insurance Corp. and the Federal Reserve.

Mr. Barofsky said the very nature of the program was "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering."

His report singled out for concern the Term Asset-Backed Securities Loan Facility, a program that allows the government to spend $1 trillion to buy distressed consumer credit and small business loans from banks. The inability to remove these loans from their books is seen by some as an obstacle to getting liquidity flowing again in the capital markets.

Mr. Barofsky said that the TALF program was particularly vulnerable to fraud and mismanagement because Treasury officials are planning to rely on credit agency ratings to determine the value of the securities.

"Credit ratings, cited as one of the primary credit protections in TALF as currently configured, have been proven to be of questionable value," the report said.  "The wholesale failure of the credit rating agencies top rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis.

To help identify fraud and abuse, Mr. Barofsky said his office had created a TALF task force, including representatives from the Federal Reserve Board, the FBI, U.S. Immigration and Customs Enforcement, and the U.S. Postal Inspection Service.

The inspector general's office is also currently conducting six audits of TARP-related activities, including surveys of executive compensation among bailout recipients; the influence of outside actors on Treasury Department decision-making; and the large payments by the American International Group Inc. to its counterparties in controversial derivatives deals.
April 20, 2009 12:48 PM

BankUnited Faces 15-Day Deadline to Raise Capital

  by AVI KLEIN

A major Florida bank is on the brink of collapse and must either raise new capital or close, federal regulators said.

BankUnited Financial Corp., based in Coral Gables, is severely undercapitalized, the Office of Thrift Supervision said in an enforcement letter last week. It told the bank, which has $14 billion in assets, to either sell its holdings, merge with another bank, or face federal receivership.

In a Securities and Exchange Commission filing prompted by the enforcement action, BankUnited reported an equity deficit of $13 million. It said its Tier 1 capital, the standard measurement of a bank's financial health, had declined to negative 0.2 percent.  Last September, federal regulators sent the bank a cease-and-desist order demanding that it maintain a minimum level of 7 percent.

The bank said in its SEC filing that it would try to comply but was not certain whether it could reach a deal. Under the terms set out by OTS, the bank has only 15 days to do so.

"We continue negotiations with various parties to raise capital and restructure our balance sheet, but we cannot assure you that in the current financial environment these negotiations will be successful and will result in a capital infusion prior to any potential actions that bank regulators might take," the bank said.

BankUnited is the largest institution of its kind in Florida, with 86 branches. Its troubles stem in large part to overexposure to the housing market. The state has been the scene in the last two years of some of the most significant real estate losses in the country.

The bank has also found itself in the middle of a controversy related to the former director of OTS, Scott M. Polakoff. The Treasury Department's inspector general is currently investigating whether Mr. Polakoff improperly permitted BankUnited in August to overstate its capital levels.

Treasury removed Mr. Polakoff from his position in late March and replaced him with his deputy, John E. Bowman.

Although OTS has shut down a number of small community banks in recent months, BankUnited is the first large financial institution since last year to face the serious possibility of federal receivership.

The Office of Thrift Supervision sent a cease and desist letter last week to the First Bank of Idaho, demanding that it too improve capital levels by either merging with another bank or selling itself.

All told, at least 25 banks have closed so far this year, the same number as in all of 2008.
April 18, 2009 7:37 AM

Regulators seize two more banks

  by CHRIS CAREY

It took less than four months for the number of bank failures in 2009 to match the total for all of 2008.

 

Regulators shut down two more banks on Friday, one in Nevada and one in Missouri. The Nevada Financial Insitutions Division seized Great Basin Bank, of Elko, Nev., and appointed the Federal Deposit Insurance Corp. as receiver.

 

The FDIC arranged for Nevada State Bank, of Las Vegas, to take over all Great Basin's $221.4 million in deposits, as well as its five branch offices. Nevada State Bank bought $252.3 million of the failed bank's $270.9 million in assets.

 

It entered into a loss-sharing agreement with the FDIC on $143.4 million of those assets, meaning the agency will take much of the financial hit if their values deteriorate.

 

The Office of Thrift Supervision closed American Sterling Bank, of Sugar Creek, Mo., and named the FDIC as receiver. It struck a deal with Metcalf Bank, of Lee's Summit, Mo., for all of the failed bank's $171.9 million in deposits and most of its $181 million in assets.

 

Metcalf Bank took over American Sterling's offices in Missouri , California and Arizona. It entered into a loss-sharing agreement with the FDIC on $100 million of the $173.6 million in assets it acquired.

 

The seizure thwarted an insurance company's plan to tap into the Treasury Department's $700 billion Troubled Asset Relief Program by acquiring American Sterling.

 

The Phoenix Cos. stuck a deal in January to buy the bank for $180 million, but the deal was contingent on American Sterling being approved for an injection of capital from the government.

 

The Office of Thrift Supervision had ordered American Sterling to find a buyer, raise additional capital or cease operations.

 

The FDIC said the two bank closings would cost its insurance fund around $84 million.

 

Nevada State Bank is a unit of Zions Bancorp, which got $1.4 billion in taxpayer capital through TARP. Another subsidiary of Zions took over a failed California bank in February.

 

Of the 25 banks that have been shut down by regulators this year, 13 have been absorbed by banks whose own finances were bolstered with money from the federal government.

April 17, 2009 10:37 AM

FirstMerit Latest To Return Bailout Funds

  by AVI KLEIN

Yet another bank has decided to return bailout funds it received from the Treasury Department.

Ohio-based FirstMerit Corp. said it would redeem all 125,000 shares of preferred stock it issued to the Treasury in January for $125 million. It will also pay an accrued dividend.

A number of other financial institutions have announced plans to return money they received under the Troubled Asset Relief Program. They have cited as reasons the negative publicity created by their participation, and a desire to avoid Treasury restrictions on executive pay, dividend increases and other uses of funds.

Paul Greig, First Merit's chief executive, said at a shareholders meeting this month that the bank had always been in good financial condition but considered the TARP money as "an insurance policy."

Treasury is not obligated to accept the redemptions. In order to return the money, banks must first prove they are financially strong enough to survive without the government's capital.

FirstMerit said it worked with a third party to conduct a thorough "stress test" of its balance sheet, and has already consulted with the Treasury about its plans. In a statement, the bank said it expects to complete the redemption of shares by next Wednesday.

It did not identify the outside consultant or provide details of the stress test. Treasury is conducting similar tests on the 19 largest banks to receive bailout money. Results of the tests are expected to be released in early May, though it remains unclear how much detail Treasury will provide the public.
April 16, 2009 3:38 PM

Lending Down Among Bailed-Out Banks

  by AVI KLEIN

In another sign that liquidity has not yet returned to financial markets, bank lending decreased in February among banks that have received bailout money,

The Treasury Department reported that overall lending among the 21 largest banks to receive money under the Troubled Asset Relief Program declined by a median percentage of 2.2 percent, or $16 billion, from the month before.

Nine banks posted gains in loan activities, while twelve banks posted declines.

The biggest declines were in commercial real estate lending, where originations were down 23 percent, and commercial and industrial lending - typically used to pay for equipment and meet payroll - where originations were down 13 percent.

Despite the fact that total loans were down, there was at least one bright spot in the Treasury's report. Mortgage refinancing increased 42 percent between January and February, a sign that lower interest rates were enticing homeowners to restructure outstanding loans.

Sixteen of the 18 banks that make home loans reported increases in mortgage originations. The three other companies in the lending survey -- American Express Corp., State Street Corp., and CIT Group, Inc. - do not offer mortgages.

In addition, Treasury reported that home equity lines of credit were being originated at levels typical for the season, as consumers prepare for springtime remodeling projects. It reported in February that American credit card originations were down 2.27 percent from the previous month.

The TARP program, along with a number of other government initiatives, is intended to boost lending and spur the struggling economy. The 21 banks, the subjects of ongoing reports by the Treasury Department on the efficacy of the bailout, have received a total of $211 billion in federal funding.

The biggest declines in lending were marked by J.P. Morgan Chase & Co., The Goldman Sachs Group Inc., and Morgan Stanley. The largest increases were by Wells Fargo & Co., SunTrust Banks Inc. and Comerica Inc.

Both J.P. Morgan and Goldman Sachs are believed to be in better financial shape than their competitors, with the latter announcing plans earlier this week to return the $10 billion in bailout money it received.

J.P. Morgan, which today reported better than expected quarterly earning, said it plans to follow suit. CEO Jamie Dimon, calling the $25 billion in TARP funds it accepted a "scarlet letter," said the company "could pay it back tomorrow."

Banks have offered a number of reasons for the decline in lending, citing a poor economic climate and a wavering housing market. Consumers have reported that banks are requiring much stricter income verification than in the past, while businesses seeking loans are being forced to put up larger amounts of collateral.
April 15, 2009 7:34 PM

Congressional Panel Investigating AIG's PR Campaign

  by AVI KLEIN

A congressional oversight committee is investigating whether American International Group Inc. used bailout money to wage a public relations campaign and attack its critics.

In a letter sent to AIG, Rep. Edolphus Towns, the chairman of the Committee on Oversight and Government Reform, asked the company for extensive details on all of its public relations activities since it began receiving $182 billion under the Troubled Asset Relief Program.

According to Towns, his investigation was sparked on the eve of an April 2 oversight hearing, when he learned that AIG was circulating an allegedly damaging dossier on the company's former CEO, Maurice Greenberg.

Greenberg, who resigned from the company in 2005 in the face of an accounting scandal, has been a frequent critic of the company in recent months, as he has tried to put the blame for the company's collapse on decisions made after he left. AIG's dossier, "The Greenberg Legacy," puts the responsibility back on him for creating the housing-related derivatives that almost bankrupted the company.

Earlier this month, Time magazine reported that Greenberg is advising the Federal Reserve and Treasury Department on how to restructure the insurance giant. He is said to favor rebuilding the company "so that it is a taxpayer and an employer again," rather than selling off its constituent parts as some have suggested.

In his letter, Towns asks Edward Liddy, AIG's current chairman and chief executive, to address his company's relationship with two major public relations firms, Hill & Knowlton and Burson-Marsteller. AIG is also asked to provide copies of all contracts and invoices from those companies, and to answer whether either was involved in preparing the Greenberg dossier.

In a prepared statement, AIG said its public relations efforts were necessary to correct Greenberg's "false and misleading statements." The company said Greenberg's activities, which have included at least 30 media appearances, were "damaging" to the company and taxpayers, who now own approximately 80 percent of the firm.
April 14, 2009 10:03 PM

Treasury completes more bank deals

  by CHRIS CAREY

The Treasury Department has completed investments in five more banks.

 

The deals were all relatively small, claiming $22.8 million of the $700 billion Troubled Asset Relief Fund.

 

City National Bancshares Corp., based in Newark, N.J., got $9.44 million in taxpayer capital by selling preferred shares to the government.  It had profits of $1.06 million last year, down 43.3 percent from 2007.

 

Capital Commerce Bancorp, of Milwaukee, Wis., got $5.1 million in TARP money. It is the holding company for Securant Bank & Trust.

 

SV Financial Inc., of  Sterling, Ill., got $4 million, while First Business Bank, of San Diego, got $2.21 million. Metropolitan Capital Bancorp, of Chicago, got the smallest amount in the latest wave of deals. It sold $2.04 million in stock to the government.

 

April 14, 2009 3:49 PM

New TARP Chief Has Close Ties to Banking and Insurance Industries

  by AVI KLEIN

The finance executive expected to head the federal bailout program has close ties to the banking industry and has made significant political contributions to a political organization representing life insurance companies, according to an analysis by BailoutSleuth.

The Wall Street Journal and other media outlets reported Tuesday that  President Obama is likely to appoint Herbert M. Allison Jr., currently the chief executive of Fannie Mae, to head the Office of Financial Stability.

 That office oversees the Troubled Asset Relief Program, and is currently run by Neel R. Kashkari, who was originally appointed by President Bush.

Allison has worked in the banking sector for thirty years, most of it at Merrill Lynch & Co.

Allison became president of the Teachers Insurance and Annuity Association - College Retirement Equity Fund (TIAA-CREF) in 2002. He held that position until 2008, when he was tapped to run Fannie Mae.

Allison also served as a director of the New York Stock Exchange from 2002 to 2005. He was a member of the board's compensation committee, which was responsible for approving former NYSE Chairman Richard Grasso's controversial $139.5 million retirement package.

Allison is a major contributor to political causes, having given at least $102,000 to federal candidates and political action committees since 1998, according to filings with the Federal Election Commission.

In addition to giving sustained support for Sen. John McCain's presidential ambitions, Allison has made large contributions to the American Council of Life Insurers. He made $5000 donations to the organization's political action committee each year from 2004 and 2006, for a total of $15,000.

How to involve life insurance companies in the bailout program promises to be one of the most important issues Allison will confront in his new role. At least 12 life insurers have applied for bailout money, an effort that in most cases has required them also to buy a savings and loan or bank.

The Treasury Department said last week that it was considering the insurers' requests on a rolling basis and could not say if and when approval would occur. Since then, at least two insurance companies have dropped out of the process.
April 14, 2009 11:16 AM

MetLife Backs Out Of TARP

  by AVI KLEIN

Despite a recent announcement by the Treasury Department that it would offer bailout money to insurance companies, one of the firms considered likely to accept it has backed out.

New York-based MetLife Inc. said it would not participate in the Troubled Asset Relief Program. The company was eligible for bailout funds because of its ownership of MetLife Bank, which it launched in 2001.

Since the bailout plan was announced last year, other life insurance companies have attempted to buy banks in order to qualify for the program.

Their efforts, however, have had mixed success, with some companies changing their minds and others finding it difficult to navigate the regulatory process. Some companies also have expressed concern about Treasury-imposed restrictions on executive pay.

BailoutSleuth reported last week that one such insurance company, Genworth Financial, cancelled an agreement to buy Minnesota-based InterBank. In that case, a deadline imposed by the Office of Thrift Supervision passed before Genworth had heard back from the Treasury about its bailout application.

MetLife said it backed out of the TARP program because its balance sheet did not need additional support.

"MetLife has already taken actions to reinforce its strong financial position, including raising capital in the marketplace," said Robert Henrickson, president and chief executive.

MetLife also confirmed that it was one of 19 banking companies chosen last month for stress tests by the Treasury. All bank holding companies with more than $100 billion have been required to submit to them, and Treasury expects to announce the general results by the end of April.

MetLife is the only one of the 19 that has not received any TARP money.
April 13, 2009 3:49 PM

First Niagara To Sell Stock to Pay Back TARP Funds

  by AVI KLEIN

Another bank has decided to return its bailout money and has announced a major stock offering to help finance the plan.

New York-based First Niagara Financial Group Inc. said it planned to sell $300 million in stock in order to, among other things, repurchase the $184 million in preferred shares and warrants it sold the Treasury Department under the Troubled Asset Relief Program.

A number of other financial institutions have said they were interested in paying back TARP money, citing bad press and concern about Treasury restrictions on executive pay.

First Niagara follows Goldman Sachs in planning a stock offering to help pay back the Treasury. The investment firm said last week it was considering a stock sale to pay back the $10 billion it received under the TARP program.

First Niagara's announcement came as it reported strong quarterly earnings and is preparing to take over 57 local branches in Pennsylvania it recently purchased from National City Bank.
April 13, 2009 1:29 PM

Oversight Panel Launches Investigation Into Credit Card Fees

  by AVI KLEIN

After months of complaints from consumer groups and politicians in Washington, federal regulators are investigating whether banks that received bailout money are raising fees improperly on credit card holders, the Wall Street Journal reported.

In an effort to boost profit margins and discourage high-risk consumers from borrowing, banks have raised late fees and interest rates, and in some cases have even paid cardholders to close their accounts.

These efforts, critics say, run contrary to the purpose of the Troubled Asset Relief Program, which was intended to expand access to credit during the economic downturn. The Treasury Department has committed $700 billion to the project, and may ask Congress for more soon.
    
Elizabeth Warren, chairwoman of the Congressional Oversight Panel, said in an interview with the Journal that her committee also is investigating whether banks that received bailout money have engaged in "inappropriate lending" practices.

"The people who are subsidizing the activities of the banks through their tax dollars are the same people who are furnishing the high profits through consumer lending," Ms. Warren said. "In a sense, we're asking taxpayers to pay twice."

The issue of fees touches on a classic paradox of the credit card industry: banks in recent decades have come to depend on late fees and the ability to charge high interest rates as a way to supplement the interchange fees they levy on retailers.

But there is a thin line between a solvent debtor able to manage an ever-growing balance, and a struggling one who may file for bankruptcy and leave the bank with a loss.  Raising fees and rates in a bad economy is one way to manage the risk, experts say.

Americans hold $955 billion in credit card debt, according to a recent report by the Federal Reserve. Although the housing market appears to have stabilized, analysts worry that banks' balance sheets remain vulnerable to widespread defaults.

Innovest Strategic Value Advisors, an investment information and consulting firm, estimates that credit-card issuers lost $41 billion from uncollectable debt in 2008 and will lose an additional $96 billion in 2009.

The problem with the banks' response, say consumer advocates, is that raising consumer costs is likely to push card-holders into bankruptcy more quickly. This is unethical, they say, because when the economy was strong, banks aggressively pushed credit cards on the same low-income consumers who are now struggling the most in the recession.

At a minimum, the banks have succeeded in lowering the amount of credit card debt overall. The $955 billion recently reported by the Federal Reserve in February marked a 9.7 percent decline from the previous month - the biggest drop since 1978.
April 11, 2009 9:49 AM

Regulators seize two more banks

  by CHRIS CAREY

Regulators closed two more banks, including one that had hoped for salvation through the Troubled Asset Relief Program.

 

North Carolina banking regulators shut down Cape Fear Bank, of Wilmington, N.C., and appointed the Federal Deposit Insurance Corp. as receiver.  It arranged for First Federal Savings and Loan of Charleston to take over the deposits and most of the assets.

 

Regulators also seized New Frontier Bank, in Greeley, Colo. State and federal agencies have shut down 23 banks so far this year, compared with 25 for all of 2008.

 

Cape Fear Bank's shareholders approved changes to its articles of incorporation earlier this year that would have authorized the sale of preferred stock to the Treasury Department. The publicly traded company said it hoped to get as much as $12.4 million in taxpayer capital through Treasury's $700 billion TARP initiative.

 

Its financial condition worsened, however.  In February, it entered into an agreement North Carolina regulators and the FDIC to halt "unsafe and unsound'' practices, boost capital levels, reduce concentrations of credit and take other steps to improve liquidity.

 

As of March 31, Cape Fear had $403 million in deposits and $492 million in total assets. South Carolina-based First Federal took over all of its deposits, and its eight branches, which it will reopen under its own name. It also bought $468 million of Cape Fear's assets.

 

First Federal entered into a loss sharing agreement with the FDIC on $385 million of those assets. The FDIC will absorb a big chunk of any losses on the assets, as part of its strategy to maximize returns and minimize disruptions by keeping the assets in the private sector.

 

The Colorado Division of Banking took over New Frontier Bank, and appointed the FDIC as its receiver. The FDIC created a new entity, Deposit Insurance National Bank, to manage the orderly disposition of New Frontier's accounts.

 

It had deposits of roughly $1.5 billion and total assets of $2 billion.

 

Bank of the West, of San Francisco, agreed to manage DINB's operations for 30 days, during which time customers can transfer their accounts to other institutions. Any amounts still on deposit at the end of that period will be paid out by check.

 

The FDIC estimated that the two closings would cost its deposit insurance fund around $801 million.  

April 10, 2009 11:29 AM

Treasury Opens TARP To Insurers, But Genworth Backs Out

  by AVI KLEIN

The Treasury Department has decided to make bailout funds available to insurance companies, but one insurer announced that it was abandoning its application to receive them.

Officials said this week that they were in the process of reviewing applications from as many as twelve insurers that had bought or were attempting to buy savings and loan or banks to qualify for money under the Troubled Asset Relief Program.

BailoutSleuth reported earlier this month that insurance companies were having a difficult time gaining access to TARP funds, in part because some of the banks they are attempting to buy face severe regulatory challenges. Some of the insurers, including Hartford Financial Co., have faced questions about their own stability as well.

Until this week, the Treasury had given no indication whether it would disperse money to insurance companies that converted to bank holding companies.  

It said Wednesday that it was reviewing applications from the insurers, but that they would be treated in the same way as all other applications and considered "on a rolling basis."

The delays proved too much for at least one insurer. Genworth Financial said that it was abandoning efforts to buy Minnesota-based InterBank because the process of getting TARP funding had outlasted a deadline imposed by the Office of Thrift Supervision to approve the purchase.

Although it has done so in at least one other case --  that of Hartford Financial's pending purchase of Florida-based Federal Trust Bank --  Treasury told Genworth it would not extend the deadline.

Genworth announced its plans to buy the bank in December. At the time, InterBank held approximately $1 billion in assets.

The terms of the deal were not announced, but it was contingent on approval for TARP funds. The Office of Thrift Supervision was equally interested in seeing the bank's capital refreshed with bailout money, and Genworth hoped that bailout funds would improve its own capital position.
April 9, 2009 11:36 AM

TARP Oversight Board Questions Bailout Assumptions

  by AVI KLEIN

The federal government has spent more than $4 trillion bailing out the financial sector, but the program relies on an uncertain premise about housing prices and has seen only "mixed" results, a congressional panel said.

The Congressional Oversight Panel, in a 151-page report to Congress, said that government efforts relied on the presumption that housing prices are depressed due to illiquidity in the market and not a deterioration of fundamental value.

If in fact there has been a major correction in the housing market, the panel said, "it is possible that Treasury will need to take very different actions in order to restore financial stability," including the injection of larger amounts of bailout money.

To date, the Treasury Department's Troubled Asset Relief Program has released or committed $590 billion out of the $700 billion originally appropriated. But when adding in programs run by the Federal Reserve and Federal Deposit Insurance Corp., the total value of the effort exceeds $4 trillion.

Since the TARP program began in October 2008, successive administrations have struggled to explain their twin strategies of injecting large amounts of capital into banks in exchange for stock, while lowering interest rates and seeking to spur lending.

In its report, the oversight panel said that recent communication with Treasury, including with Secretary Timothy F. Geithner, suggested that the department's strategy is to revive credit markets and improve liquidity.

Yet this plan, the panel noted, rests on potentially optimistic assumptions about future economic growth. The Treasury Department, it said, had not provided the panel with any details about those assumptions, though it noted that they appeared to be in line with mainstream economic forecasts.

Nevertheless, other observers, including economist Nouriel Roubini of New York University, have been much more pessimistic about the fate of the economy, pointing to potentially enormous losses in the credit and housing markets that would overwhelm current bailout efforts.

The oversight panel offered a range of alternatives for the Treasury to consider, though it was careful to say that it was not making any specific recommendations.

Federal regulators should consider forced liquidation of struggling institutions, it said, noting that such a move would benefit taxpayers and send unmistakable signals to the market that poorly managed banks would not be propped up indefinitely.

"Allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal," the report said

The panel also recommended that Treasury "hold management accountable by replacing -- and, in cases of criminal conduct, prosecuting -- failed managers."
April 8, 2009 8:30 PM

Check out the financial disclosure forms for Obama administration officials

  by CHRIS CAREY

ProPublica.org has posted the financial disclosure statements of nearly 180 members of President Barack Obama's team, including Treasury Department officials and others helping to guide the administration's economic-stability efforts.

ProPublica, a nonprofit journalism organization, is asking its readers and the general public to help review all of the filings to see if they can find anything notable.

We'll be checking out the disclosure forms, and we urge our readers to do the same. Click on this link to visit the ProPublica page where the documents are posted.

The collection includes the financial disclosure statements for Treasury Secretary Timothy F. Geithner; Lawrence H. Summers, director of the National Economic Council; and Mary L. Schapiro, head of the Securities and Exchange Commission.

Among other things, the disclosure statements show whether the Obama administration officials have investments in banks or other companies that could get government funds through the Troubled Asset Relief Program. Similarly, the documents show how those employees might benefit from other economic-stability initiatives, including toxic asset purchases and federal stimulus spending.

Summers' financial disclosure statement last week showed that he received $5.2 million in 2008 for his part-time role at a hedge fund company called D.E. Shaw & Co. He also collected nearly $2.8 million in speaking fees, with the biggest single payment -- $135,000 -- coming from Goldman Sachs Group Inc.

That investment bank got $10 million in TARP money last October, and has received billions more through the government bailout of AIG Group Inc. Goldman Sachs was a counterparty to some of the transactions at the root of AIG's problems. 

April 7, 2009 7:11 PM

Treasury invests in 10 more banks

  by CHRIS CAREY

 

The Treasury Department has completed investments in 10 more banks, tapping $54.9 million in funds from the Troubled Asset Relief Program.

All 10 were new to BailoutSleuth's running tally of banks that have received taxpayer capital through TARP. The total is now approaching 550 institutions.

Community First Bancshares Inc., of Harrison, Ark., sold $12.7 million in preferred stock to the government. Community First is a privately held company, as were most of the other banks that got TARP money in the latest round of deals.

First Capital Bancorp Inc., Glen Ellen, Va., got just under $11 million in taxpayer capital. It completed its stock sale on April 3. That same day, First Capital announced that it had agreed to be acquired by Eastern Virginia Bankshares Inc., in a deal valued at $27 million.

Eastern Virginia Bankshares is based in Tappahannock. It got $24 million in TARP money in January.

First Capital's earnings slumped last year with the economy. It had profits of $170,000, down more than 90 percent from 2007. It attributed the decline mainly to higher provisions for loan losses.

Two Missouri banks got TARP money in the latest round of government investments. BancStar Inc., of Festus, got $8.6 million, while Fortune Financial Corp., of Arnold, got $3.1 million.

Millennium Bancorp, of Edwards, Colo., got $7.26 million. It primarily serves ski areas on the western slope of the Rocky Mountains.

The other banks and holding companies getting TARP money were:

Prairie Bancshares Inc. (Olathe, Kan.) -- $2.80 million

Tri-State Bank of Memphis (Memphis, Tenn.) -- $2.79 million

TriSummit Bank (Kingsport, Tenn.) -- $2.76 million

Titonka Bancshares Inc. (Titonka, Iowa) -- $2.12 million

BCB Holding Co. (Theodore, Ala.) -- $1.71 million

 
April 7, 2009 1:53 PM

Government TARP Losses Reach $100 Billion

  by AVI KLEIN

The federal government's investments in banks and automotive companies have lost more than $100 billion in value, according to analysis by an economic think tank.

The Ethisphere Institute, using a stock index that tracks both private and publicly traded companies that have received money under the Troubled Asset Relief Program, said that the Treasury Department's initial investment of $306.1 billion was now worth only $196.5 billion.

These losses, which work out to $968 for each taxpaying household, have not actually been realized. They reflect only the diminished value of the stock the government received in exchange for bailing out the banks, the group said.

Congress and the Treasury never expected instant profits on the program. The thinking was that the government would reap any returns slowly, through the collection of dividend payments and the exercise of warrants to buy additional shares of the companies getting TARP funds.

And although investors have charged back into the stock market in recent weeks, the value of the Treasury's TARP portfolio has not improved.
 
"Recent rallies in the stock market have not translated into an increase in the Ethisphere TARP Index," said Stefan Linssen, managing editor of Ethisphere Magazine and one of the lead research analysts working on the index.

The worst performers include American International Group Inc., which has lost $30 billion in value for taxpayers since it was bailed out starting in September, and Citigroup Inc., which is down $24.4 billion since November.

Although Treasury's portfolio has suffered overall, a few stocks have seen some significant gains. The value of Treasury's holdings in Morgan Stanley has improved by $3.2 billion, and its stock in Goldman Sachs has gained $577.6 million, according to the analysis.

In creating its index, the Ethisphere Institute acknowledged that it was difficult to calculate the value of the preferred shares received by Treasury due to a lack of disclosure of the original terms of investment, including details about the liquidation preference and conversion rate.

To calculate the value of the warrants that Treasury received to buy additional common stock in publicly traded companies, the institute used the mean of the 20-day trailing average for each company's stock price.

To calculate the movement of Treasury's investment in private companies, it tracked the movement of the NASDAQ Bank Index and the S&P Banking Index.

Ethisphere also wrote down the value of the government's preferred shares in automotive companies by 90 percent.

BailoutSleuth is in the process of creating its own regularly updated tally of the value of the shares and warrants that Treasury received for its TARP money. It will be posted as a link on the site soon.
April 6, 2009 9:53 PM

Five more banks decline TARP funds

  by CHRIS CAREY

Five more banks have declined to participate in the Treasury Department's Troubled Asset Relief Program despite being approved for government aid.

ChoiceOne Financial Services Inc., of Sparta, Mich., said Monday that it had decided to turn down the $9.65 million in taxpayer capital it was allotted.

The Treasury Department announced in October that it would make $250 billion available to banks through the Capital Purchase Program, in which qualifying institutions sell preferred stock to the government.

ChoiceOne thought it prudent to apply for the money given the uncertainties in the financial markets in late 2008, President James Bosserd said.

 "We believe that the CPP is a good program that is available to qualified banks to build capital," Bosserd said in a prepared statement. "Our Board of Directors and management carefully considered all the aspects of the funding for which we were approved. We decided that the cost of the investment, the restrictions placed upon us if we accepted the funds, and potential dilution of existing shareholders outweighed the benefits of the funds."

First Citizens Bancorp Inc., of Columbia, S.C., said it was turning down $50 million in TARP money. Pinnacle Bancshares Inc., of Jasper, Ala., said it was turning down $4.8 million.

Ledyard Financial Group Inc., of Hanover, N.H., and Commerce State Bank of West Bend, Wis., also announced that they had told the Treasury Department they had decided not to participate.

Neither of those banks disclosed how much taxpayer capital they had been approved to receive.

More than 60 banks have either publicly declined their TARP allotments, or returned the money within months after taking it.

 

April 6, 2009 12:21 PM

Hartford Gets Extension on Effort to Get TARP Funding

  by AVI KLEIN

Hartford Financial Services Inc. is loaning $20 million to a Florida savings and loan to keep it afloat while it continues its efforts to get bailout money, according to a disclosure report filed with federal regulators.

Hartford is one of at least twelve insurance companies that have attempted, with various degrees of success, to buy banking institutions in order to qualify for money under the $700 billion Troubled Asset Relief Program.

BailoutSleuth reported last week that Hartford's purchase of Florida-based Federal Trust Corp. faced a March 31 deadline imposed by the Office of Thrift Supervision. Regulators have threatened to shut down Federal Trust unless it raised more capital.

The purchase itself is contingent on Hartford and Federal Trust's ability to get TARP funds. On news of Hartford's loan, the Office of Thrift Supervision extended the deadline to June 30, giving the two companies extra time to wait for a decision from Treasury.

When the purchase was first announced, Hartford believed it could raise as much as $3.6 billion from the TARP program. Since then, however, the Treasury has moved slowly to release funds to banks and thrifts owned by insurance companies.

Another Florida-based institution, Bonifay Holding Co., found the waiting too much to bear. Last week it cancelled an agreement under which it would be acquired by insurance company Protective Life Corp.

Protective Life cited "uncertainty" about the TARP program as the reason for the cancellation.
April 4, 2009 11:42 AM

Fannie Mae and Freddie Mac to pay $210 million in bonuses

  by CHRIS CAREY

Employees at government-controlled Fannie Mae and Freddie Mac are slated to collect $210 million in bonuses between 2008 and 2010, in part to keep them from leaving.

James B. Lockhart III, director of the Federal Housing Finance Agency, outlined the bonuses in a letter to Sen. Charles Grassley, a Republican from Iowa who sits on the Senate Finance Committee.

Lockhart said in the letter that the bonus plan was developed with the help of an outside consultant. He said it was designed to keep key employees -- without rewarding poor performance - and to attract new employees to fill vacancies.

With the financial services industry laying off tens of thousands of people and the national unemployment rate at a 25-year high, critics are asking where Fannie Mae and Freddie Mac think that workers who leave their ranks could find jobs.

Fannie Mae and Freddie Mac, which provide financing for the mortgage industry, were placed under federal conservatorship last year to prevent their collapse. The government has allocated $100 billion for each of those organizations.

"It's hard to see any common sense in management decisions that award hundreds of millions in bonuses when their organizations lost more than $100 billion in a year,'' Grassley said in a prepared statement.  "It's an insult that the bonuses were made with an infusion of cash from taxpayers."

A similar bonus plan, at American International Group Inc., sparked outrage last month. That company, which is now owned largely by the federal government, paid out more than $160 million in bonuses, with 73 employees getting $1 million or more each.

The Treasury Department and the Federal Reserve intervened last year to rescue the struggling insurance and investment company, and has provided more than $182 billion in federal aid.

Fannie Mae paid $33.5 million in bonuses last year, Lockhart said in his letter. It is slated to pay an additional $71.9 million in bonuses this year, and $7.2 million in 2010, he said.

Freddie Mac paid $17.3 million bonuses last year, and is slated to pay an additional $74.5 million this year and $5.8 million in 2010.

The most any individual would receive in bonuses from 2008 to 2010 would be $1.5 million, Lockhart said.

In his letter to Grassley, Lockhart noted that the collapse in the value of Fannie Mae and Freddie Mac stock had all but wiped out years of savings for many employees.

He added that the declines had destroyed the value of previously awarded stock grants that will vest in the future, limiting their value as a retention tool.

Lockhart also noted that, for senior executives, salary represented only one-tenth to one-third of expected income, with bonuses and other incentive awards accounting for the rest.

 

April 3, 2009 2:47 PM

GAO Criticizes Treasury For Incomplete Conflicts Policy

  by AVI KLEIN

The Government Accountability Office said in a new report that the Treasury Department had made progress in overseeing the bailout program, but that it has not done enough to monitor conflicts of interest.

The GAO said that, while Treasury's Office of Financial Stability had a "range of formal and informal processes in place" to manage conflicts of interest with the law and accounting firms it hired to advise on the bailout, there is no process in place to document the decisions made and the actions taken.

"In the absence of documentation, there is no record of how issues were addressed and resolved, should the need to revisit those issues arise in the future," the GAO said.

According to the report, OFS said it is developing procedures to address the documentation problem.

In addition, the GAO noted that OFS had reviewed the conflicts mitigation plans submitted by six contractors working on the TARP program. Two of them, GAO said, had to be renegotiated as a result.

The GAO's report also singled out Treasury's ongoing hiring problems for criticism. While it applauded efforts to hire asset managers to oversee the Treasury's portfolio of bank securities, it said that no one has yet been hired to fill those jobs.

According to the GAO, as of March 20, OFS had 113 full-time employees. It expects to need 196 to operate at full capacity. That represents an increase of 65 full-time employees from its January estimate of 131.

Treasury Secretary Timothy F. Geithner has been criticized in recent months for failing to assemble a large enough staff to deal with the Troubled Asset Relief Program and other initiatives related to the economic crisis.

Recent media reports have said that the Obama administration's strict vetting of tax compliance and conflicts of interest have made it hard to hire qualified employees.

The GAO also pointed to Treasury's communication strategy as another area that needs improvement.

Despite public and congressional uncertainty about the banking bailout, "Treasury has yet to develop a communication strategy for regularly and routinely communicating its activities to relevant congressional committees, members, the public, and other critical stakeholders," the GAO said.

The failure to improve public communication, the GAO noted, could make it more difficult for Treasury to ask for additional bailout money in the future.
April 2, 2009 3:50 PM

Kroll Sees High Risk of Fraud in Bailout and Stimulus Packages

  by AVI KLEIN

The economic downturn has created a welcoming environment for fraud, according to global risk consultancy firm Kroll Inc.

The firm, which specializes in financial investigations, issued a report this week pointing to the bailout and stimulus programs as prime targets for illegal activity.

"Those impacted by the economic instability who are inclined to engage in fraudulent business practices will work to secure stimulus funds by any means possible," said Blake Coppotelli, a senior director in the firm's business intelligence and investigations practice.

With so much money circulating due to the stimulus package and the Troubled Asset Relief Program, there are many opportunities for greedy, and sometime desperate, people to cut corners or defraud clients and employers, the firm said.

Kroll pointed to fraudulent minority- and woman-owned companies as prime examples. Many public-works projects give special consideration to such firms, and there are temptations for companies to create sham ownership structures in order to qualify.

"Many companies will want to take a closer look to ensure that the competition is not using a false claim of minority or woman-ownership to gain and unfair advantage," said Kroll director Mark Skertic.

Infrastructure projects, which make up a large part of the stimulus package, already have a notorious history of corruption, the firm said.

In the case of the banking bailout, the more details the United States and other countries disclose, the less chance there is for fraud, said Robin Hodess, director of policy and research for Transparency International.

"We want government to come clean on the decisions being taken in terms of what companies are being bailed out," she said in an interview with Kroll. "Which companies are being supported and what they are doing with the money are issues that need to be made clear."
April 2, 2009 7:51 AM

TARP Program Redacts Own Office Location

  by AVI KLEIN

The Treasury Department's public list of procurement contracts for the Troubled Asset Relief Program is missing one document - the lease for private office space being used by some of the people working on the program.

That agreement calls for Treasury to pay $116,408 a month for the first nine months of this year. The agency will pay $252,386 a month for the following 12 months in expanded space in the building, at 1801 L Street NW in Washington D.C.

We can't say whether the latter figure translates to a good deal for 71,000 square feet of high-end office space. But we wonder how many businesses, in the current economy, would be willing to commit to monthly lease payments that large.

Treasury's deal is technically with the General Services Administration, the arm of the federal government responsible for managing the office space and other property it owns and leases.

The agreement was never announced by Treasury but was mentioned in an oversight report.

The location of the office was not specified in the GAO report, and was redacted in related service contracts. But BailoutSleuth found that the initial agreement was for the eighth floor of 1801 L Street, a prime downtown location.

The federal government has leased the current space from a company called Eleven Eighteen LLP since 1988, and various agencies have used it since. The GSA signed a 10-year agreement for an expanded space in the building earlier this year.

Since the TARP program began, critics have pointed to redacted sections of Treasury's contracts with legal and accounting firms as evidence that the department is not being open about how it is spending taxpayer money.

Although Treasury officials blacked out or deleted sections of those agreements, the department still released them as part of a stated effort to be as transparent as possible in its dealings with outside contractors. Because the GSA is a federal agency, it does not fall into the same category, and the property lease is not mentioned on the Treasury webpage dedicated to procurement deals.

A GSA spokesman told BailoutSleuth that leases of this size were handled by electronic bidding. The spokesman said he could not release a copy of the lease without a Freedom of Information Act request.

According to press reports, Treasury initially required about 30,000 square feet of office space to house 90 people. The space at 1801 L Street NW serves as the headquarters for the Office of Financial Stability, which runs TARP. Neil M. Barofsky, the special inspector general assigned to act as the program's watchdog, said in a report in February that his staff also was taking one floor of the building.

Barofsky himself is working from a space at the Treasury Department building.

Treasury rented nearby parking spaces for nine months with Colonial Parking for $75,850.  It also spent $8,750 to paint its new offices and $3,212 for shredding machines. In both contracts, the office location was blacked out.

In addition, Treasury spent $168,308 to terminate an earlier agreement with Regus, a Luxembourg-based company that provides temporary office space around the world. 
April 1, 2009 7:04 AM

Banks repay TARP money

  by CHRIS CAREY

Old National Bancorp said it returned the $100 million it received through the Treasury Department's Troubled Assset Relief Program.

Old National, based  in Evansville, Ind., is the eighth TARP receipient to either repay the government or file notification to do so.

Three other banks said Tuesday that they also had redeemed the preferred stock they issued to the Treasury Department in return for public money.

Signature Bank, of New York, returned $120 million. Iberiabank Corp., of Lafayette, La., repaid $90 million and Bank of Marin, of Novato, Calif., returned$28 million.

Old National had not previously announced its intention to return the TARP money. It offered no specific explanation for the move.

It said in a press release that it had performed a "rigorous stress test'' of its balance sheet and earnings, comparable to the test the Treasury Department is requiring of the largest TARP recipients.

"Based on the results of the stress test,'' Old National said, "The company believes that it's well positioned to withstand current and future economic challenges.''

The other banks that have filed notifications with the government to redeem their shares are TCF Financial Corp.; Sun Bancorp Inc.; Shore Bancshares Inc., and Centra Financial Inc.

The eight banks that have repaid their TARP money or initiated the process to repay it got a total of $828.5 million in taxpayer capital.

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