At least one of every nine banks that got taxpayer investment through the government's Troubled Asset Relief Program was later cited by federal regulators for violating rules or failing to meet operating or financial standards, according to a BailoutSleuth.com investigation.
The findings seem to contradict statements by Treasury Department officials, who have continually assured the public that taxpayer money was invested only in healthy banks.
Instead, the results suggest that, in some cases, Treasury invested in banks that were engaging in risky behavior. They also suggest that some banks were poor stewards of taxpayer money and that government intervention was not enough to spare others from hard times.
BailoutSleuth determined that at least 84 Capital Purchase Program participants or their subsidiaries were cited by federal banking regulators in 2009 and 2010 for violating banking laws and regulations.
(Search through BailoutSleuth's interactive database of TARP banks subject to enforcement action here.)
The regulatory actions included more than 30 cease-and-desist orders and more than 20 written agreements, supervisory agreements or prompt corrective action orders.
The actions came from four regulatory bodies - the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision. A fifth agency that regulates financial institutions, the National Credit Union Administration, did not issue any enforcement actions against TARP recipients.
According to BailoutSleuth's analysis, banks that sold stock or other securities to the government through TARP's Capital Purchase Program and later were cited by regulators received those notices an average of nine and a half months after getting taxpayer money.
In some cases, the actions came much sooner.
Integra Bank
Take, for example, Integra Bank N.A., of Evansville, Ind., which was already on the rocks before the Treasury offered help. The bank - deemed healthy enough to warrant taxpayer aid - reported a net loss of $110.9 million for 2008.
Its non-performing loans rose more than six-fold that year, to $150.9 million, with residential and commercial real estate each contributing to the troubles.
On Feb. 27, 2009, Integra's holding company got $83.5 million from the government in return for preferred stock and other consideration. What followed was a series of setbacks that seem to reveal an institution in steep and rapid decline.
Integra got its first enforcement orders in late May, when the Office of the Comptroller of the Currency criticized its handling of loan workouts. The bank examination that prompted the OCC's order was dated Feb. 19 - just days before Integra received the taxpayers' aid.
Michael T. Vea resigned as chairman and chief executive in May 2009, and Martin M. Zorn - who was both chief financial officer and chief operating officer - announced his departure in October. Two directors also resigned last year, and another left in May of this year.
Last September, Integra stopped paying dividends to stockholders, and in December, it began an aggressive plan to sell 25 branch operations in Indiana, Kentucky and Ohio to raise cash and boost its capital levels.
Integra's stock price had fallen so low by the end of December that the NASDAQ stock exchange warned that its shares were in danger of being delisted. Its net losses jumped to $195 million last year, up 75 percent from the previous year, while non-performing loans rose to $214.9 million, up 42 percent.
Integra's non-performing loans have continued to climb this year, reaching $222.1 million at the end of the latest quarter. That compares with $2.9 billion in total assets.
Last month, the Federal Reserve stepped in and took even more drastic action, forbidding the bank's holding company - Integra Bank Corp. -- from paying dividends or taking on debt. The Fed also ordered it to develop a plan for maintaining sufficient capital and to create a written report outlining its sources and uses of cash, for debt repayment, operating expenses and other activities.
Despite Treasury's initial decision to deem Integra healthy, the bank's fall from grace in the year-and-a-half following its government investment has shown it to be an institution in perilous condition. BauerFinancial, a respected bank research firm, has given Integra its worst possible rating: 0.
More than 700 "healthy" banks
Under TARP's Capital Purchase Program, Treasury invested $204.9 billion in 707 "healthy" financial institutions. The program was intended to promote financial stability, maintain confidence in the financial system and increase lending. The program closed at the end of 2009 and will not disburse any more funds. So far, $137.3 billion has been repaid.
Treasury promoted the TARP investment program by insisting that the funding was only for healthy banks. "Healthy banks, not weak banks, lend to their communities and the CPP is a program for healthy banks," the agency wrote in March 2009. But BailoutSleuth's investigation shows that some of those banks may have had problems at the time of Treasury's investment, and that the department may have lacked the foresight to ensure that banks that received taxpayer assistance were in solid shape.
Some of the enforcement actions levied against banks were for relatively minor infractions, such as violations of the National Flood Insurance Act, which mandates that banks require property used as collateral for loans in some areas to be covered with flood insurance. But others were significant and extensive.
Methodology
BailoutSleuth cross-referenced the financial institutions that received federal enforcement actions in 2009 and 2010 with those that got TARP money. Because those funds were typically disbursed to bank holding companies, and enforcement actions frequently are levied against the banks themselves, BailoutSleuth also considered whether a TARP recipient's subsidiary was penalized by the federal government. Our study did not include enforcement actions levied against a bank's individual employees.
The revelation that at least 11.8 percent of companies that got government money through the Capital Purchase Program were hit with federal enforcement actions in 2009 and 2010 calls into question the security of taxpayers' investment and the prudence of some of the Treasury's choices.
BauerFinancial issues ratings on a 0 to 5 scale that help provide insight into the state of the banks in BailoutSleuth's investigation. Thirteen banks had Bauer's lowest rating of 0, indicating an institution facing "considerable challenges." The TARP banks that received enforcement actions had an average rating from Bauer of 2, defined by the firm as "problematic." Fifty-six of the banks on the list - the majority of the banks identified in BailoutSleuth's study - had ratings of 2 or less, or had failed.
Even if a bank doesn't fail, it still can cost taxpayers if that institution merges or restructures as a result of financial troubles. TD Bank acquired The South Financial Group - the recipient of $347 million in TARP investment -- earlier this year. As part of the deal, TD Bank was able to wipe out South Financial's debt to the Treasury for just $130.6 million, resulting in a loss to taxpayers of $216.4 million.
At least one bank identified by BailoutSleuth's investigation may face a similar fate. First Sound Bank in Seattle received $7.4 million in taxpayer aid in December 2008. In April of this year, the FDIC ordered it to either sell enough voting shares to become recapitalized or become acquired by another bank, which could cost taxpayers depending upon how a deal is structured.
First Sound's problems are reportedly tied to the purchase of a leasing company that was finalized in early 2008. The bank accuses the company of misrepresenting its profitability and has filed a federal lawsuit against the former owners.
Banks don't have to close or get bought out to cost taxpayers money. Many of the TARP banks that received enforcement actions are on a list (p. 77) compiled by the Special Inspector General for TARP of 104 institutions that have failed to make a combined $189 million in scheduled dividend payments to Treasury. The payments are required as a condition of receiving taxpayer assistance. But in some instances, once a payment is missed, Treasury cannot recover it.
TARP "deadbeats" who missed dividend or interest payments are five times more likely to have received an enforcement action in 2009 or 2010 than the banks that paid on time, according to an analysis of BailoutSleuth's data conducted by Linus Wilson, a professor at finance University of Louisiana-Lafayette.
City National Bank
The Comptroller of the Currency found "unsafe and unsound banking practices relating to asset quality and credit risk management" at City National Bank of New Jersey in June 2009 -- less than three months after it received a $9.4 million investment through TARP.
The OCC went on to order City National to conduct an internal audit, to develop a plan to improve its loan portfolio management, to revise its lending policies, develop a capital plan, and to coordinate a strategy for handling a liquidity crisis.
Even more troubling is that the OCC exam that prompted the order began in December 2008 - well before City National received the TARP money - suggesting that officials might have been aware of some of the bank's problems before it was approved for government aid.
OCC officials declined to comment on this story.
Three failures so far
While most banks that receive enforcement actions don't fail, almost all banks that do fail are the subject of enforcement actions in the months prior to their closure.
Already, three banks that got TARP funds have gone under, including Midwest Bank and Trust Co., in Elmwood Park, Ill.; Pacific Coast National Bank, in San Clemente, Calif; and United Commercial Bank, of San Francisco. A fourth recipient, CIT Group Inc., filed for bankruptcy. Taxpayers are expected to lose most or all of all their investment in those companies - a combined $2.7 billion.
A December report from a government-sanction TARP watchdog called the Congressional Oversight Panel highlighted that issue. "In addition to costing taxpayers, the recent bank failures call into question Treasury's assertion that CPP funds were only available to 'healthy' or 'viable' banks," the panel writes. It also notes that Citigroup Inc.'s need for $20 billion in extra TARP funds -- weeks after receiving a $25 billion investment through the Capital Purchase Program - "further calls into question" Treasury's assertions.
The FDIC maintains a list of "troubled" banks that warrant special attention because of their weakened financial state. That list is closely guarded and not released publicly. But Elizabeth Warren, who chairs the Congressional Oversight Panel, said in a letter that the list likely includes 15 to 20 TARP banks.
AnchorBank
AnchorBank FSB in Madison, Wis., is another institution that has struggled since getting TARP aid. In June 2009 -- less than five months after its holding company received $110 million in taxpayer investment --AnchorBank was ordered by the Office of Thrift Supervision to develop a contingency plan in the event it couldn't stay adequately capitalized.
In its quarterly report for the period ending Dec. 31, 2008 -- before it received the public money -- the bank wrote that regulators did not consider the bank well capitalized. Anchor said its "substandard" assets had increased to $413.1 million from $143.9 million in March of that year.
The bank's non-performing assets totaled $166.4 million at the end of 2008, up from $87 million a year earlier.
The bank admitted then that further troubles would be likely, due to the faltering real estate market. Still, Treasury considered the bank healthy enough to qualify for government investment.
Anchor's woes continued despite the infusion of capital. It lost $228.3 million in the fiscal year that ended March 31, 2009, and lost a further $160.1 million in the first nine months of its current fiscal year.
The bank ended 2009 with $344.4 million in non-performing assets, more than double its total at the end of 2008, according to SEC filings. Anchor has more than $4.4 billion in total assets.
Sterling Savings Bank
The holding company for Sterling Savings Bank in Spokane, Wash. received $303 million in TARP money in December 2008. The following October, the FDIC found that Sterling's board lacked proper oversight and that the bank was being run in a way that produced operating losses. It also cited inadequate capital and a large volume of poor-quality loans.
Sterling's quarterly report ending Sept. 30, 2008 -- the most recent one before Treasury gave it the loan -- shows that its non-performing assets had increased seven-fold over the course of the year to $436.7 million, largely due to deteriorating residential real estate loans and construction loans.
Sterling's parent company, Sterling Financial Corp., posted a loss of $336.7 million for 2008. The red ink hit $855.5 million last year, as the company took more than $680 million in provisions for loan losses.
It ended 2009 with $987.4 million in total non-performing assets, up from $610.7 million at the end of 2008. On March 31, the end of its most recent quarter, the figure stood at $1.07 billion. Sterling has nearly $10.6 billion in total assets.
Sterling is trying to secure outside investment to boost its capital levels, and also wants the Treasury Department to convert the preferred stock it received in the TARP financing to common stock.
Profit or loss?
Ultimately, it's unclear whether the Capital Purchase Program will turn a profit or a loss for taxpayers. According to Special Inspector General Neil Barofsky's report (see p.74), the Congressional Budget Office estimates that the program will generate $2 billion in gains, while the Office of Management and Budget predicts it will cost taxpayers $1 billion.
But regardless of how that program turns out, it will only be half the story. That's because Treasury is actively campaigning for the creation of another program that would provide up to $30 billion in assistance to banks called the Small Business Lending Fund. Critics say the program could suffer some of the same challenges as the Capital Purchase Program, since the two are structured similarly. And architects of the program are advocating for it to be excluded from the oversight of the special inspector general's office which has delivered comprehensive and critical reports of TARP programs.
In some instances, the actions of financial institutions seemed to run counter to the spirit or intent of the program, given that taxpayers were providing them with substantial sums of money.
Six months after American Express Co. received nearly $3.4 billion in aid, the company got in trouble with the FDIC for failing to notify customers in a timely manner that their credit lines had been reduced. Many customers using bank-issued convenience checks learned later they were declined, which caused them to suffer bounced check fees and damaged credit. That resulted in AmEx having to pay more than $3 million in restitution to customers.
In the case of Royal Bank America in Narbeth, Pa., the FDIC cited it for having a board that didn't offer proper supervision and for operating with "inadequate management, policies and practices" that proved detrimental to the company. The FDIC said the bank also had excessively delinquent loans, inadequate underwriting and a lack of capital protection, liquidity, and internal controls.
Royal Bank got $30.4 million in taxpayer money in February 2009. The FDIC's stinging criticism came less than five months later.
Questions from watchdogsWatchdogs are starting to pay attention to the issue. In an April letter to Treasury Secretary Timothy Geithner, Warren - of the Congressional Oversight Panel - expressed her concern over "the fact that Treasury has had to establish policies and structure a process for handling TARP-assisted banks that are on the brink of failure."
She went on to ask Geithner: "What happened to these banks after the infusion of TARP funds that caused them to go from healthy to unhealthy," referring to TARP banks that have failed, missed dividend payments or have dangerously high loan concentrations. "Have you discovered any information since the time of the initial CPP investment that suggests that Treasury's decision to provide TARP funds to particular institutions was, in retrospect, ill-advised?"
Geithner didn't answer that question directly and instead laid some of the blame on the banks' regulators. Treasury "gave considerable weight to their recommendations" when deciding who would get TARP funds, he said in his response.
He also did not answer Warren's questions about Treasury's level of exposure to failing TARP banks, or say whether some of Treasury's investments, in retrospect, were a mistake. "While all institutions were deemed viable at the time of Treasury's investment, it is possible that some institutions have since experienced financial difficulties for any number of reasons, including a loss of value in certain asset classes," he wrote.
Treasury spokesman Mark Paustenbach also declined to answer BailoutSleuth's questions about how Treasury can reconcile its insistence that TARP banks were healthy with the subsequent problems many of them have encountered.
Treasury, it should be noted, made the final decisions on Capital Purchase Program assistance - not the regulators. A 2009 report from the Office of the Inspector General at the FDIC, the regulator that issued the most enforcement action against TARP recipients, said the agency "stressed that the CPP was a Treasury program and that Treasury had developed program parameters, including criteria for assessing applicants' financial viability."
FDIC spokesman Greg Hernandez told BailoutSleuth that all the TARP applicants recommended by FDIC were considered "viable" -- Treasury's standard for inclusion in the program - at the time of the investment.
"Since that time, the financial condition of some CPP participants has deteriorated, frequently due to credit exposures and a protracted decline in economic and real estate activity in markets around the country," Hernandez wrote. "The TARP funds have helped these institutions weather these adverse conditions."
CIT Group
Warren and Geithner had a similar back-and-forth following CIT's bankruptcy filing last year. In November 2009, Warren wrote to Geithner and asked whether CIT was considered healthy when it got its billions through the Capital Purchase Program.
Geithner responded by, again, noting Treasury's reliance on banking regulators' recommendations.
Geithner went on to explain in his letter to Warren that it would be impossible to guarantee the success of every TARP investment. "Given the program was designed to contribute to the stability of our financial system, we cannot rule out the possibility that not all of the individual investments will earn profits for taxpayers."