Taxpayers to take big hit in Pacific Capital restructuring

Taxpayers can expect to lose much of their $180.6 million investment in the bailed-out Pacific Capital Bancorp when the Treasury Department completes a restructuring of the company's TARP aid.

Under the new deal - part of a broader plan to recapitalize the struggling bank -- Treasury's existing preferred stock in Pacific Capital will be exchanged for new preferred stock at a discounted rate of 37 cents on the dollar.

The new preferred shares will eventually be converted into common stock, at a price of 20 cents a share.

Although the conversion to common stock would give Treasury some potential upside, the initial restructuring would essentially forgive $113.8 million of the $180.6 million that Pacific Capital received through the Troubled Asset Relief Program in November 2008.

Treasury spokesman Mark Paustenbach declined to answer BailoutSleuth's questions about why the agency made the deal, and what it now estimates the value of taxpayers' investment in the company to be.

Treasury has done similar deals with other banks whose fortunes have declined since they received TARP money. The institutions on that list include Independent Bank Corp., which has headquarters in Ionia, Mich., and First BanCorp, based in San Juan, Puerto Rico.

Pacific Capital Bancorp is the parent company of Pacific Capital Bank N.A., which operates 48 branches under the names Santa Barbara Bank & Trust, First National Bank of Central California, South Valley National Bank, San Benito Bank, and First Bank of San Luis Obispo.

With $5.6 billion in deposits and nearly $7.4 billion in assets, Pacific Capital Bank N.A. is one of California's largest banks. If it had failed, it would have been the largest bank in the continental U.S. to go under this year.

Earlier this year, a subsidiary of Ford Financial Fund L.P. - headed billionaire banker Gerald J. Ford --struck a deal to invest $500 million in the company. The investment, through the acquisition of newly issued common and preferred stock, could give Ford Financial up to a 91 percent stake in the company.

The deal is expected to close Aug. 31.

Though taxpayers may have seen tens of millions of dollars of their investment wiped out, they could have lost even more had the bank gone under. Ford's capital infusion likely saved Pacific Capital from oblivion, and the restructuring of the Treasury deal was a condition of that investment.

 "We are pleased that we are making such good progress towards completing our investment in this franchise, which will provide the financial support that will allow the bank to continue serving its customers and actively support its community partners," Ford said in a statement.


Pacific Capital's president and chief executive, George Leis said he expects that the deal will give the institution enough capital to make it considered "well capitalized" again, following an order from its federal regulator.


Pacific Capital is among the growing number of TARP recipients that have stopped paying the dividends to Treasury that were a condition of receiving government assistance. The Santa Barbara, Calif.-based company has skipped five quarterly payments; if it misses another, Treasury will have the right to appoint a pair of directors to its board.

Pacific Capital has been hemorrhaging money, suffering net losses of $22.8 million in 2008 and $431.3 million in 2009. It already has net losses of $138.8 million through the first half of 2010. Independent banking analysts BauerFinancial give the bank a worst-possible rating of 0.

In May, the Office of the Comptroller of the Currency slapped the bank with a cease-and-desist order instructing it to develop a new strategic plan, to boost its capital ratios, to address its commercial real estate concentrations, and to improve liquidity, among other provisions.

Linus Wilson, a professor at University of Louisiana-Lafayette, noted that under the terms of the Ford deal, some subordinated debt holders are getting 65 cents on the dollar for their investments, as opposed to the taxpayers' 37 cents.

He said that doesn't seem like a great deal for taxpayers at first, but had the bank but put in receivership, their entire investment could have been lost.

This isn't the first time that taxpayers have seen their TARP investments significantly reduced. Treasury reduced the debt owed by The South Financial Group from $347 million to $10.6 million when the ailing institution was acquired by TD Bank in May.


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