TARP outperforming expectations

Just as Bank of America, CitiBank and Wells Fargo get in position to pay back the U.S. Treasury for the investments they received from the Troubled Asset Relief Program (TARP), the Treasury has released a detailed report on TARP’s progress. Overall, it amounted to good news because the program will cost taxpayers much less than originally anticipated.

To recap events: TARP invested public money in U.S. financial institutions to help those institutions restore their balance sheets while they work through the impacts of the financial crisis that exploded last Fall. This program and other government initiatives seem to have had the intended effect, averting a financial panic and keeping banks open and operational. Indeed, according to the report the funds reserved ($700 billion) will not all be used as originally intended, because the investments made by the Treasury on behalf of the taxpayer to keep our banks open are actually generating a bit of a return. The negative impact on the national debt may end up being be less than $300 billion. This is still a huge chunk of change, but saving about $400 billion off of the original estimate looks good at this point. Of course, the riskier TARP “investments” of about $160 billion in such outfits as AIG and the car companies are far less likely to get paid back, and would form the bulk of the loss that TARP could incur.

Northern California has mixed TARP results

Here in Northern California, 28 banks received TARP funds, according to government records and news reports. So far, only three institutions have made progress paying the funds back: Wells, WestAmerica and Bank of Marin. Still, we taxpayers are ahead on most of these investments, as only one bank receiving TARP funds has folded (United Commercial Bank.)

Admittedly, it only takes one lost TARP investment to wipe out a lot of interest paid. As an example, if we collected about 5% on our $25 billion investment in Wells Fargo (putting aside stock appreciation), that amounts to $1.25 billion in interest earned. Against that, United Commercial Bank received $299 million in TARP funds that have been wiped out by its bankruptcy. (The only other Bay Area bank seized by the FDIC, Pacific National Bank, seems not to have received TARP funds.)

Here is where we stand now in our regional corner of TARP:

Three Northern California banks are in the process of paying back TARP funds so far.

Institution HQ City TARP Funds Received ($millions) Repayments Made
Bank of Commere Redding $17 $0
Bank of Marin San Rafael $28 $28
Bridge Capital Holdings San Jose $24 $0
California Bank of Commerce Lafayette $4 $0
Central Valley Commercial Bank Fresno $7 $0
Citizens Bancorp Nevada City $10 $0
Community Bank of the Bay Oakland $3 $0
Community Business Bank West Sacramento $4 $0
Community First Bank Roseville $3 $0
Exchange Bank Santa Rosa $43 $0
First Northern Community Bank Dixon $17 $0
First United Labor Bank Oakland $5 $0
FNB Bancorp South San Francisco $12 $0
Fresno First Bank Fresno $2 $0
Heritage Commerce Bank San Jose $40 $0
Oak Valley Bancorp Oakdale $14 $0
Pacific Coast Bankers Bancshares San Francisco $12 $0
Peninsula Bank Holdings Palo Alto $6 $0
Plumas Bancorp Quincy $12 $0
Redwood Capital Bancorp Eureka $4 $0
Silicon Valley Bank Santa Clara $235 $0
Sonoma Valley Bancorp Sonoma $9 $0
Summit State Bank Santa Rosa $9 $0
United American Bank San Mateo $9 $0
United Commercial Bank San Francisco $299 $0
Valley Community Bank Pleasanton $6 $0
Wells Fargo Bank San Francisco $25,000 in process
WestAmerica Bank San Rafael $84 $42

(If there are any inaccuracies in this compiled list, please let me know and I will set it straight!)

The light at the end of the tunnel remains dim

While early paybacks and interest earned are good news for our government’s budget deficit issues, economic problems remain in the private sector. As the report points out, lending to consumers and small businesses remains anemic, stunting the economy’s ability to generate growth that creates jobs.

“Bank lending also continues to contract…In the third quarter, commercial and industrial (C&I) loans outstanding contracted at an annual rate of 27 percent, and commercial real estate (CRE) loans outstanding at 8 percent. Small businesses rely on banks for 90 percent of their financing. (This credit contraction) is in part a function of the fact that many banks face continued losses on outstanding exposures, in particular in commercial real estate. FDIC-insured commercial banks reported that net charge-offs—that is, losses that have occurred—increased to 2.9 percent as a share of loans and leases in the third quarter, up from 0.6 percent before the recession. And delinquencies of com¬mercial real estate loans were nine percent in the third quarter and increasing.”

Regional and community banks will suffer disproportionately from the coming crisis in commercial lending, as commercial real estate loans hit their refinancing points. This is why you do not see the smaller banks on the TARP list rushing to repay the money. (Of course, they are also not in a rush because they are not as concerned about government-imposed limits on executive pay. Excessive pay is not a trait that regional banks share with the national “too-big-to-fail” financial institutions.)  Banks are still failing as a result of this ongoing economic fallout, and prudent managers must weigh the advantages of TARP support against the good feeling of paying it back early. (The FDIC still has over 500 institutions on its watch list, and will continue closing/merging banks well into 2010.)

Still, TARP seems to have hit its target. The panic has faded, and the wholesale collapse of the financial industry (and the car industry) seems to have been averted. Lots of hard work cleaning up the financial sector remains ahead of us before we get a decent recovery going, but “depression” is off the table, which was a real concern just twelve months ago.

For more information, review the Treasury report on their financial stability initiatives.

Click here to find out more!

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