A couple of stories in last week's American Banker (paid subscription required) illustrated just how much of a dysfunctional "tarp baby" (as Jamie Dimon once labeled it) TARP and its latest iteration, the Small Business Lending Fund, have become for those banks unlucky or unwise enough to still be stuck in TARP and/or to be considering diving into the SBLF. On Monday, Kate Davidson discussed the hundreds of TARP-takers who haven't yet exited the program, and how they are "desperate for an exit strategy, even if it means selling." Most of the latter are smaller in size and, in a bit of a twist, owe less than those that have already repaid Tarp funds. But the credit quality of their assets continues to deteriorate, and many cannot pay the dividends owed on the funds, making it nearly impossible to raise the capital to buy back the preferred shares. For those banks, options are few. "A lot of these little banks that took Tarp are stuck," said Matthew Kelley, an analyst at Sterne, Agee & Leach Inc. "There just is not an ability for them to go out and raise the types of equity to repay and to achieve the capital ratios that have been outlined by regulators." […] Lingering problems are likely to force many banks to sell in 2011. "I think you're going to see more sales of some of the distressed institutions that do have Tarp," Kelley said. I agree that we'll see more sales of smaller banks in the 2011 and subsequent years. For the TARPers, the need for capital to pay off TARP (especially as the 5-year deadline approaches where the dividend rate on the preferred stock will rise substantially) and the difficulty of raising it will add to the pressure that faces every community bank as the full weight of the brave new regulatory world post Dodd-Frank manifest itself as a python that wraps around and squeezes the life out of small banks throughout the country. Mergers of equals and not-so-equals will gather steam, generating fees for investment bankers and other marriage-makers, as well as those dreaded M&A and (cough) bank regulatory attorneys. Out of every tragedy rises a glimmer of hope, eh? One expert quoted by Ms. Davidson thinks one way out of the TARP trap will be the SBLF. [University of Louisiana at Lafayette finance professor Linus] Wilson said he expects hundreds of banks to exit by refinancing into the Small Business Lending Fund, a $30 billion fund signed into law in September as part of the Small Business Jobs Act. Under the program, banks with assets of less than $10 billion can apply for capital with an initial 5% dividend payment, which could drop to as low as 1% for a few years as banks increase lending. Under Tarp, banks pay a 5% dividend, which will increase to 9% in 2013. That's a "capital idea" except for one thing: as Cheyenne Hopkins points out in a January 7 article, the newly released (by the Treasury Department) terms of the SBLF program "may discourage participation in the program." Among the negative terms in Tre3asury's "term sheet" are the following: SBA 7(a) loans and other government-guaranteed loans won't count toward fulfilling the bank's small business lending commitment in order to lower the dividend rate on the preferred stock. The trade group for SBA lenders claims that this will discourage the most qualified small business lenders from participating in the program. The Treasury has the right to determine that in order to qualify for SBLF capital, the bank must raise a matching amount of capital from 9other sources. In other words, those banks that really need this capital may not have access to it. D.C. bank attorney Gerard Comizio correctly points out that raising "private-sector money costs capital and takes time." I'd add that if the bank has access to private capital, why would it want to jump in bed with the US government, which has a long and treasured history of reneging on its contractual obligations with banks and showed in connection with the original TARP program that it liked to change the rules of the game in the second quarter, in ways that screwed the TARP recipients (and not in an enjoyable fashion). The capital will bear a variable interest rate that can rise (or fall) dramatically (within 8 percentage points) for the first two years measured quarterly.. That's a lot of potential volatility that will make it risky to take the cap0ital unless you're sure you can put out the qualifying loans in a hurry. In addition, the 1% rate applies only to a portion of the capital. Some of the experts cited by Ms. Hopkins (and, of course, the spokespeople for the Treasury Department) think that the SBLF is an attractive source of capital for banks that need it, if not an outright little slice of heaven. We'll see. Personally, I wouldn't bet any money I couldn't afford to lose that this program will accomplish much of anything.
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