Small banks want to wash hands of bailout money

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Bankers really don't like the idea of more federal government control, so some banks are starting to repay borrowed federal funds as fast as they can. The first to do so are four regional banks, which repaid their loans yesterday, according to a report in The Washington Post.

Signature Bank of New York (SBNY), which took $120 million in bailout funds, was that largest to exit the loan program. The other three were Old National Bancorp of Indiana (ONB) ($100 million), IberiaBank of Louisiana (IBKC) ($90 million) and California's Bank of Marin Bancorp (BMRC) ($28 million). The Bank of Marin took a loan from another source to get rid of the added government control.

The key sticking point is compensation restrictions. Banks believe that restriction on pay will hamper retention of top employees and give banks that don't take the aid a competitive advantage. They also believe that the stigma of taking money from the government is making it appear as though they're in trouble.

When the Bush administration first gave the money there were few restrictions. In February, after a public outcry about bonuses and pay at bailed out banks and the lack of increased lending produced by the bailout money, Congress imposed tighter pay limits on aid recipients. But it also made it easier for banks to opt out of the program. Originally the rules required the banks to raise private funds to replace government money. Now companies must just file a withdrawal application showing that their lending capacity will not be affected if they repay the money.

So far only smaller banks have applied for the right to exit the bailout program, but Goldman Sachs (GS) and Northern Trust (NTRS) have made noises they want out, too. The government is still reviewing hundreds of applications for federal aid and a Treasury spokesman told The Washington Post that new investments in other banks will be made.

Some fear a rush to the exits could hurt lending and slow the recovery. But, in reality, most of the nation's 25 largest banks that got funds haven't increased their lending anyway. Lending by the five largest banks fell at an annualized rate of 16 percent in the fourth quarter, according to Federal Reserve Governor Elizabeth Duke in a speech Monday. Lending of the 20 largest banks fell by 4.25 on an annualized basis.

I don't know why the fact that big banks aren't lending should come as a surprise to anyone. In addition to cutting back on new lending, banks have been rapidly cutting credit lines for small businesses and credit card holders for months. Clearly this bailout program did not work, and the faster the taxpayers are repaid, the better.

Newly designed programs by the Obama administration to rid the banks of their toxic assets, as was the original idea behind the TARP bailout, probably have a better chance of freeing up money for lending than these capital infusions in banks ever had. Rather than provide more infusions, whatever money is repaid should probably be shifted to help fuel the toxic-asset buyouts.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and the Complete Idiot's Guide to Value Investing.

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