LOS ANGELES — Nearly four years after Washington bailed out Wall Street, small banks have yet to repay $11 billion of taxpayer money.
LOS ANGELES — Nearly four years after Washington bailed out Wall Street, small banks have yet to repay $11 billion of taxpayer money.
Uncle Sam wants out and is threatening to unload its stakes in the banks at big discounts to new investors. Many of the 324 institutions, mostly tiny community banks and niche players, wonder whether they’ll be able to stay in business.
Some stragglers would become financially unstable if they repaid their part of the $245 billion doled out during the financial crisis by the Treasury Department’s Troubled Asset Relief Program.
“Many of these banks feel forced into a situation they can’t control — a potential fire sale with new and perhaps unfriendly shareholders,” said Jerry Comizio, a banking lawyer at Paul Hastings in Washington. “For some banks, though, given their small size and financial condition, they may not have any other viable option.”
The fact that so many small banks — most with less than $1 billion in assets each — cannot do so illustrates how the struggling economy has crushed business strategies that often relied on housing-related loans and small-business mortgages.
The Treasury Department bought preferred stock in the banks on the condition that they compensate the government by paying a 5 percent dividend for five years, which then jumps to 9 percent late next year or in 2014. Counting the dividend payments, the government has turned a $19 billion profit overall on its bank bailouts.
Nearly half the 707 banks that received TARP funding have yet to repay their debt.
The Treasury Department is encouraging the banks to buy back their own stock, which some are planning to do. But most are required to clean up soured loan portfolios, strengthen management and raise new capital privately before regulators will allow them to buy their own stock or even to pay dividends.
“There’s no capital out there for little banks, no capital for inner-city banks and no capital for banks with a lot of troubled assets,” said Wayne Kent-Bradshaw, an executive with Broadway Financial Corp. in Los Angeles.
The three-branch bank, founded in 1947 by African-Americans to help blacks who had been shut out by mainstream banks, “is all of those,” Bradshaw said.
In a bid to keep the company’s Broadway Federal Bank in business, the Treasury Department has agreed to trade its dividend-paying stock for non-dividend shares at a 50 percent discount. But the deal is on only if Broadway raises $5 million in new capital and persuades other preferred stockholders to take a haircut.
Bradshaw said investors have pledged $3.5 million, and sale of the bank’s headquarters yielded $1.5 million after taxes — a total of $5 million.
“We’re negotiating with everyone, including Treasury, to get this worked out,” he said.
Some small banks have kept the funds by choice, biding time until the dividend rises. Others have agreed to takeovers by larger rivals in deals that repay the government.
Timothy Massad, the assistant Treasury secretary for financial stability, said deals such as the one with Broadway are struck only if they represent the best outcome for taxpayers.
“Some of those institutions were very close to failing,” Massad said, which would wipe out the government’s entire investment.
More common are the discounted sales. In the past three months, the Treasury Department has sold its stake in 20 institutions, with recoveries ranging from 74 percent to 98 percent of its original investments. The next such auction will be held in late July.
The department also plans to unload its stock in about 200 smaller banks this fall by combining shares of various institutions in pools for sale. Bidders are likely to include hedge funds and other specialists in disposal of troubled assets.
The banks can forestall the sales if they buy back their own stock for what the Treasury Department’s consultants deem to be a reasonable minimum price.
But most of the banks are still so weak that regulators won’t allow them to deplete their capital by buying back their shares, said Gary Findley, a small-bank consultant in Anaheim, Calif. He expects a consolidation trend to continue, with the department’s actions encouraging more takeovers.