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April 28th, 2009

Report: 250 Banks Avoid TARP Money

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Two hundred and fifty financial institutions with “preliminary approval” to receive TARP funds had withdrawn their applications as of the end of March. The withdrawal has raised red flags amongst the banks’ regulator, saying the action is “counter” to the program’s purpose and could serve to increase the market’s instability.

According to a first-quarter report issued by the Financial Stability Oversight Board to Congress (pg. 39), “To the extent that such withdrawals reflect a wariness of qualifying financial institutions to seek or receive capital under the TARP, the actions run counter to the purposes of the CPP [Capital Purchase Program], which are to make capital available to broad segments of the banking industry in order to promote stability, public confidence in the financial system and support lending to households and businesses.”

As of March 31, 2009, according to the report (pg 39), five organizations had paid back approximately $353 million in CPP capital — a fraction of the billions that had been handed out. “Treasury will consult with the institution’s appropriate Federal banking agency regarding any proposed redemption of CPP capital to ensure that any proposed redemption is consistent with the safety and soundness of the relevant banking organization,” according to the report.

Fear that banks will redeem funding without first securing sufficient capital levels has prompted the Treasury to release an additional set of “tests” for the institutions to pass before the money can be returned.

Today, regulators informed both Bank of America and Citigroup that based off initial results from the Treasury’s series of stress tests that the banks would need to raise more capital. According to the Wall Street Journal, top officials at each institution plan to dispute the preliminary results.

Banks have sent a clear message to the Treasury Department that the money had, if nothing else, made their business quite a bit more complicated. Moreover, the Treasury’s growing stake in banks like Citi has been enough evidence to other institutions that once you accept the money, it will be quite difficult to pay it back.

How does this affect you? If the U.S. continues to establish a controlling stake in the nation’s largest financial institutions, it could dictate a change to the banking landscape as we know it. Nationalization would allow the government to mandate new rules and regulations as they see fit. Take credit cards for example — if Congress were to decide that every American should own a credit card from a nationalized bank, the private market would likely be eliminated, taking competitive rates and terms with it.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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