Fallout: The Financial Crisis

Local banks hold onto taxpayer money

Amy Scott Dec 7, 2009
HTML EMBED:
COPY
Fallout: The Financial Crisis

Local banks hold onto taxpayer money

Amy Scott Dec 7, 2009
HTML EMBED:
COPY

TEXT OF STORY

Kai Ryssdal: With all this talk of redirecting the bank bailout, let’s not forget hundreds of banks out there aren’t quite ready to pay anything back. Citigroup, for one, springs to mind. Also, dozens of the regional banks that support small business and community developments. They have accepted billions of dollars in taxpayer money. Marketplace’s Amy Scott reports they say, there are good reasons to hold onto it.


AMY SCOTT: The first reason is that regional banks lend a lot more of their money to fund projects like malls and condo developments. Defaults on those loans are at a 16-year high, and rising.

Matthew Anderson with Foresight Analytics says as many as 250 more banks could fail in the next year. Until those losses start to recede, he says regional banks won’t be paying anyone back.

MATTHEW ANDERSON: And I think that’ll be next year at the earliest, if not more like 2011.

Reason number two?

Analyst Craig Siegenthaler at Credit Suisse says to pay the money back, banks have to raise so-called common equity by selling shares and that hurts current shareholders. If they wait, he says they can earn that money organically.

CRAIG SIEGENTHALER: I think a lot of these banks are thinking we’re going to pay it back, but why don’t we wait a few years out and try to pay it back with a lower level of common equity. From a shareholder perspective, that’s the most favorable scenario.

The third factor? Even if banks are ready to repay the government, the Treasury Department might not let them.

Scott Valentin is with FBR Capital Markets. He says Treasury wants to make sure banks have enough of a cash cushion to absorb future losses.

SCOTT VALENTIN: The last thing the Treasury would want to see would be them to approve a bank repaying TARP, and then maybe in 12 months or 18 months that bank runs into problems again from a capital perspective.

Valentin says a lot is riding on how fast the economy improves. If Friday’s better-than-expected employment figures aren’t just a blip, and the economy really is coming back, he says banks will repay the money sooner.

In New York, I’m Amy Scott for Marketplace.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.