Small banks still stuck in federal bailout

@CNNMoney October 27, 2011: 7:17 AM ET

WASHINGTON (CNNMoney) -- Hundreds of struggling small community banks could be stuck in the federal government's much-maligned bank bailout program, a watchdog agency warned in a report released Thursday.

The Special Inspector General for the Troubled Asset Relief Program (TARP) warned the Treasury Department that it should come up with a "clear TARP exit" plan to help small banks get out the federal bank bailout program.

"Despite the dramatic efforts to expedite the largest banks' exit from TARP, there appears to be no corresponding concrete plan for community banks' exit from TARP," said Christy Romero, the acting special inspector general for TARP, in a quarterly report to Congress.

Treasury disputed the inspector general's warning and said it has "metrics to guide our decision-making to insure that taxpayers and the institutions are being treated equitably," said Timothy Massad, Assistant Secretary for Financial Stability in response to the inspector general's concerns about small banks.

TARP is the $700 billion bailout program that Congress passed at the height of the financial crisis in the fall of 2008.

Only $245 billion was actually used to help some 700 banks, according to Treasury. As of Sept. 30, most of the bank bailouts had been paid back. Indeed, Treasury often touts that when you count dividends and interest, taxpayers got back $257 billion, a $13 billion profit.

SigTARP says taxpayers are still out $186.8 billion, from bailouts made to American Insurance Group (AIG, Fortune 500) and Chrysler, as well as other programs aimed at helping homeowners with underwater mortgages, small businesses and the automakers.

But SigTARP is particularly concerned about the health of some 400 small and medium-sized community banks that have yet to pay off their bailout loans.

More troubling, SigTARP says, nearly half of those banks -- 193 -- have missed making dividend and interest payments -- meaning the federal government hasn't collected $357 million that was due to taxpayers.

Of that group of small banks that missed payments, 72 banks had missed six or more dividend or interest payments. Another 20 banks had missed five dividend payments, SigTARP reported..

SigTARP warns that missed payments may only get worse come the fall of 2013, when the small banks will have to pay a 9% dividend rate instead of the current 5% dividend rate.

"SigTARP is concerned that when the dividend rate increases, many of these banks will remain in TARP but still will be unable to access new capital," the report said. "Many will have no means either to exit TARP or to pay their required dividend payments."

Treasury said that possible future missed payments won't push these banks to default on what they owe to taxpayers or fail.

This is not the first time a watchdog has sounded the alarm about TARP's power to aid smaller banks.

In July 2010, the now disbanded Congressional Oversight Panel, then headed by Elizabeth Warren, warned that TARP had made little difference in the health of small banks. To top of page

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