TARP failed Main Street banks

WASHINGTON (CNNMoney.com) -- While bailed-out Wall Street is back on its feet and making profits, Main Street banks have gotten little to no boost from taxpayer bailouts, a watchdog panel said Wednesday.

The Troubled Asset Relief Program's help has made little difference for small banks, according to the latest report by the Congressional Oversight Panel. The panel also warned that taxpayers could remain on the hook for small bank bailouts for years to come.

"If TARP ultimately saves Wall Street but leaves behind smaller banks, the result could be that 'too-big-to-fail' banks grow even bigger," said Elizabeth Warren. Warren heads the five-member panel appointed by Congress to be the guardians of the $700 billion program that passed in October 2008 to stabilize the economy.

Treasury Department spokesman Mark Paustenbach countered that TARP is useful to small banks and is still providing relief.

"TARP has helped small banks, including by being able to provide loans and other services to consumers and businesses," Paustenbach said.

A total of 707 banks have participated in what's called the Capital Purchase Program (CPP) -- better known as the bank bailout. Of those, 690 are considered smaller banks with assets that range from less than $1 billion to a $100 billion.

Most of the money has been paid back, and 13 of 17 Wall Street banks are now out from under the government's thumb. But of the 690 smaller banks that got a total of $40 billion, only $15 billion has been repaid.

The report argues that TARP called for a "one-size-fits-all" formula for all bank bailouts. That was a bad fit for small banks, which lack the same access to capital markets and the implicit guarantee that the government won't let them fail. Small banks are also disproportionately exposed to commercial real estate losses.

That means fewer Main Street banks are in a position to return the bailout loans.

The report also found that:

• 10% of small banks have repaid taxpayers;
• 15% that got bailouts have missed one dividend payment;
• and one bank missed six quarterly dividend payments.

"For smaller banks, the CPP is a long-term investment, subject to market uncertainty, stigma, and pressure," according to the report.

The panel also claimed that the Treasury Department appears to lack a plan to get small banks to pay back their loans and exit the program.

"Treasury may remain invested in smaller banks through the CPP for years to come, which could destabilize the sector," the report warned.

Treasury defended the inclusion of small banks in the CPP program, pointing to a June 2009 inspector general's survey of banks that got TARP. In response to a questionnaire, banks self-reported in early 2009 that bailout loans helped them make more loans to consumers and small businesses.

"Many banks reported that lending would have been lower without TARP funds or would have come to a standstill," Paustenbach said.

Treasury is in the process of winding down TARP. If Wall Street reform passes, federal officials can make no new expenditures in TARP. Instead, unused bailout money will be used to pay for the legislation.

The final price tag of the bailout program is expected to be significantly less than originally budgeted.

In August 2009, Treasury projected that TARP would increase federal deficits by $341 billion. A June Treasury analysis put the cost at $105 billion.