Banks Obviously in Trouble, 91 Banks Missed May Payments to Treasury

Reuters reported yesterday that 91 banks missed their May 17th TARP payments. Under the TARP program, the U.S. Treasury invested money into insolvent banks through the purchase of preferred shares of stock, and those shares require the banks to make regular dividend payments to the Treasury, with the right to repurchase the shares at some point in the future.

So, it’s just like an interest only loan. The banks pay the interest only payments, called dividends, until they repay the principal by repurchasing the preferred shares the government bought under TARP.

So, obviously, an increasing number of banks are struggling to meet their obligations, but I suppose that’s what happens when you’re an irresponsible bank owner.

SNL Financial compiled the statistics from U.S. Treasury data, which showed that it was the first missed payment for 23 of the banks, but for the others, it was at least their second missed payment. Not only that, but the data also showed that the number of banks unable to make their TARP payments rose for the third quarter in a row. In February of this year, 74 banks didn’t make their payments and 55 banks missed payments last November.

Perhaps most disturbing was that the analysis found that 20 banks have missed at least four payments since the program began in 2008, and eight banks have missed five payments. The data did not make clear how many of these defaulting loans are due to actual hardships, and how many are strategic defaults, but some taxpayers say they’re suspicious.

With 600 banks still owing the government payments under the TARP program, there’s the definite potential that the crisis could spread, littering communities with empty banks everywhere that some fear would be irresistible targets for vandalism, and therefore would be costly to clean up after they were burned to the ground by local residents out having a good time.

In some cases, banks are attempting to renegotiate or modify their loans. For example, Midwest Banc Holdings offered to swap $84.8 million in preferred shares issued under the TARP program for $15.5 million in common shares, but that would have meant an 80 percent loss for U.S. taxpayers who are the investors in the loans.

The U.S. Treasury, who is servicing the loans, says they denied Midwest Banc’s application for a loan modification because Midwest failed the NPV, and because the taxpayer investors have made it clear that they’re not interested in giving out principal reductions to irresponsible sub-prime bankers who were flipping loans during the bubble, borrowed beyond their means, and took risks based on the idea that real estate would go up forever. Now they want to be bailed out again and taxpayers are saying no.

Unable to raise private capital, regulators seized Midland back in May, but the bank says it could have kept itself going if Treasury had just given it a little more time. The bank says that it received a letter saying that it had been approved for a trial loan modification. Then, a week later and without notice, the bank found itself being seized by the FDIC.

A Midland spokeswhiner said that it’s not fair to be seized while under consideration for a modification, but FDIC Chair Sheila Bair responded by saying: “Huh? I’m sorry, did you say something?”

Sheila Bair thinks to herself… “I hate it when he prays for the recovery.”

Midland executives say the process of applying for a loan modification was a nightmare. The bank claims that Treasury lost the paperwork it submitted four times, and was impossible to reach on the phone. One bank executive who did not want to be named said that he waited on hold around the clock for three straight days. When someone finally answered he asked to see the results of the NPV test that Treasury claims the bank failed, but Treasury responded by saying that they don’t have to provide that information, and then the line went dead.

Perhaps predictably, some politicians around the country are going into the business of offering to help distressed bankers get their loans modified. These politicians often claim to have special relationships, and 99% success rates, claiming to be able to get a bank’s loan modified for an upfront fee of $350,000 to $500,000.

U.S. taxpayers, however, have issued strong warnings to bankers, saying that these politicians are nothing more than unscrupulous scammers looking to take advantage of desperate bankers.

A spokesperson for U.S. taxpayers stated that politicians promising to modify a bank’s loan are making promises they can’t keep, because once taxpayers find out about such promises, there’s no chance of those politicians still being in office after the upcoming midterm elections.

According to U.S. taxpayers, if you’re a banker at risk of losing your bank to seizure, you don’t need a politician to get your loan modified… you can call the Treasury, or better yet, call a taxpayer directly.