The U.S. taxpayers' investments in smaller banks are increasingly at risk.
In a sign that more banks are under great pressure from the recession, 34 financial institutions did not pay their quarterly dividends in August to the Treasury on funds obtained under the Troubled Asset Relief Fund (TARP). The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.
"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.
The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."
However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds.
Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid."
Some say Treasury might have been too hasty in approving some banks for TARP funds.
"Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking."
Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment.