BankWatch: TARP Investments Lead to Huge Losses for U.S. Treasury

As struggling banks get acquired or fail, the U.S. Treasury is shouldering a growing burden: Its investments in TARP are turning out to be a bust, leading to huge losses. And there are signs of more trouble ahead.

Example: When Canada's Toronto Dominion Bank (TD) bought a South Carolina bank earlier this month, it came with a hefty price tag for the U.S. Treasury Department -- a 60% loss in its TARP investment. T

Turns out, this is only one among several hits that the Treasury and the U.S. taxpayer have taken recently. In fact the string of losses in TARP, the Troubled Asset Relief Program, isn't only large, it's gathering momentum.

TARP Takes Hits on Its Investments

To wit: The recent acquisition of Pacific Capital Bancorp (PCBC) by Texas billionaire Gerald Ford means a $145 million, or 80%, loss in the U.S. Treasury's $181 million TARP investment in the Santa Barbara, California-based bank. And private equity firm Thomas Lee's investment in Spokane, Washington-based Sterling Financial meant a 75% haircut in the $303 million Treasury investment.

These losses showcase how poorly many of the Treasury Department's TARP investments have fared. Still, on May 21, the Treasury Department grabbed headlines when it notified Congress that the cost of TARP has decreased by $11.4 billion to $105.4 billion. While that is no small achievement -- given that less than a year ago, the estimated cost topped $340 billion -- it hides the stream of investment losses that the Treasury is taking almost weekly from several of its TARP recipients, costing taxpayers dearly.

Just days before, on May 17, the Treasury took a 60% hit to its $347 million TARP investment in a South Carolina bank named The South Financial Group (TSFG), which was awarded the cash in December 2008. At the time, H. Lynn Harton, CEO of South Financial said: "The Treasury Department's investment is a vote of confidence in TSFG and enhances our ability to support economic growth in the communities we serve."

In fact, the "vote of confidence" investment turned out to be a bust. The Treasury Department is getting just $130.6 million in cash in return for its $347 million TARP investment. Canada's Toronto Dominion Bank, part of TD Bank Financial Group (TD), is acquiring South Financial Group's outstanding shares for a mere $61 million.

Losses in Failed Banks Are Mounting

As we are seeing, the story of the TARP losses is being repeated over and over again. Just this month, the Treasury Department lost all of its $84.8 million TARP investment in Midwest Bank & Trust of Illinois. The 23-branch bank was seized by the Federal Deposit Insurance Corporation in mid-May. That was on top of a $2.3 billion loss when CIT Group (CIT) filed for bankruptcy last year, the $298 million loss at failed bank UCBH Holdings and an additional $4.1 million in Pacific Coast National Bancorp.

There are signs of more trouble ahead. More and more banks that took TARP funds are under so much stress that they aren't paying dividends to the U.S. Treasury. The failed Midwest bank was just one of 104 TARP recipients that hadn't paid dividends, according to Neil Barofsky, the special inspector general of TARP. Barofsky says that as of March, unpaid dividends totaled $188.9 million.

Besides, it's anyone's guess how many banks that took TARP funds are part of the recently updated FDIC "Problem List" of 775 banks at the end of the first quarter of 2010, an increase from 702 in the previous quarter.

Don't Hold Your Breath

Barofsky also said that it's quite unlikely that the Treasury will get back all of the $84.8 billion that it handed out to the auto companies and their financial arms or that it will see much of the $50 billion that's earmarked for home loan modifications.

Still, Treasury officials like to point out that the primary objective of the Troubled Asset Relief Program has been achieved.

"TARP has succeeded in achieving its intended goal of stabilizing the economy and putting America back on track for future growth," said Herb Allison, Treasury's Assistant Secretary for Financial Stability. "Not only have we averted an economic catastrophe, we're in a stronger position sooner than anyone predicted."

To be sure, TARP has played a big role in stabilizing the financial system. However, much of the calming seems to have taken place in the larger banks, while the smaller banks are still reeling from the economic recession and bad loans. And it's still up for debate whether the TARP investments in hundreds of banks achieved much. After all, TARP funds were later handed out to spur lending and shore up capital.

Lending Picture Still Dismal

However, as federal regulators' numbers show, lending has hardly picked up and banks continue to weaken as an increased number slide into failure. At last count, the FDIC had seized 238 banks since 2008, and 73 of the failures occurred just since the beginning of the year.

Indeed, in the most recent widely watched survey of bank loan officers, the Federal Reserve found that overall lending standards were unchanged in the first quarter since the same time last year. What's more, terms on loans to households and businesses, especially from small to mid-size banks, continued to tighten.

While it's true that an economic catastrophe has been averted, as the U.S. Treasury's Allison claims, as the Fed data shows, it's certainly up for debate whether TARP has been successful in achieving its many goals as the losses mount.