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TARP Is a Trap


A warning to community banks.

The impending arrival of grandson number 2 thwarted our annual pilgrimage to the Community Bankers Association meeting in Phoenix this past week, as our priorities and what matters most comes first. But the conference call feedback from my banking colleagues who attended was most insightful, if not frightful.

Why would a solvent and "adequately" capitalized community or small regional bank want to take any TARP money? It means more rules, Federal regulations, compensation issues, regulators, interest payments, and payback pressures, and it makes the question of whether or not we really need this money the more relevant issue.

That's the question du jour being posed by the community bankers, who never sold or held any toxic assets. However, they've been painted and tainted by a very broad brush; they're feeling the impact of the economy and facing increased FDIC insurance fees to pay for the sins of their larger banking brethren. Many of these bankers remain reluctant to make loans, as their capitalization requirements remain the primary focus of their own "stress test" - and of their ultimate survival.

But if faced with the alternative, do they really want to be subjected to the many onerous rules and regulations that accompany the TARP money? Or as my Granddad would ask during our chess match as it grew darker in the cabin down by the lake: Is the game worth the candle?

As a banker, I can understand the functionality of bolstering capitalization and liquidity in an ongoing recession, but at what price? An equity offering has its own set of downsides for the issuer, but it's done with much less government intrusion into an already heavily regulated business. The issue persists: Does a solvent (albeit, minimally capitalized) community bank really want to accept the government's TARP money and the baggage that comes with it?

Keeping in mind, community banks (and bankers) are a different breed; the old adage I've heard the most the last few days has to do with lying down with dogs and getting fleas. Whether the Congress, the Federal Reserve or the Treasury Department represent the dog or the fleas is of little matter. The point is well-taken: Doing business with the government is an uncomfortable proposition. Unless the liquidity and capitalization need is indisputable, the game may very well not be worth the candle.

Community banks are noted for personally knowing their clients. Unlike a Citigroup (C), a Bank of America (BAC) or a SunTrust (STI), community bankers seldom collateralize, re-package and re-sell loans. They simply service them.

While they may participate in established, well-collateralized loans with other banks, the originating bank will remain the "holder in due course," and all sins are ultimately visited directly upon them.

Unlike the Countrywides, Bank of Americas, and Citigroups of the world who "regifted" their champagne, not knowing its vintage or its worth, community banks know who they made their loans to and the participating bank knows where to find them.

As a lawyer, I feel the rules changing under my feet. Like playing football with Toddo on a shaky field during an earthquake; will they change the rules again? For example, have the established constitutional prohibitions against ex-post facto laws and Bills of Attainder been summarily and unilaterally abolished? I'm as outraged as anyone at paying the "bad guys" bonus money from taxpayer dollars. But do we suspend the Constitution to stop it?
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Positions in AZO, community banks

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