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Gov’t Report: 66 Struggling Banks Got Bailout Money Through 'Healthy' Bank Program

Despite getting government funds, many banks that barely qualified for bailout funds are still struggling to survive, according to a recent government watchdog report.

Of banks that were bailed out through TARP’s Capital Purchase Program – a program intended for healthy bank – 66 were known to be weak at the time of their bailout, according to a new report by the Government Accountability Office.

The 66 weak banks — most of which are small, community banks — were more likely to miss paying out dividends and interest to the government, and their ranks have grown over time. (The worst has been California’s Saigon National Bank, which has missed every single payment.) The GAO report notes that some banks that got money have already failed:

Four [Capital Purchase Program] institutions have failed, but the number of firms exhibiting signs of financial difficulty — such as missing their dividend or interest payments — has increased over time.

For instance, 78 bailed-out banks were on the FDIC’s list of “problem banks” as of June 30, which meant their continued survival was in question, according to the report.

The Capital Purchase Program, which loaned money to 700 banks, was supposed to help “healthy institutions” get through tough times. But the GAO report focused on a small group of weaker banks that managed to get funds through the program and are still struggling, raising questions about why they qualified in the first place.

The report noted that because banks seeking funds were recommended to the Treasury by their regulators, the use of discretion by each bank regulator “created the potential for inconsistency” across the program. The report also said that weaker banks often got a pass because Treasury officials or bank regulators would identify factors “such as management quality or substantial capital levels” that “mitigated the weakness."

As we've noted, lawmakers seem to also have had some sway. For instance, at the time OneUnited Bank received money, regulators knew it was in poor shape. After a push by Rep. Maxine Waters and Rep. Barney Frank, OneUnited still managed to get funds through the Capital Purchase Program. (Exactly how much of a push it received is the subject of an ethics investigation involving Rep. Waters, a California Democrat whose husband has a financial stake in the bank.) Another example is Central Pacific Financial, a bank in Hawaii that didn't receive a recommendation from its bank regulator, the FDIC, but managed to get bailout funds after an aide to Sen. Daniel Inouye, D-Hawaii, put in a call to federal regulators.

We’ve flagged some of the problems with weaker banks receiving bailout funds in the past. From our previous coverage:

Some analysts have criticized regulators for choosing apparently unhealthy banks, while others have said it's an understandable consequence of the pressure regulators felt to speed the review process. One reason it's hard to settle: Treasury has released only the general outlines of the bank reviews – the records for each individual review are kept secret. 

The Treasury’s $700 billion Troubled Asset Relief Program officially began winding down this week after its authorization to make new expenditures expired. Its final cost to taxpayers remains to be tallied, and depends on — among other things — repayment from the banks. (While repayment is a small part of it, the bigger factors in the final cost will be how the Treasury recoups the billions it spent rescuing AIG and GM.)

In another report released today, the Treasury estimated that TARP's total cost to taxpayers will end up being about $30 billion, far less than expected. A recent estimate by the nonprofit Congressional Budget Office had put the final figure at $66 billion--still significantly less than early estimates in the hundreds of billions.

For more on the bailout, check out our bailout tracker, which follows every dollar, and take a look our recent post reviewing the program's star and slackers

Listen to ProPublica reporters Paul Kiel and Karen Weise discuss the successes and failures of the bailout in the ProPublica podcast.

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