Bailouts Failed

Bailouts Failed to Aid Small U.S. Banks, Warren Says (Update1)

By Ian Katz and Betty Liu

July 14 (Bloomberg) -- Elizabeth Warren, who leads the congressional panel overseeing the Troubled Asset Relief Program, said U.S. taxpayer bailouts helped Wall Street and not small banks.

TARP “worked really well for the Wall Street banks, but it didn’t work well for the rest of the banks in the system,” Warren said today on Bloomberg Television’s “In the Loop with Betty Liu.”

Small banks that took money from TARP may struggle under the weight of their repayment obligations, Warren’s Congressional Oversight Panel said in a report released today. The Treasury Department may be stuck with stakes in banks that can’t raise replacement capital, the panel said. Banks that don’t repay TARP capital by 2013 will have their dividend payment grow to 9 percent from the current 5 percent.

About 10 percent of the participating smaller banks have repaid taxpayers, and another 15 percent are late on at least one dividend payment, according to the report.

Congress authorized TARP in October 2008 to prevent a collapse of the U.S. financial system. Large companies including Goldman Sachs Group Inc. and Bank of America Corp. that took funds have since repaid the government.

“The commercial real estate problem for small banks is huge,” Warren said. “The overall economy obviously is a problem for them.”

Consumer Protection Agency

Warren declined to comment on whether she’s interested in heading a consumer protection agency that’s part of the overhaul of financial-services regulations the Senate may approve this week. The proposed agency “is strong, it has a lot of teeth,” Warren said.

The oversight panel recommended that the Treasury clarify its exit strategy and also develop a policy for how to handle banks that miss six or more dividend payments and trigger a provision that lets the government replace board members. The Treasury injected about $205 billion in capital into 707 banks, including 690 with assets of less than $100 billion, the report said.

Treasury spokesman Mark Paustenbach said TARP is “still providing relief” to participating small banks. He said there have been four failures of small banks that accepted capital injections, or 0.6 percent of banks that took TARP funds. Out of all U.S. banks, 2.9 percent have failed since the end of 2007, he said.

Treasury Secretary Timothy F. Geithner said last month that the capital injections for small banks were designed to help them weather the economic crisis. The Treasury will work with the banks to give them alternatives to slashing lending in a way that would harm the recovery, he told Warren’s panel in a June 22 hearing.

The oversight panel has five members, three appointed by Democrats and two by Republicans. Four Republicans have left the panel since it was created in October 2008.