The Special Inspector General for the U.S. Treasury’s Troubled Asset Relief Program has reported that 137 banks out of the 332 banks participating in the Treasury’s Small Business Lending Fund used more than half of the funds disbursed by the program to exit from TARP.
This announcement will surprise you as much as the discovery that your child has eaten the cookies you set out on the counter to cool.
Launched in September 2010, SBLF was created by Congress for a specific purpose: to boost small-business lending. But Congress left the goods out on the counter, it allowed banks in TARP to access SBLF and it made no law prohibiting the use of the funds to repay TARP. It had communicated its intent for SBLF, without making a law.
In fact, Congress created an incentive for TARP banks to use SBLF in this fashion. “Several members of Congress voiced concerns that the program could serve as a vehicle for TARP recipients to refinance into SBLF under more favorable terms… TARP banks paying a dividend rate of 5 percent that transferred into the SBLF program had the potential to lower their dividend rate to 1 percent if they increased lending,” the Inspector General reported. “In addition, the SBLF dividend is non-cumulative, meaning that participants have no obligation to make quarterly payments as scheduled or catch up on missed payments, compared to TARP dividends, which generally are cumulative.”
In the middle of last year, the U.S. Treasury also notified small banks that it would begin to auctioning pools of stock from banks participating in TARP in the fall. The 200 banks that received the notice made up $2 billion of the Treasury’s then $11 billion TARP investment. Treasury cannot require banks to repurchase their own investments but Treasury can sell its TARP stock without the bank’s consent. And, if the bank didn’t have the capital to buy its securities back, its stock would be sold to the highest bidder. Is it any wonder the banks used SBLF to exit TARP? I had access to the cookies and I didn’t like the idea of others eating them, so I took one.
More than a majority of TARP community banks (320 out of 552) applied for SBLF funds. Banks selected for SBLF were required by Treasury to repay TARP in full, and Treasury allowed banks use SBLF funds to do so.
There is no doubt that the banks which used SBLF to exit TARP did not use the program in a way consistent with its purpose. Out the 137 former TARP banks in SBLF, over 96 percent did not significantly increase small business lending. They used $2.1 billion of the $2.7 billion they received to repay TARP.
There also was a significant difference in lending depending on whether the bank received only enough SBLF funds to repay TARP or received additional funds. TARP banks that received only enough funds to repay TARP have lent out significantly less than they received in SBLF funds – increasing lending by only 25 cents for each $1 in SBLF funds. TARP banks that received additional SBLF money beyond the outstanding TARP balance have increased lending by $1.67 for every $1 in SBLF funds. Non-TARP banks increased lending by more than three times that amount – $3.45 for each $1 in SBLF funds.
Even with such loose restrictions on the use of SBLF funds, Treasury only managed to invest $4 billion of the $30 billion available. And of that $4 billion, about 66 percent went to banks exiting TARP. Congress and President Obama successfully created a program which, in the majority of cases, only proved useful for those banks which had already been bailed out.
Perhaps now Congress will learn that in the arena of government handouts and chocolate chip cookies, creating something with the right intentions does not guarantee the intended result. I’m not getting my hopes up.