Friday, May 01, 2009

Small WV Bank Loses $750,000 Due to TARP And Pays Treasury 60% Annual Interest for 6-Week Loan

The Troubled Asset Relief Program (TARP) was crafted at the outset of America's economic crisis by people under a great deal of stress, and probably without much sleep. It's had some unexpected consequences for the banks that borrowed money in the bailout.

Take the case of Centra Bank, a relatively small institution in West Virginia. Centra accepted a $15 million loan from the government and promptly paid it back. But that money came with strings attached, and over the past couple of weeks, Centra executives have realized they lost the better part of $1 million in their dance with TARP.

Here are some of the facts:

To protect taxpayers, warrants are typically part of TARP loan packages, and for Centra to get $15 million, the government forced Centra to sell preferred Centra stock worth $750,000 to the Treasury for $750. When the bank paid back the $15 million loan after six weeks, Centra Bank President Douglas Leech figured the bank would just return the $750 to Treasury.

But Treasury told Centra that to exit the TARP program, the bank would have to wire the full $750,000, plus interest.

Even though the bank had held the money for only six weeks, Centra had to pay the equivalent of a 60% annual interest rate on it. If Centra had stayed in TARP longer, the money would have been a cheap loan. But exiting early came with a stiff penalty. For Centra Bank, TARP backfired. It was supposed to give banks extra capital. Instead, it lost $750,000.

Here's the full NPR story.

MP: Senator Dick Durbin (D-Illinois) has introduced a bill called “Protecting Consumers from Unreasonable Credit Rates Act,” which proposes a federally regulated maximum interest rate of 36%. Perhaps he would consider amending it to also protect small banks like Centra receiving TARP funding from paying more than 36%?

11 Comments:

At 5/01/2009 8:39 AM, Anonymous Anonymous said...

Wow! It sound like the TARP program is just a ploy for the government to seize bank assets. Who'd have thunk that...

 
At 5/01/2009 8:43 AM, Anonymous Mika said...

Good idea, MP. Maybe that would only be fair.

On the other hand, seeing banks getting hammered with an exorbitant interest rate seems like poetic justice, considering what they are doing to credit card holders. When the mafia did it, it was called "loan sharking" and resulted in prosecution.

 
At 5/01/2009 8:49 AM, Anonymous Rand said...

60% interest! They could get better rates from Tony Soprano!

 
At 5/01/2009 9:15 AM, Anonymous Anonymous said...

TARP will be fertile ground for future prosecutions of Obama administration officials. That will be the real "poetic justice".

 
At 5/01/2009 9:54 AM, Anonymous Anonymous said...

It is funny how congress doesn't want credit card companies "changing the rules" on consumers after the fact, but that is exactly what they did with TARP recipients!

It is also what Obama is trying to do with Chrysler's bondholders who have legal standing that is trying to be swept under the rug.

 
At 5/01/2009 10:57 AM, Blogger Bret said...

Warrants are a bit different than interest, no?

 
At 5/01/2009 6:05 PM, Blogger randian said...

Warrants are a bit different than interest, no?The IRS doesn't think so. Property received as compensation for the use of money is "interest", whether it's cash, warrants, or sheep.

 
At 5/01/2009 8:12 PM, Blogger marketdoc said...

Another example why Washington should not get involved in the free markets.

 
At 5/03/2009 7:24 AM, Blogger 1 said...

"Good idea, MP. Maybe that would only be fair"...

ROFLMAO!

Got to wonder about the socialists...

Do they live on the same planet as the rest of us?

"It is also what Obama is trying to do with Chrysler's bondholders who have legal standing that is trying to be swept under the rug"...

Consider the following (found on John Lott's blog site) from ABC: Thomas Lauria, Global Practice Head of the Financial Restructuring and Insolvency Group at White & Case, told ABC News that Rattner suggested to an official of the boutique investment bank Perella Weinberg Partners that officials of the Obama White House would embarrass the firm for opposing the Obama administration plan, which President Obama announced Thursday, and which requires creditors to accept roughly 29 cents on the dollar for an estimated $6.8 billion owed by Chrysler.

 
At 5/03/2009 11:07 PM, Anonymous Clayton said...

TARP will be fertile ground for future prosecutions of Obama administration officials. That will be the real "poetic justice". -Anon

Please note that the TARP program was instituted under the BUSH administration, and I believe was the mastermind of both Bush and Paulson. It was crafted after a similar program that Hoover put together.

One should avoid mixing politics with their views on public policy, lest they risk sounding uneducated.

 
At 5/05/2009 10:29 AM, Blogger 1 said...

"Please note that the TARP program was instituted under the BUSH administration"...

Said program could've been stopped at any time by the present administration...

"One should avoid mixing politics with their views on public policy, lest they risk sounding uneducated"...

One actually should pay attention to reality since public policy is politics...

 

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