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%?