The Truth About The Bank 'Bailout'
Government assistance, needed or not, does not amount to 'free money'
In October 2008, Congress and the U.S. Treasury worked together to create Troubled Asset Relief Program, a $700 billion fund. One component of TARP is the Capital Purchase Program (CPP), through which the U.S. Treasury purchases preferred securities issued by financial institutions.
The proceeds from the preferred securities sale are intended to provide financing capital to the institution issuing the securities, enabling the institution to continue lending during the current recession. If the program works as intended, the financial institutions will dull the recession's impact by avoiding a long-term convulsion in the credit markets.
Shortly after CPP’s inception, the U.S. Treasury “asked” the nation's 20 largest financial institutions to participate, regardless of financial health. Then, the Treasury implemented an application process for all sizes of banks, savings banks and their respective holding companies. Many financial institutions decided to apply, while others opted out. Some were asked by federal regulators not to apply. Many with pending applications were politely encouraged to withdraw. As of May 31, 2009, more than 600 of the approximate 8,300 financial institutions in the U.S. were accepted into CPP and received capital infusions.
While numerous financially sound institutions were included in the initial group of 20, the general public consensus is the institutions that received CPP funding would have collapsed without it. Consequently, the terms TARP and CPP became synonyms for "government bailout" — despite the reality that banks outside the 20 largest institutions were being denied CPP funds unless they had a strong enough financial condition to extend credit in a harsh economic environment.
To this day, many depositors and customers of community banks participating in CPP have the misconception that their banks needed the CPP capital to survive. Let's clear this up.
In meetings with our bank clients’ customers, most people believe only weak institutions received CPP funding. Hardly anyone knew that CPP funds had to be repaid. Few customers understood the costs, restrictions and prohibitions involved when a financial institution participated in CPP. Many felt the "bank bailout" was simply the Treasury providing free capital. Nothing could be further from the truth.
CPP participants must repay the funds, with interest, and face numerous other restrictions (i.e., compensation, redemptions and payment of dividends). In light of the financial obligations that accompany CPP, federal regulators have not allowed weak community banks to participate in CPP because such institutions would risk the Treasury's investment.
Of course, many healthy banks have elected not to participate, as they did not need the capital and/or did not want to be bound by the restrictions and prohibitions. In fact, only 7.5 percent of holding companies have been approved for CPP.
Treasury Secretary Tim Geithner recently announced that small institutions will be able to apply for CPP. With fewer than 10 percent of the financial institutions participating, the original purpose of CPP—aiding economic recovery by increasing the flow of credit—would be better served if the approval standards are adjusted to increase participation.
The “bank bailout” does not provide free money. Rather, the funds obtained carry substantial expense, restriction and prohibition. Assuming there are no failures of financial institutions that received funds, the Treasury (and the taxpayers) will make money through CPP funds. The Treasury and federal regulators need to review the qualification standards so more financial institutions, in need of capital, can participate in CPP. 
Bob Monroe
is chairman of the Financial Services Division for Stinson Morrison Hecker LLP in Kansas City.
P | 816.691.3351
E | bmonroe@stinson.com