May 1, 2009

Hi, we are from the Government, we are here to help you.

That phrase sends a cold chill down my back. Check out the story of Centra Bank and their experience with TARP From National Public Radio:
Small Bank Hit With Big Bill In Bailout
The Troubled Asset Relief Program 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 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.

CEO Douglas Leech describes Centra as a community bank. He helped found it in 2000 by maxing out his credit cards and mortgaging his house. Leech says Centra is the kind of place where a human being answers the phone when you call, usually before the second ring. He says Centra is not an international bank and had never made a subprime loan.

"When we make a loan, we can see the collateral, the businesses," he says. "We see them open their doors and close their doors in the evening. We go to church, to school with our neighbors � and that's where our business is done."
A bit more:
"Receiving TARP funds was really like Merit Badge in the Boy Scouts," Leech says. "It was being made available to only the strong banks. And you, in fact, may not be looked at quite as favorably if you didn't receive the TARP."

Centra filled out what Leech remembers as a three-page form. Soon the Treasury Department wired the bank what amounted to a $15 million loan. The government got $15 million of "preferred shares" in Centra that paid a 5 percent dividend. In common terms, think of it as a loan at 5 percent interest.
And the kicker:
Centra wired back the $15 million plus a little interest to Treasury. But then there came the issue of the warrants. Centra is a private bank, and to protect the taxpayer, the warrants let the government pay $750 for preferred stock worth $750,000.

Leech figured he'd just return the $750.

"Two days later, the lady that runs our wire transfer department came in to me and said, 'Doug got a wire back from Treasury for $750.' Simultaneously, my assistant delivered to me a letter from Treasury indicating that in order for us to exit the TARP program, the pathway was to wire $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 percent 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.
Sixty Percent Interest for a loan only held for six weeks? There is more at NPR -- it's not just the money. These poor people got the shaft. Posted by DaveH at May 1, 2009 12:49 PM
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