A growing number of healthy bank chains across the country are bailing out of the $700-billion federal banking bailout program, saying it has tarnished the reputation of banks that took the money and tangled them in unwieldy regulations.

When the program began last fall, it was billed by then-Treasury Secretary Henry M. Paulson as an investment in strong banks to make them even stronger.

Traditionally conservative local banks around the country began applying for the program, accepting Paulson’s explanation that participation would be a sign of financial strength.

But not long after the program began, it became clear that the bulk of early funding was going to a handful of financially crippled giants such as Bank of America Corp., Merrill Lynch & Co., American International Group Inc. and Citigroup Corp.


“It was supposed to be a badge of honor if you were able to get this money, but now it’s a badge of honor if you didn’t take it, with all the bad publicity it has attracted,” said Alan Rothenberg, chairman of 1st Century Bank in Century City.

Rothenberg’s bank took a look at the Treasury program and decided to avoid it.

More than 100 banks were approved by federal regulators to get money under the Troubled Asset Relief Program, or TARP, and then backed out before getting any, a senior Treasury official disclosed. The department said earlier this week that 489 banks have received funding and about another 1,000 are still being evaluated.

But a growing number of banks that have received the money now want to give it back.


“The TARP money is tainted and we don’t want it,” said Jason Korstange, a spokesman for Minnesota-based TCF Financial Corp., which received $361 million and announced this month that it wanted to pay it back. “The perception is that any bank that took this money is weak. Well, that isn’t our case. We were asked to take this money.”

The bank issued a toughly worded statement earlier this year, saying that the money had put the financially strong banking chain at a “competitive disadvantage” and that the bank now believed it was “in the best interest of shareholders” to return it.

Chicago-based Northern Trust Corp., which took $1.5 billion, seems even more anxious for a quick exit. It found itself the object of national ridicule several weeks ago when it put on a golf tournament for its well-heeled customers at the Riviera Country Club in Pacific Palisades.

In a letter to House Financial Services Committee Chairman Rep. Barney Frank (D-Mass.), the bank said it didn’t need the money and in fact had a profit of $795 million in 2008. What’s more, the golf outing, which has raised $50 million for charity through the years, did not draw on the federal funds, the bank said. A spokesman said Tuesday that the bank wanted to pay the $1.5 billion back as fast as possible.


Frank, one of the toughest critics of the banks, was caught up in his own bank bailout controversy when he inserted legislation to assure TARP money for a bank in his own district. He defended that action by saying the bank was a victim of the credit meltdown, not a cause of it.

When the program began in October, the Bush administration pushed banks to take the money, particularly the first nine big institutions that included Bank of America, Citigroup and Merrill Lynch. At the time, it wasn’t entirely clear how wobbly their conditions were, and so many healthy banks also jumped in, not anticipating what kind of party they were attending. And some of those mid-size banks were strongly encouraged to accept the funds by federal regulators.

Wayne Abernathy, executive vice president of the American Bankers Assn., said the financial industry now has a generally dim view of how the Treasury Department handled the program in its early days.

“It was sold as something good for the economy and something showing that the participating banks are strong, but that isn’t how it played out,” he said.


After the initial program was enacted, Congress went back and added provisions that covered executive compensation, financial disclosure requirements and conditions on acquisitions and mergers, Abernathy said.

“It was not popular when it was born and it didn’t get any more popular as time went by,” he said. “They added so many strings to it that it is pretty much unworkable.”

For Rothenberg, the banker in Century City, the prospect of unlimited government intervention was too much.

“The real issue was the clause that the government could change any of the terms,” he said. “It was so open-ended.”


Another issue was the cost of the money. The banks had to pay the government 5% interest.

“It was billed as cheap money, but it really wasn’t,” Rothenberg said.

The TARP money was paid in exchange for preferred stock and would count as bank capital, which is the cushion that banks use to assure their solvency.

One of the biggest problems with the program was trying to explain to the public how it would affect lending.


Banks don’t lend their capital. They lend out of their deposits.

But some banks found that raising deposits was not easy, even with the added capital cushion, and loan demand was weak.

In many cases, banks didn’t like the public reaction.

Iberia Bank applied for the TARP money and received $90 million on Dec. 5. But the 88-branch bank based in Lafayette, La., was also the first bank in the nation to say it wanted to give it back.


“We notified Treasury on Feb. 26,” said bank spokeswoman Beth Ardoin. “We don’t feel that this is the right program for us. We don’t need the money.”

Only a few banks formally have told the department they would return the money early, although others have signaled they intend to follow suit, a Treasury spokesman said.

So far, the banks are waiting to hear how they are supposed to return the money.

In a question-and-answer statement issued Feb. 26, the Treasury Department told banks they that would have to consult with the regulatory agencies that oversee the institutions for procedures on returning the money. Each bank has one of four federal agencies as its primary regulator, depending on how the bank is chartered.


In one of the questions and answers, Treasury said, “What does the consultation with my primary regulator involve?”

The answer: “Treasury is working . . . to determine what factors are involved in the consultation.”

Industry officials say they are still awaiting an explanation.

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ralph.vartabedian@latimes.com