98 Bailed-Out Banks Close To Collapse

Just because a bank has been bailed out, doesn't mean it will stay afloat. Close to 100 small banks that received billions of TARP dollars are now sinking toward failure, according to analysis by The Wall Street Journal. Linda Wertheimer talks to the Journal's Michael Rapoport about the paper's report.

LINDA WERTHEIMER, host:

The TARP bank bailout program was supposed to help healthy banks survive the financial crisis. But a new analysis by the Wall Street Journal shows that billions of dollars flowed to 98 small banks that are in shaky condition. Michael Rapoport wrote the story for the Journal.

Mr. Rapoport, welcome to the program.

Mr. MICHAEL RAPOPORT (Wall Street Journal): Hi, how are you?

WERTHEIMER: Fine, thank you. And thank you for joining us. Could you just remind us again how the TARP program's supposed to work?

Mr. RAPOPORT: What happened was that back in 2008 the government decided that, in the wake of the financial crisis, that it needed to prop up the banking system. And what it did was it gave hundreds of billions of dollars to about 700 banks that - loaned, essentially - that it would enable to tide them over.

Tens of billions of it went to the major banks - Bank of America, Citigroup and the like. But it was also a very substantial amount of money that went to community banks around the country. What's happened now, is that a lot of those banks are running into problems for various reasons.

WERTHEIMER: The largest banks returned to profitability very quickly. Why are small banks struggling so much?

Mr. RAPOPORT: A lot of them were burdened, to a greater extent, than the larger banks with commercial real estate loans that have gone bad - strip malls, and the like, around the country that are having problems. And the smaller banks, unlike the larger ones, didn't get the kind of other financial assistance from the government that the larger banks did.

We've heard, recently, about the Federal Reserve's lending programs that helped out a lot of the bigger banks. And also these smaller banks, they aren't publicly held. They don't have the kind of access to the capital markets that the bigger banks have. And so, having gotten into a bad situation, they find it harder to get themselves out.

WERTHEIMER: Now, obviously the Federal Deposit Insurance Corporation protects consumers.

Mr. RAPOPORT: That's right.

WERTHEIMER: But what about TARP funds? What about the funds that went to these little banks?

Mr. RAPOPORT: If these banks fail - and seven TARP recipients have failed thus far - the TARP funds to the government are essentially lost. The government gave, I think, about $2.7 billion to these seven TARP recipients that have failed. And the 98 banks that we identified as being in trouble got a total of about $4.2 billion in TARP funds. So that's a lot of money doled out by the government to ostensibly healthy banks that might be in jeopardy and the government might not get their money bank.

WERTHEIMER: Put this in context for us. You said seven banks that were part of the bailout program have already failed. Are we likely to see more of them? Are we going to see a record level of failures for 2010 by the end of this week?

Mr. RAPOPORT: We aren't going to see a record level of failures. We have seen more failures for 2010 than in recent years. There've been 157 banks that've failed this year. That's more than any year since 1992. By the same token, back in the early '90s during the savings and loan crisis, we had more than 800 banks fail in the space of just a few years. So this level of failures that we've seen lately is very high by recent standards, but it's not necessarily high historically.

WERTHEIMER: Looking ahead to next year, do you see any signs that small banks like these will continue to be in shaky shape or do you think their prospects are improving?

Mr. RAPOPORT: Well, the FDIC has said that 2010 would be the peak for bank failures. And there have been some indications, the last few months, that the level of failures is slacking off some. You used to see failures virtually every week. Now you'll see a week or two go by without a failure.

It's too soon to tell, I think, whether we've kind of hit the peak. But certainly there have been some indications that it's ebbing a little bit. The level of failure is still going to be very high. And as recently as the Friday before Christmas Eve, we saw six failures. So it hasn't ended yet.

WERTHEIMER: Michael Rapoport is a reporter for the Wall Street Journal.

Thank you very much.

Mr. RAPOPORT: Thank you for having me.

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