TARP's Problem Children

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Last year, the U.S. Treasury began a crusade to fix the economy by buying stakes in ailing banks. The good news is that many of the biggest investments were quickly repaid in full, plus interest. The frustrating news is that hundreds of banks still hold government funds. The bad news is that 46 banks not only still hold funds, but aren't paying the preferred dividends they owe.

According to a report by TARP's special inspector general, 46 banks had missed at least one TARP dividend payment as of the end of September, although some are back to making payments. Here are the largest 10 still in default:

Company	Unpaid TARP Dividends, as of Sept. 30, 2009
CIT Group	$29.1 million
Popular	$11.7 million
First BanCorp	$5.0 million
Pacific Capital Bancorp	$4.5 million
First Banks	$4.0 million
Sterling Financial Corp.	$3.8 million
UCBH Holdings	$3.7 million
Anchor BanCorp Wisconsin	$3.0 million
Midwest Banc Holdings	$2.1 million
Dickinson Financial Corp. II	$2.0 million

Source: special inspector general, TARP.

The cumulative amount past due is $75.74 million. If an institution stays delinquent long enough -- six missed payments -- the Treasury gets two seats on the company's board of directors. That's about as close to nationalization as it gets. As of the end of September, no bank found itself in that postion, although this little threat often becomes moot, since a company that deep in default often just goes bankrupt, wiping the TARP investment out entirely. Indeed, that's what CIT did just a few weeks ago.

If there's a silver lining here, it's that the dividends that have been paid into TARP far outweigh the shortfall. As of Sept. 30, TARP banks had paid taxpayers $9.5 billion in dividends and interest. This doesn't include stock warrants repurchased from the Treasury, which add an extra $2.9 billion. For some banks, the combination of dividends plus warrants left taxpayers with heavy profits:

Bank	Dividends + Warrants Paid to Taxpayers	As a Percentage of Total Investment
Goldman Sachs (NYSE: GS)	$1.4 billion	14.2%
American Express (NYSE: AXP)	$414 million	12.2%
Morgan Stanley (NYSE: MS)	$1.3 billion	12.7%
US Bancorp (NYSE: USB)	$334 million	5.1%
Bank of New York Mellon (NYSE: BK)	$231 million	7.7%
BB&T (NYSE: BBT)	$160 million	5.1%

Source: special inspector general, TARP; Financialstability.gov; author's calculations.

The biggest risk to taxpayers isn't that more TARP recipients will default on dividend payments. It's that they'll file for bankruptcy, just like CIT, typically rendering the entire TARP investment worthless. There are also several nonbank companies that received TARP payments -- like AIG, General Motors, and Chrysler -- that are very unlikely to repay bailout money in full (despite vague promises by some of those companies). Then there's Citigroup (NYSE: C), which converted some of its TARP investment into common stock, relieving it of dividends, but making repayment to taxpayers a big, wild guess.

For related Foolishness:

• It's Time to End 'Too Big to Fail'
• Farewell, Dear Bailout
• Bailouts on Hold