Gift Certificates 4: Revolt of the Small Banks

Well, well, isn't this interesting. Looks like some people still have a spine after all.

Smaller Banks Resist Federal Cash Infusions

Excerpts:

Community banking executives around the country responded with anger yesterday to the Bush administration's strategy of investing $250 billion in financial firms, saying they don't need the money, resent the intrusion and feel it's unfair to rescue companies from their own mistakes.

But regulators said some banks will be pressed to take the taxpayer dollars anyway.

. . .

President Bush, in introducing the plan, described the interventions as "limited and temporary."

"These measures are not intended to take over the free market but to preserve it," Bush said

Did he steal that last line from Tom Coburn?

. . . in offices around the country, bankers simmered.

Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."

At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.

Good for them!

The opposition suggested that the government may have to continue to press banks to participate in the plan.

Uh-oh. Not so good.

Federal regulators said they did expect some banks to volunteer, though none stepped forward yesterday. But they added that they would not rely on volunteers. Treasury will set standards for deciding which banks can be helped, and the regulatory agencies will triage the banks they oversee: The institutions faring best and worst will not receive investments. The institutions in the middle, whose fortunes could be improved by putting a little more money in the bank, will be pushed to accept the money from the government.

"We will encourage institutions to apply," said John C. Dugan, the comptroller of the currency, who oversees most of the nation's largest banks.

In return for its investments, Treasury will receive preferred shares of bank stock that pay 5 percent interest for up to five years. After that, if the companies haven't repaid the government's initial investment, the interest rate goes up to 9 percent.

And here's the payoff:

(FDIC chair Sheila C.) Bair acknowledged that the new guarantees shelter banks from the immediate consequences of misbehavior because depositors and investors have no incentive to remove their money from an institution if they know that the government stands behind it.

But Bair said the government's first priority was to stabilize the industry.

"The risks of moral hazard were simply outweighed by the need to act and act dramatically and act quickly," Bair said.

(Emphases mine)

And how is demoralizing the industry supposed to stabilize it? By keeping the small fry in line, perhaps?

Will some banks be more "sheltered" than others? Could this be a tool for playing favorites and punishing those who get out of line? Hmm . . .

We'll see how that works out.

(Hat tip: Cox and Forkum via Repeal the Bailout)