Banking Law

The Big Dogs that took TARP have, for the most part, paid it back and are doing as well or better than any other line of business in the current struggling economy. According to the St. Louis Business Journal, many of the small banks that dipped their toes in "Lake TARP" found the water not only cold, but full of piranha that have been gnawing those toes to the bone (and are working their way up the legs).

Small banks are struggling to repay the bailout funds they accepted under TARP, which could make them vulnerable to takeover or failure. Meanwhile, healthy mid-size banks may seek bargain prices for these distressed institutions, seizing the opportunity to grow. The result will be fewer banks in St. Louis and across the country in the next three to five years, experts say.

The Business Journal's Rebecca Boyle has put her finger on a potential trend that others have been predicting: many ommunity bankers are ready to exclaim that they no longer want the cheese; all they want is out of the trap.

Regulatory reforms and the recession?s toll have made it difficult for small banks to raise capital, said Rick Maples, head of investment banking and the financial institutions group at Stifel, Nicolaus & Co. Inc.

?You are starting to see people get really tired of fighting this fight,? he said.

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?What we are starting to see, in the early phases, is a semblance of life in what we call our regular mergers and acquisitions market, where Bank A buys Bank B,? Maples said. ?There are conversations that are starting to be had. Buyers are starting to be open-minded, and there are a fair amount of pent-up sellers waiting for market conditions to be right.?

According Ms. Boyle's sources, many of the small TARP-taking banks are having a difficult time paying the 5% dividends on the TARP preferred stock. Without the same access to the capital markets that is available to the large, publicly traded banks, they've also found it extremely difficult (in other words, impossible) to raise the additional capital necessary to redeem the TARP preferred stock and stop the bleeding. This capital drought is exacerbated by the Financial Reform Act's hammering of one capital source that many smaller banks once used: Trust Preferred Securities.

Mr. Maples asserts that all of these factors are driving the smaller TARP recipients to seriously consider merging with or being bought out by larger banks. He predicts that "[t]here will absolutely be fewer banks in three to five years from now than there are today."

With or without having taken TARP capital investments, smaller banks are going to be under the gun in the next three-to-five years. For many of the TARP-takers, however, the additional capital has increased their odds that they will not be around for the long haul. Like Hitler's decision to invade Russia in June of 1941, many TARP recipients who thought that the TARP capital would ensure their independent survival may end up ruefully exclaiming, "But it seemed like such a good idea at the time!"

As philosopher Soren Kierkegaard once observed, "Irony is a disciplinarian feared only by those who do not know it, but cherished by those who do."