The TARP Sinkhole

When it comes to your tax dollars, Congress should be tight as a miser's fist.

But it isn't. Not when it comes to the bailouts of the financials and the banking system.

Many banks are getting bailout money when they should not qualify for the funds at all. Especially banks that willy nilly chucked loan money at all sorts of commercial real estate projects now mothballed and moth-eaten, vacant lots that, if lined up end to end, would stretch from here to Jupiter.

In fact, of the 202 banks that have been approved for capital injections from the government's $700 bn Troubled Asset Relief Program [TARP], a full 142 are in violation of federal bank risk regulations.

So says Richard Suttmeier, a bank analyst at the research group ValuEngine, who X-rayed the way the money is going towards banks-as well as federal bank rules that are supposed to stop banks from playing with bank capital like they're running a slot machine in Las Vegas, rules that are as transparent as a bucket of molasses.

Suttmeier says because of their poor risk management, these banks face a higher chance of failure than others. So the question is, should they get TARP money, taxpayer money, now if they face a higher risk of bellyflopping? "The TARP has given billions of dollars to community banks that hold $617 bn in construction and development loans, which are becoming" delinquent, he says, "at a rapid pace."

Back in December of 2006, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency issued regulations on risk management for banks who do  commercial real-estate lending. While the bubble was still inflating, the central bank and federal bank regulators were worried about banks with severe overexposure to commercial real estate loans.

Regulators had kicked around the rules since the fall of 2005, so the problem of banks overextending themselves here-an understatement to be sure--was on the watchdogs' radar screen for some time.

Specifically, the rules said that if a bank's loans for construction and land development amounted to 100% or more of the bank's total risk capital-meaning, the required sums it had set aside as a cushion-the bank would supposedly fall into a serious dangerous zone when it comes to government oversight.

There are now 202 banks that have been approved for capital injections from the government's $700 bn Troubled Asset Relief Program, what Suttmeier calls the TARP Sink Hole.

But out of the 202 banks, the number of banks violating the 2006 regulatory guidelines, in which they should not make construction loans that meet or exceed their regulatory cushions, now number 142.

Why worry about the rules though? Especially since the government can change them at will?

Just as it suddenly did an about face and changed the rules by resurrecting just for Citigroup and just for AIG a version of the first iteration of the Troubled Asset Relief Program [TARP]?

In the first go around, the government said it would buy at auction bad securities built during the credit bubble, even though by the time of that decision the Federal Reserve had taken on $29 bn (now worth $27 bn) in bad securities and assets from Bear Stearns. The Federal Reserve then quietly took on $52.5 bn in toxic securities from AIG.

And the government recently made a whopping exception when it opted to backstop $243 bn or so in Kryptonite mortgage-backed and commercial real-estate backed securities at Citigroup.

TARP is careening around worse than the Olympic Jamaican bobsled team.

Out of the 142, here are 15 of the worst offenders, according to Suttmeier:

Source: ValuEngine