Bailed Out Banks on Brink of Bankruptcy — Again

Tuesday, 28 Dec 2010 09:15 AM

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About 100 banks bailed out by the government are teetering on the brink of bankruptcy again, The Wall Street Journal reports.

Based on a review of third-quarter results, 98 banks were battling weakening capital levels, mounting bad loans and heat from regulators, up from 86 in similar trouble in the second quarter.

The banks in question took more than $4.2 billion from the Treasury Department under the Troubled Asset Relief Program (TARP), which was created for healthy banks only.

"The depth of today's problems for some of the institutions, however, suggests that a number of them were in parlous shape from the beginning," The Wall Street Journal says.

Seven TARP recipients have gone under already, taking more than $2.7 billion in TARP funds with them.

Treasury Department officials recognize the trouble.

"We certainly understand and recognize that some of the smaller institutions are experiencing stress," David Miller, chief investment officer at the Treasury Department's Office of Financial Stability, which runs TARP, tells the newspaper.

The Obama administration says it will keep a closer watch on banks that received TARP money but are failing to pay dividends back to the Treasury Department, a requirement for receiving the bailout money.

Some 132 such banks, community lenders mainly, have failed to make at least one dividend payment to the government as of the third quarter of 2010.

While big banks are paying back bailout money, the failure of little banks to do so reflects poor planning by the government, Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, tells The Washington Post.

"It just shows the weakness of the government's selection process and the weakness of the banking sector in general."

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