WASHINGTON — People are fed up with bank bailouts that risk taxpayer billions. The government's apparent solution: call them something else.
Congress is at work on a new program that would send $30 billion to struggling community banks, in a process similar to the huge federal bailouts of big banks during the financial crisis. This time, money is more likely to disappear as a result of bank failures or fraud.
Two weeks ago, President Barack Obama declared an end to taxpayer bailouts when he signed a sweeping overhaul of financial rules. In his weekly radio and Internet address on Saturday, he described the new bailout program as "a common-sense" plan that would give badly needed lending help to small-business owners to expand and hire.
EDITOR'S NOTE – An occasional look behind the rhetoric of public officials.
At its core, the program is another bank rescue. Some lenders need the bailouts to survive. Others could take the bailouts and crumble anyway. That's what happens when banks run out of capital – the money they must keep in case of unexpected losses. Banks with too little capital can be shuttered to protect the taxpayer-insured deposits they hold.
Or, under this proposal, many could get bailouts. The new money would be available to banks that are short on cash. It's supposedly reserved for banks deemed "viable." But regulators won't consider whether banks are viable now. They'll envision how strong a bank would be after receiving a fresh infusion cash from taxpayers and private investors. If the bank would become viable because of the bailout, the government can make it happen.
"This is a below-the-radar bailout for community banks," said Mark Williams, formerly a bank examiner with the Federal Reserve. "What we lack here is oversight and true accountability." He said the potential costs are far greater than the program's impact on small businesses. The change for them would barely be noticed, he said.
Small banks are struggling partly because the economy is so weak. For banks in the hardest-hit areas, it can be nearly impossible to recover once too many loans sour.
Yet the bill would require that banks be protected against "discrimination based on geography." It says the money must be available to lenders in areas with high unemployment.
Such banks are "only as strong as the loans they make in their communities," said Williams, now a finance professor at Boston University.
Also, the government knows far less about these lenders than about Wall Street megabanks. Many community banks are overseen by state regulators struggling under budget cuts and limited expertise. Many are ill-equipped to monitor banks during a crisis, Williams said.
The administration says the bill is not a bailout, but a way to spur lending to small businesses and bolster the shaky economic recovery. The idea is that businesses want bank loans, but banks don't have enough money to lend. And they say the program has to include riskier banks in order to work.
"When banking groups have advocated for measures that were about saving or bailing out struggling banks and not spurring small business lending, we have strongly opposed those proposals," said Gene Sperling, a senior counselor to Treasury Secretary Tim Geithner who has met with community bank lobbyists on the issue.
Sperling said Treasury rejected proposals to further lower the bar for which banks are considered "viable" or to let banks delay accounting for commercial real estate losses.
Some banks will have an easier time granting loans after receiving bailouts. But Federal Reserve Chairman Ben Bernanke and others have questioned whether the problem is lack of capital, or if there simply aren't enough creditworthy borrowers.
The administration's haziness about whom the program benefits has fueled comparisons to the $700 billion bailout known as the Troubled Asset Relief Program, or TARP. A few important differences make this bailout riskier.
The bailouts that started in 2008 were subject to oversight by a special watchdog. Neil Barofsky, who heads that inspector general's office, recently saved taxpayers $553 million by stopping the Treasury from mailing a check to a failing bank accused of fraud.
Under the new law, it's not clear the money would have been saved. The new bailouts have the same investment structure, size limits and approval process as the old ones. Yet they aren't subject to Barofsky's oversight. His office has staff and procedures in place to monitor banks for bailout fraud – resources that cost taxpayers millions.
The new law creates an office that duplicates those efforts, and Barofsky's supporters say that's an effort to silence one of Treasury's loudest critics.
There's another reason banks want to join the new program: It will save them money.
Assuming they increase lending modestly, the banks will pay lower quarterly fees to Treasury. If lending falls, their fees will rise. But the banks still will pay less than they would to private investors, experts said.
Banks that were short on cash weren't even eligible for money from the $700 billion financial bailout passed in 2008. Yet limiting it to healthy banks was no guarantee the money would be safe.
A few bailed-out banks have failed. One-sixth of them were behind on their quarterly payments to Treasury at the end of May, according to an analysis by University of Louisiana finance professor Linus Wilson.
"The problem is, they're not really picking healthy banks," Wilson said.
Legislation to put the new program in place ran into a roadblock in the Senate last week. Further action isn't expected until September, after lawmakers' summer break.
The measure has been the subject of a monthslong lobbying push by small bankers. Disclosures show that community bank bailouts have been the most common topic of Treasury's bailout meetings with lobbyists over the past 10 months.
The trade groups insist that smaller banks are not necessarily riskier because they weren't behind the speculation that nearly toppled Wall Street.
History suggests that's not true. Most of the 268 banks that have failed since 2008 were community banks.
The proposal has drawn little notice from a public weary of bailouts for Wall Street, auto makers, insurers and homebuyers.
Wilson said that shows how well it's been sold.
"If you put small business in the name, people will like it, and if you put banks in the name no one will like it – but the money is going to banks, not small businesses," he said.
TARP inspector general: http://www.sigtarp.gov