Housing News

Small Players Finally Get a Bailout

Smaller Institutions Getting Bailouts
But is it all advantageous?

The Treasury has released the new rules that will govern the bailout of small financial institutions. In a report by Businessweek, “The government earlier had established a Dec. 8 deadline for about 3,800 banks that are classified as C corporations to apply for money. Both types of corporations are named for the part of the tax code that applies to them. The rules that will govern the applications from small S corporations will provide for government support in the form of loans rather than the purchase of preferred shares of stock. The debt will carry an interest rate of 7.7 percent until the fifth year of the government’s investment when the rate will increase to 13.8 percent, according to the Treasury rules.”

Despite these statements, we’ve discovered some limitations within the proposal. In Georgia, The Atlanta Journal-Constitution found out even before that small banks are likely to lose in the bailout. Because they’ve backed builders who have not completed their projects because of the financial downturn, they will be forced to accept lower property values from these distressed projects. According to the report, “Many community banks have been stuck holding empty lots and half-built homes in the suburbs that have sharply declining market value… Current accounting rules require banks to price holdings at market value, forcing banks to either take big losses on paper or unload property at a heavy loss.”

In Philadelphia, small banks will be forced to write off their large holdings of Fannie Mae and Freddie Mac preferred stocks. This would mean taking large losses in their balance sheets in exchange for bailout privileges. Considering their size, imminent bankruptcies are possible. Among those that are in danger include Astoria Financial Corp., Flushing Financial Corp., Webster Financial Corp., Westamerica Bancorp, Gateway Financial Holdings Inc., Sovereign Bancorp Inc., and Cascade Financial Corp., as reported by Marcy Gordon of the Associated Press .

Finally, some banks believe that being able to avail of the bailout package would constitute a common notion that they have followed the mismanagement of the large banks like Lehman Brothers and Bank of America. (Read our earlier post here .)

When pressed with potential setbacks such as these, it is necessary for the Treasury to revise accounting rules that will create exceptions to small banks meeting potential losses. It may be biased but it can certainly avert shut downs in the future. Also, it should work hand in hand with Obama’s plan of providing more oversight to the TARP. Through this, they monitor the correct use of funds whether in the hands of either large or small recipients.

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