John R. Koelmel and Peter G. Humphrey remember the dark days about three years ago when a worldwide crisis led their healthy banks to take money from the government.
In the fall of 2008, it looked like the economic world was about to collapse.
Massive losses on subprime mortgages and investments were bringing financial giants to their knees. Lehman Brothers Holdings had filed for bankruptcy, triggering a global financial panic.
Washington Mutual failed and was taken over by J.P. Morgan Chase & Co.; Merrill Lynch & Co. and Wachovia Corp. succumbed and were acquired by Bank of America Corp. and Wells Fargo & Co., respectively.
And the federal government nationalized Fannie Mae and Freddie Mac, while launching what would ultimately be a $180 billion bailout of American International Group.
"Something needed to be done to keep the financial system afloat," said Bert Ely, an Alexandria, Va., bank consultant.
With the capital and credit markets frozen, officials in the Bush administration and the Federal Reserve devised a series of initiatives to prop up the banking sector, supplement Wall Street, revive lending, and restore confidence in the financial system.
Perhaps the best known effort was the $700 billion Troubled Asset Relief Program, perhaps better known as TARP.
"TARP was part of a multi-pronged attack by the Bush administration to prevent the economy from sinking to lows that we haven't seen in multiple generations," said Jaret Seiberg, banking analyst at MF Global's Washington Research Group.
Through TARP, money was sent to several hundred banks, including three in Western New York: First Niagara Financial Group, Financial Institutions and M&T Bank Corp.
All three local banks said they used it to grow and meet the demand for loans in their communities, just as the federal government had intended.
"It served a productive and, more importantly, necessary purpose," said Koelmel, CEO of Buffalo-based First Niagara. "The state of the financial industry and the stability of the economy at large is in a better place than it would have been without the benefit of TARP."
"The additional capital allowed banks to continue to lend money, to continue to grow at a higher growth rate than we would have been able to do without the TARP capital," said Humphrey, CEO of Warsaw-based Financial Institutions, parent of Five Star Bank.
For many banks, TARP wasn't a bailout, but a stimulus. These were healthy institutions, who were being pushed to lend rather than pulled from the brink.
Now, after 30 months, billions of dollars have been lent, 350 banks have failed, and the worst appears to have past. Most of the government's initiatives have either terminated or are approaching their end.
Banks are earning heady profits again, some are paying jaw-dropping salaries, and Wall Street bonuses are surging. Dividends and stock buybacks are returning. And companies are paying back the government aid with interest, enabling the Obama administration to claim some victory and assert far lower losses than originally projected.
The government says it has recouped 99 percent of the $245 billion loaned to banks, leaving $1 billion to go.
That's somewhat misleading, since that includes not only repayments of the original preferred stock investments, but also dividends and buybacks of "warrants" that the banks issued that would have allowed the government to buy their common stock at a discount. In other words, it's like counting interest payments on a loan when discussing how much of the principal has been repaid.
>Repayments picking up
Still, the pace of repayments is picking up, and there's no question that the bank portion of TARP will make a profit.
"What's amazing about TARP is that predictions that the government was going to lose every penny have been proven not just to be wrong, but to be in left field," Seiberg said. "The government's going to make a profit on TARP. So TARP worked better than expected."
Some observers have suggested even the AIG bailout could ultimately be repaid at a profit for taxpayers. "The taxpayer is going to get a very good return on those government investments," Humphrey said.
Critics say the program did little in the end to revive business and consumer lending enough to spur spending and job growth.
"It's pluses and minuses. Some aspects turned out well. Other aspects have not done very well," Ely said. "It kept the banks afloat, but it's questionable if it spurred lending.
Locally, the three TARP participants are in various stages of getting out. First Niagara paid back its $184 million in May 2009, followed by its related warrant a month later for $2.7 million. It paid a total of $4.75 million in TARP dividends.
"It's a topic that's very much in the rearview mirror for us," Koelmel said. "It served a very useful purpose."
Financial Institutions, which received $37.5 million, repaid the first $12.5 million last month, and recently raised $43 million through a stock offering and has requested government permission to repay the rest. It has already paid $4 million in dividends to Treasury, and still has to buy back the warrant.
But it will now be able to raise its dividend for other shareholders, perhaps in May, Humphrey said. "It's time to move on," he said. "This puts us in a great position to take advantage of market opportunities."
Buffalo-based M&T started with $600 million before acquiring Provident Bancshares of Baltimore, which added $151.5 million in TARP loans. It will add another $330 million after it buys Wilmington Trust Corp., giving it $1.08 billion in all. It has paid $72 million in dividends so far, and has not announced plans to get out of the program.
"We were among the last of the larger banks if not the last to take TARP, even though we felt that we didn't need it, but because we supported the federal government's response to the financial crisis and their intention to support continued lending, which we've done," spokesman C. Michael Zabel said.
The gradual wind-down of TARP and other programs comes as pundits on both sides of the political aisle and philosophical divide continue debating the value and wisdom of the unprecedented intervention. Free-market critics say the government should not have interfered, insisting banks should be allowed to succeed or fail on their own merits.
"You can say that TARP wasn't needed, because the programs that the FDIC and the Federal Reserve [started] did more to stabilize the economy than TARP," Seiberg said. "But there was no way to know that when Congress needed to vote in the fall of 2008. And to take a gamble that it wouldn't be necessary would have been reckless.
"It's easy to forget that we might have been a couple of days away from the payment system no longer working. You can't even fathom that."
>A necessary evil
Even the local bankers agree TARP was a necessary evil, justified by events and proven over time. And bankers aren't known for supporting intervention.
"It helped stabilize the banking system when it was in a state of stress," Humphrey said. "I think it was the right thing to do."
"If the government didn't step in, a lot more people would have lost their jobs, a lot more people would have lost their homes, and collectively the country would be worse off," Seiberg said.
More than 930 entities received money from the U.S. Treasury through TARP and related bailout programs, totaling more than $563.7 million, according to an accounting by the independent journalism nonprofit ProPublica. Of that, $245 billion went to about 800 banks.
For Western New York's participants, TARP meant strengthened coffers to weather the turmoil, and take advantage of opportunities to lend and grow.
"We had every expectation and intention of doing that, with or without TARP, but it was even easier for us to be assertive," Koelmel said. "It gave us all the more confidence and conviction to keep pushing forward, and that was the purpose."
First Niagara originated $1.5 billion in new loans in the second half of 2008, including $814 million in the fourth quarter, when it received its TARP investment. That's a four-fold leveraging of its TARP money in the quarter, well below the 10-fold target for using capital.
Financial Institutions has grown its assets by about $250 million during the period of its TARP investment. That's also less than a 10-fold increase. But Humphrey said that's because the bank is being cautious and loan demand remains slack.
"People say banks aren't lending. But especially in Western New York, banks are lending, [yet] they can only lend to the extent that people request loans and qualify for those loans and can pay back loans," he said.
TARP wasn't free for the banks. Terms of the program called for the Treasury Department to buy a special class of preferred stock, paying a 5 percent annual dividend through 2014, rising to 9 percent afterward. That initial rate was considered "cheap capital" when compared to alternatives at the time, but the total cost to the banks is high.
"It was very expensive capital for the banks, especially for those that paid it back quickly, and it opened the industry to a regulatory response that was beyond anything seen in decades," Seiberg said. "It also created a public perception that the banks were bailed out, and that perception is going to take years to live down."
Three local banks received loans from the Troubled Asset Relief Program
FIRST NIAGARA FINANCIAL GROUP
$184 million TARP loan (repaid)
$2.7 million warrant (repaid)
$4.75 million TARP dividends paid
FINANCIAL INSTITUTIONS (FIVE STAR BANK)
$35.5 million TARP loan ($12.5 million repaid)
$4 million TARP dividends (thus far)
M&T BANK CORP.
$600millon TARP loan
$151.5 million TARP loan from Provident Bankshares purchase
$330 million TARP loan when Wilmington Trust Corp. purchase closes
$1.08 billion possible TARP loan total
$72 million TARP dividends (paid so far)