| NEW YORK
NEW YORK A growing number of U.S. banks are finding that participating in the $700 billion government program designed to spur lending is more trouble than it is worth.
In the last week, at least three banks that took money from the Troubled Asset Relief Program (TARP) created by former Treasury Secretary Henry Paulson have given it back. Their decisions came after the White House signed into law a $787 billion economic stimulus that imposed new rules on TARP recipients.
TCF Financial Corp TCB.N, Iberiabank Corp (IBKC.O) and Sussex Bancorp (SBBX.O), each with less than $20 billion of assets, have in the last week decided to give back TARP money.
They are likely to be joined by other lenders that decide they do not need the capital, do not want the special oversight, or do not deserve to be tarred over their survival prospects.
"Onerous obligations are being put on banks," said Bert Ely, an independent banking consultant in Alexandria, Virginia. "We see threats of future actions, particularly in lending mandates. So the understanding among banks now is, get out as fast as you can."
THE RULES CHANGE
Lawmakers who approved TARP last October originally thought it would be a way to take bad assets off bank balance sheets.
The government abandoned that goal, and transformed TARP into a means to spur lending by injecting capital -- typically through bank sales of preferred shares with a 5 percent yield.
Some 400 banks and a few others, notably insurer American International Group Inc (AIG.N), took TARP money. Many said they did so to help the economy, not because they needed it.
Investors once believed that it was a good thing for a bank to get TARP money, because it signaled a government belief that a recipient was strong enough to warrant an infusion.
Indeed, some troubled lenders including National City Corp had to scramble after being shut out of TARP. That lender was later bought by PNC Financial Services Group Inc (PNC.N).
Sixteen U.S. banks have failed this year, and analysts expect hundreds more failures in 2009 and 2010.
Terms of the standard TARP agreement, however, can change, as they did with the new economic stimulus law.
One new rule can limit pay for 20 top executives, which banks say would make it harder for them to hire and retain top talent. Another has sowed confusion about whether TARP lenders must hold new capital for three years, or can repay it early.
Asked on a March 2 conference call if there were a "double secret probation" dictating when Pittsburgh-based PNC could exit TARP, Chief Executive James Rohr said "there's a cloud" around exactly what the government now requires.
There are other clouds for TARP recipients as well.
Having seen AIG, Bank of America Corp (BAC.N) and Citigroup Inc (C.N) get government bailouts after receiving TARP money -- together they now have access to $160 billion of TARP capital -- more investors now see TARP as a taint. So for banks that do not need the capital, the reasoning goes, why accept it?
"Public perception views those banks that took the TARP money as having done so out of weakness and a need to survive," said William Cooper, the chief executive of TCF, a Wayzata, Minnesota, lender with $16.7 billion of assets, which said it will repay its $361.2 million of TARP capital.
A TCF spokesman, Jason Korstange, added: "People now believe any bank that took the money was failing. That is not what we were told in November."
Lafayette, Louisiana's Iberiabank and Franklin, New Jersey's Sussex cited similar reasons for giving back a respective $90.6 million and $10 million of TARP money.
Bank of America Chief Executive Kenneth Lewis said his bank made a "tactical mistake" in accepting $20 billion of TARP money to absorb Merrill Lynch & Co, and should have taken half that amount. "It put us in a league too far out" compared with rivals, he told the Financial Times on Monday.
TARP recipients also face a growing populist perception that they are using money unwisely. This has led Wells Fargo & Co (WFC.N), Morgan Stanley (MS.N) and other TARP recipients to scrap client and employee events that critics deem frivolous.
Northern Trust Corp (NTRS.O), faulted for treating clients to concerts and fancy food at a recent golf tournament, plans to repay its $1.6 billion TARP money as fast as it can. Goldman Sachs Group Inc (GS.N) and JPMorgan Chase & Co (JPM.N) are among other lenders that want to repay TARP money quickly.
LOAN DEMAND COOLS
And there is another reason to give back TARP money, perhaps a more worrisome one for policymakers: Banks do not need it because customers are unwilling to borrow.
"I don't know what we would have done with additional capital at this point, because there is not much loan demand," said Donald Kovach, Sussex's chief executive, in an interview. "The purpose of putting up the money in the market was to fire up lending, and that's not the way it is working."
For some banks, repaying TARP money now is an option only if they can raise enough capital to replace it.
This is an issue even for many lenders that claimed they did not need capital but took it. This is because regulators and investors have begun using new measures to judge banks' health. As a result, some banks that previously looked fine now appear deficient -- and less able to repay the money.
Another way could be to shrink their balance sheets by lending less, a move that could improve capital ratios but would also defeat TARP's goal of having them lend more.
Larger banks may ultimately need to raise capital if they flunk upcoming "stress tests" to gauge their ability to handle a tough economic downturn.
Ely, the bank analyst, said TARP recipients should expect an even greater government role as efforts multiply to shock the economy and capital markets back to life.
"TARP has become much more of a negative than a positive," he said. "You come across as not being a good citizen if you don't take it, but set yourself up for a lot of political bashing and more restrictions if you do. Over time, this will be a negative for banks' stock prices."
(Reporting by Jonathan Stempel; Additional reporting by Anurag Kotoky in Bangalore; Editing by Gary Hill)