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updated 7/14/2010 10:37:04 AM ET 2010-07-14T14:37:04

To the list of economic woes squeezing small banks, add another one: government bailouts.

The Treasury Department's bailout program was designed with Wall Street megabanks in mind, according to a new watchdog report. The "one-size-fits-all" program may actually be hurting small banks that are struggling to repay the money or even deliver quarterly dividend payments, the report says.

The main bank bailout program anticipated banks springing back from the crisis and raising fresh funds to repay the government, the report says.

That's exactly what happened to most of the big banks that took the most bailout money. Yet small banks continue to struggle, dragged down by souring loans for commercial real estate and high unemployment. Hundreds more small banks are expected to fail by the end of next year.

The 690 small banks that took bailout money are even worse off, according to a report Wednesday from the Congressional Oversight Panel, which monitors the $700 billion financial bailout. Already, one in seven has failed to pay a quarterly dividend due to Treasury. They can't afford the payments, which will nearly double in 2013.

That's troubling because small banks' crucial role in lending to small businesses and supporting economic recovery, said Elizabeth Warren, who chairs the panel.

The program "was not intended as a bailout for Wall Street," said Warren, who also is a professor at Harvard Law School. "It was intended to support ... homeownership, retirement savings and banks across the country."

Warren said the bailout bill, known as the Trouble Asset Relief Program, did stabilize the financial system. But she said that was only one of the program's goals. She said efforts to boost lending and support consumers have been less successful.

"There is very little evidence to suggest that the (bailouts) led small banks to increase lending," the report says.

In the end, that could mean that the biggest banks get even bigger, the report says. Dozens or hundreds of bailed-out banks could collapse or consolidate because they can't afford their obligations to taxpayers, it says. That would leave the handful of biggest banks with an even larger share of the banking system.

"The result could be that 'too big to fail' banks grow even bigger," Warren said.

Treasury spokesman Mark Paustenbach disputed the findings, saying in a statement that the bailouts helped many of the banks "weather the storm and continue to extend credit in the economy."

The Congressional Oversight Panel was created by Congress to report on whether the bailouts are meeting their goals. The law also requires regular audits by the Government Accountability Office and creates a special inspector general to investigate fraud and other problems.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Smaller banks still struggling

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    >> with us from washington, d.c. now, chair of the congressional oversight panel elizabeth warren who is back on the show. good to have you back, elizabeth .

    >> good to be here.

    >> let's, first of all, talk about what the oversight panel might be a little bit concerned about and that would be, if i'm correct, small badges.

    >> that's right. it's looking into t.a.r.p. and how well it worked out. it worked well for the wall street banks but it wasn't worked so well for the smaller financial institutions .

    >> and why is that?

    >> well, it's for a couple of reasons. the basically model was to put money into these banks really fast, announce that they were stabilized and expect the banks to go to the capital markets and raise money and repay the taxpayer. it worked for the financial institutions 76% have repaid and off making record profits and record bonuses. for small banks , however, it didn't work out that way. where we stand right now is fewer than 10% have repaid, and 15% have already missed a dividend payment, suggesting that they are in trouble. and part of the reason for this is what actually happened when we got t.a.r.p. and that is the investors look, well, you can invest in a small bank, invest in a big bank. the big banks have implicit guarantees. something goes wrong, taxpayer steps in. small banks , on the other hand, don't have those explicit guarantees and their facing some real problems in the future. commercial real estate is going to be a really hard hit on them. and so they are under a lot of financial pressure. the smaller banks , and they are having difficulty repaying, so that's what this report is about.

    >> john heilemann?

    >> elizabeth , you know that the -- in the financial reform bill one of the biggest pieces is this consumer financial protection. you're a godmother of that idea and a lot of people think you would be an appropriate head for it. i want to ask you two bes about that. first, would you like to have that job? second, you know there's a lot of opposition for you taking that job on wall street . what would you say to people who think it's a bad idea, people in the financial industry , a bad idea for you to be the head of that bureau.

    >> i want to start by saying the bill is not law. tomorrow, i hope the senate will be voting, but, boy, have i learned around washington, don't count any chickens, right, early. so i'm still very focused on the question of getting this bill on through congress, making it all the way through, not on the personalities about who is going to run it, but, ultimately, there really will be questions that will arise. whether they are about me or whether they are about someone else on what kind of person do you want to run it? is it somebody approved by wall street or somebody approved by the american people . one of the problems we've had in our regulatory agencies is that the people who are supposed to be regulated are very cozy with the regulators. and i think that the point of regulation is to give some balance. we're supposed to have these rules and regulations to make sure that we protect the american people and that markets function for the american people , not for a handful of insiders.

    >> dylan ratigan ?

    >> that will be an issue.

    >> if you were to look, elizabeth , at what something -- anybody else could do, something that anybody in this country could do right now to help move the ball towards solution and away from the problem, move us towards fairness, towards better markets, et cetera , what is your counsel to people who would like to do something but, quite honestly, don't know what to do?

    >> i would start in the credit market . i think the federal protection agency is good at this. what happened in that area we had a market that worked for centuries and it all worked under the concept usury, a limit on what could be charged. and we built a robust country and we built a strong middle class and then what happened was we effectively deregulated, we effectively repelled our usury laws and the consumer continuation services industry moved to a tricks and traps model. what they did is they pretended to sell you something either free or at a very low price and their plan to make all of the money in the back end on the fees and the tricks and the traps. and they basically knocked a hole in the financial bottom of the boat for many middle class american families. they drained money out. they increased the risk that these families faced and so i think this is something where this is one of the first times -- i'm actually very hopeful about this. we put an agency in place that says, look. the game can't be tricking people. you can get out there, you can lend to people, there are reasons we need credit, but you can't keep fooling people. you can't cause people to spend more than they think they should be spending to take on more risks than they thought they should be taking on. that may be the tip on the sphere that we start to move in a different direction, a direction that says the most important thing we do is strengthen america's middle class . that's what this country is about.

    >> quickly before we go, isn't the task of moving in a new direction one that you describe, elizabeth , isn't that going to take a lot longer to achieve progress? i mean, isn't that the bottom line ? if we don't want to gamble any more and be greedy and spend more than we have, this is a huge reset.

    >> mika, it may take longer, but at least our feet will be on solid ground. we build something that's real and that is what i'd like to do. i don't want fast, but we're only pretending. it can't work that way.

    >> i totally agree with you. elizabeth warren , thank you so much for being on the show and come back soon.

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