Wednesday, January 14, 2009

In Michigan, Bank Lends Little of Its Bailout Funds

TROY, Mich. — The bad bets made by executives at Independent Bank of Michigan are on display in spots across the state: a defunct bowling alley, a new but never occupied shopping center and the luxurious Whispering Woods Estates, which offers prime lots for never-constructed dream homes.
Keith Lightbody, a senior vice president at Independent Bank of Michigan, and Stefanie Kimball, its chief lending officer. “We need to make loans that are reasonable in this day and age,” she said.
Now it is the federal government making the big bet here.
The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank, which traces its roots back 144 years in Michigan. It is a small chunk of the giant rescue fund being wagered by Washington to encourage banks like Independent to resume lending and jump-start the frozen economy.
But Independent, hard put to find good borrowers in a suffering economy, and fearful of making the kind of mistakes that got it into trouble in the first place, is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. “It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”
This is not what the Treasury Department had in mind when it started this program, saying it would give the nation’s “healthy banks” enough money to start lending again, so that people could buy homes and businesses could invest and create jobs, thereby invigorating a disintegrating economy.
A close look at Independent Bank’s handling of its government money demonstrates just how much harder this has turned out to be, and the conflicting challenges that banks across the United States are confronting in the new bailout era. Like hundreds of other banks, it is caught between the government’s push to increase lending and its own caution.
As of Tuesday, 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention.
But it is the smaller community banks like Independent that are seeing the largest number of investments, with 186 banks so far getting allocations of less than $100 million. With little public attention, this money in recent weeks has been streaming out to community banks across the nation, in dollops as small as $1 million — the amount set aside for Independent Bank of East Greenwich, R.I. Ultimately, more than 1,000 banks are expected to take part in the program.
While most of the banks that have received money appear to be relatively healthy, dozens of other banks that received federal funds are, like Independent Bank of Michigan, financially stressed by a high volume of delinquent loans.
Bailout Is Questioned
Economists say the decision by banks like Independent to use the federal money for purposes other than lending, while perhaps disappointing, is not surprising, given that the Treasury Department did not honor its plan to give the money only to healthy banks.
“It’s a matter of logic — when you are in a perilous position, like many of them are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary policy economics professor at Princeton. “But this is a real flaw in the program.”

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