A growing number of healthy banking chains across the country are bailing out of the $700 billion federal banking bailout program, saying it has tarnished the reputation of banks that took the money and tangled them in unwieldy regulations.
When the program began last fall, it was billed by then-Treasury Secretary Henry M. Paulson Jr. as an investment in strong banks to make them even stronger. Traditionally conservative local banks around the country began applying for the investments, accepting Paulson's explanation that the investments would be a sign of financial strength.
But not long after the program began, it became clear that the bulk of early funding was going to a handful of financially crippled giants, including Bank of America Corp., Merrill Lynch & Co., American International Group Inc. and Citigroup Corp.
"It was supposed to be a badge of honor if you were able to get this money, but now it's a badge of honor if you didn't take it with all the bad publicity it has attracted," said Alan Rothenberg, chairman of 1st Century Bank in Los Angeles.
Rothenberg's bank took a look at the Treasury program and decided to avoid it.
More than 100 banks were approved by federal regulators to get money under the Troubled Asset Relief Program, or TARP, and then backed out before getting the money, a senior Treasury official disclosed. The department said Tuesday that 489 banks have received funding and about another 1,000 are still in the pipeline being evaluated.
But a growing number of banks who received the money now want to give it back.
"The TARP money is tainted and we don't want it," said Jason Korstange, a spokesman for Minnesota-based TCF Financial Corp., which received $361 million in federal money and announced earlier this month that it wanted to pay it back.
"The perception is that any bank that took this money is weak. Well, that isn't our case. We were asked to take this money." The bank issued a toughly worded statement earlier this year, saying that being associated with the TARP program had put the financially strong banking chain at "competitive disadvantage" and that the bank now believed it was "in the best interest of shareholders" to return the funds.
Chicago-based Northern Trust Corp., which took $1.5 billion in funds, seems even more anxious for a quick exit. It found itself the object of national ridicule several weeks ago when it put on a golf tournament for its well-heeled customers at the Riviera Country Club in Pacific Palisades, Calif.
In a letter to House Financial Services Committee Chairman Rep. Barney Frank, the bank said it didn't need the money and, in fact, had earned $795 million in 2008.
What's more, the golf outing, which has raised $50 million for charity through the years, did not draw on the federal funds. A spokesman said Tuesday that the bank wants to pay the $1.5 billion back as fast as possible.
Frank, a Massachusetts Democrat, has been among the toughest critics of the banks, though he was caught up in his own bank bailout controversy when he inserted legislation to assure TARP money for a bank in his district. He defended that action by saying the bank was a victim of the credit meltdown, not a cause of it.
When the program began in October, the Bush administration pushed banks to take the money, particularly the first nine big institutions that included Bank of America, Citigroup and Merrill Lynch.
At the time, it wasn't entirely clear how wobbly their condition was, and so many healthy banks also jumped in, not anticipating what kind of party they were attending. And some of those midsize chains were strongly encouraged to accept the funds by government regulators.
Wayne Abernathy, executive vice president of the American Bankers Association, said the financial industry now has a generally dim view of how the Treasury Department handled the program in its early days.
"It was sold as something good for the economy and something showing that the participating banks are strong, but that isn't how it played out," he said.
After the program was enacted, Congress went back and added provisions that covered executive compensation, financial- disclosure requirements and conditions on acquisitions and mergers, Abernathy said.
"It was not popular when it was born and it didn't get any more popular as time went by," he said. "They added so many strings to it that it is pretty much unworkable."