The backlash by the banking industry against the federal government's heavy hand began in earnest this week as IberiaBank Corporation (Nasdaq:IBKC) announced that it would be redeeming preferred stock held by the U.S. government.

In the fall of 2008, the Bush administration created the Capital Purchase Program (CPP) as part of the Troubled Asset Relief Program (TARP) to help the banking system replenish its capital, increase lending and restore confidence to the banking system. The Treasury offered capital to banks in return for a dividend-paying preferred stock. The offer was accepted by hundreds of banks, both those in need and those that took it just in case their losses deepened during the recession.

IN PICTURES: Top 7 Social Security Myths: Exposed

No Free Lunch

The recipients of the preferred shares have since learned that government capital came with strings attached in the form of restrictions on dividends, and Congress has since pressured banks on employee bonuses, executive compensation and even expressed outrage over golf and business outings with clients. The restrictions are expected to get worse during the next year due to the Obama administration's values and continued democratic control of both houses of Congress.

First to Repay
The first bank to do more than complain quietly is the IberiaBank Corporation, a Southeastern bank with operations and offices in eight states. The bank received $90 million in capital from the government in early December 2008, and is redeeming the entire amount on March 31, 2009. The bank said that recent actions by the government would put the bank at an "unacceptable competitive disadvantage," if it didn't redeem the issue. (Learn more in Liquidity And Toxicity: Will TARP Fix The Financial System?)

More to Come?
Other banks that regret the eager acceptance of government capital may follow Iberiabank's. MidSouth Bancorp (NYSE:MSL) has $936.8 million in assets and has offices in Texas and Louisiana. The bank received $20 million from the government as part of the CPP. Rusty Cloutier, the president and CEO of MidSouth, has publicly questioned the wisdom of taking the money. "It was sold to us by the feds as a partnership, but it's turning out to be something very different. It's looking more and more like the federal government wants to treat this like it was a needs-based issue, and we didn't need the money."

Even giant JP Morgan (NYSE:JPM) seems eager to pay back the preferred stocks as soon as it is able. James Dimon, the company's CEO, said he would like to do it in 2009 but would have to confer with regulators beforehand.

Perhaps the smartest bankers out there were the approximately 60 banks that said no to the CPP when it was first announced. Kearny Financial (Nasdaq:KRNY) was one of these. The bank had a ratio of tangible equity to tangible assets of 18.1% at the end of the third quarter of 2008, and John N. Hopkins, the company's CEO, said that accepting the funds would "impose various limitations on our long-term capital management plan and, therefore, is not in the best interest of our shareholders." (Find out how economic capital and regulatory capital affects risk management in How Do Banks Determine Risk?)

The Bottom Line
A growing number of banks that received TARP money from the government are starting to regret the decision, and one has decided to redeem the preferred stock held by the government and pay back the funds rather than deal with increasing government scrutiny.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Savings

    The Worst Financial Problems Ultra-High-Net-Worth-Individuals (UHNWIs) Face

    Understand how the problems of ultra-high-net-worth individuals (UHNWIs) are different from ordinary problems, and identify the unique financial challenges they face.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center