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.

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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.

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