Four more of the smaller banking institutions have announced that they will be redeeming so-called bailout money in late 2008, as part of the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP). This increasing trend of banks cashing in on the government shows no sign of slowing, and is a sign that the government's heavy-handed politicization of the program is starting to cause a backlash.

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The Myth
It's clear that the stampede of banks returning TARP money runs contrary to the government's goal of reversing the credit contraction that is hurting economic growth. The politicization of the program is partly the result of public misperception of the program as being a "bailout." This misperception has been inflamed by the constant use of that term by the media.

Signature Bank (Nasdaq:SBNY) has $7.19 billion in assets and operates 22 offices in the New York City area. The bank is repurchasing $120 million in preferred stock, citing its strong tangible equity ratio of 8%, as evidence that it doesn't need the additional capital. Management said that it was returning the money so it could be "recycled to those institutions that need the funds." This is a unique bank, as it doesn't use the word branches, but calls them private client offices.

If Signature Bank went out like a lamb, then Sun Bancorp (Nasdaq:SNBC) went out like a lion, blasting the government for changing the original deal. Thomas X. Geisel, the CEO of Sun Bancorp, said, "the partnership then became politicized; the rules and regulations changed, and the dynamics of the partnership substantially shifted. These changes significantly restricted the way we support our customers and communities, as well as the way we run our business." The bank currently has $3.6 billion in assets. (Break down the walls around researching financial instutions' financials, see Analyzing A Bank's Financial Statements.)

Old National Bancorp (NYSE:ONB) is the largest banking institution headquartered in Indiana, and prior to the redemption announcement, it performed a stress test with the aid of an outside firm to make sure it could afford the loss if capital. The bank redeemed $100 million in preferred stock.

Bank of Marin Bancorp (Nasdaq:BMRC) was the smallest of the four institutions and redeemed $28 million of preferred stock held by the government. The bank said it took the money to help stimulate the economy, and cited as justification for returning it, "the operating restrictions we experienced as a participant."

The Reality
Virtually every bank that received TARP money was in sound financial condition, and didn't really need the capital. The banks that did need the capital were not approved for it by the government, due to a weak financial condition. A bank like Colonial Bancgroup (NYSE:CNB) falls into this category. (Find out more in Liquidity And Toxicity: Will TARP Fix The Financial System?)

The government didn't bailout the banking system; it invested in it and received something of value in return for that investment – a preferred stock that pays a 5% dividend. Please note that every single recipient of TARP funds is current on its dividend payments.

The government also received warrants to purchase stock. Although these warrants are, in most cases, underwater currently, once the economy recovers and valuations expand in the financial sector, these warrants could be worth billions for the taxpayer.

The Backlash
There are now at least seven banks that have either redeemed or announced its intention to redeem the preferred issue. These banks include Iberiabank Corporation (Nasdaq:IBKC), TCF Financial (NYSE:TCB) and Sussex Bancorp (Nasdaq:SBBX).

The list of banks returning TARP funds is starting to snowball, something that runs contrary to the original goal of the program, which was to counteract the effect of the credit contraction. Our political leaders may one day regret politicizing such an important part of the recovery process.

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