Ten years ago, the U.S. Treasury was in the midst of investing more than $206 billion in the nation’s banks as a way to help them through a financial crisis brought on mostly by losses caused by imprudent real estate lending and risky investments in mortgage-related securities.
The Troubled Asset Relief Program, hastily hatched in September 2008, was unprecedented and highly controversial, but officials in the Bush administration and Congress were worried that if they didn’t act, the world financial sector would come crashing down. In a report last year, the Treasury Department summarized the situation in this manner:
“A decade ago, the U.S. financial system faced challenges on a scale not seen since the Great Depression. The banks and financial markets on which American families and businesses rely to meet their everyday financing needs were on the brink of failure. By October 2008, major financial institutions of all sizes were threatened and many of them tried to shore up their balance sheets by shedding risky assets and hoarding cash. People were rapidly losing trust and confidence in the stability of America’s financial system and the capacity of the government to contain the damage. Without immediate and forceful action by Congress and the federal government, the U.S. economy faced of the risk of falling into a second Great Depression.”
At the height of TARP, the federal government held direct investments in more than 700 banks through its Capital Purchase Program, the primary vehicle for federal involvement in the banking industry. Most of the CPP money went into larger banks, including such giants as Citicorp, Bank of America, Chase and Wells Fargo. Scores of other financial institutions got federal money in other parts of TARP, including the Community Development Capital Initiative Program, which mostly focused on smaller banks and credit unions.
The government also bailed out major automobile producers and insurance giant AIG. Thousands of homeowners were able to avoid foreclosure by restructuring their mortgages under another part of the TARP program. All told, the Treasury pumped $440.7 billion into the economy.
Despite the questions and concerns, TARP has proved to be mostly a good investment. The Treasury calculates it has collected $226.9 billion, including interest and dividends, on the $206 billion advanced through the Capital Purchase Program. Altogether, the government estimates it has recovered $442.9 billion from all the components of TARP.
Treasury has spent most of the past decade trying to reduce its unprecedented investments in the banking sector and the economy in general. A report last year from Treasury said that “[c]ompleting the wind-down of remaining TARP investment programs” is the top goal of the Office of Financial Stability, created to oversee TARP inside the department.
Three relatively small banks remain in the Capital Purchase Program:
• OneUnited Bank of Boston, which owes all $12 million Treasury invested in the bank, plus more than $8.1 million in unpaid interest and dividends.
• Harbor Bankshares of Baltimore, which owes $5.8 million of its $6.8 million federal investment. Harbor is current on its dividend payments.
• Broadway Bank of Los Angeles, which owes nearly $4 million of the original $9 million the federal government put into the bank. Broadway has no outstanding dividends.
Seven institutions remain in the Community Development Capital Initiative Program with an outstanding investment balance of $29.1 million; they also owe the Treasury $300,000 in dividends and interest.
• The largest of these is Carver Bancorp of New York, which hasn’t repaid any of the $18.9 million investment it received; the bank is current on its dividend payments. Carver’s money originally came through the Capital Purchase Program, but it was transferred to CDCI.
• Hope Credit Union of Jackson, Mississippi, owes its full investment of $4.5 million. It has no outstanding dividends.
• Co-operative Center Federal Credit Union of Berkeley, California, which owes its full investment of $2.8 million.
• Tri-State Bank of Memphis, which still owes $1.8 million of an original $2.8 million infusion, plus $300,000 in dividends.
• D.C. Federal Credit Union, which still owes $500,000 of a $1.5 million Treasury investment.
• North Side Credit Union of Chicago, which owes its full $325,000 investment.
• Buffalo Cooperative Federal Credit Union, which owes its full $145,000.
The Treasury Department refused to say how it plans to deal with these remaining TARP institutions. Through a spokesman, the department said it does “not comment on individual recipients of CPP funds.”
The 2018 report said, “OFS continues to exit CPP and CDCI by either: allowing banks that are able to repurchase in full in the near future to do so; or restructuring and selling OFS’s investments in limited cases.”
OneUnited Bank of Boston, which received $12,063,000 on Dec. 12, 2008, is among the banks remaining in the Capital Purchase Program. It owes its full government investment. In addition, it owes more than $8 million in past due dividends and interest.
Treasury records show the bank has paid only $93,000 in dividends. No bank owes the government more, according to Treasury.
Treasury’s investment in OneUnited drew scrutiny when it was made in 2009 after it was learned that the husband of Rep. Maxine Waters, D-Calif., held part ownership of the bank. Waters, who became chair of the House Finance Committee in January 2019 when Democrats took over the House of Representatives, was then a member of the committee, which oversees bank regulators, among other things It was disclosed that she had contacted Treasury officials.
The matter was referred to the House Ethics Committee, which eventually cleared Waters of wrongdoing. The committee found that Waters had made her entreaties on behalf of minority-owned and focused banks as a group, not as an advocate for any single institution. Nearly all the institutions that have outstanding TARP investments are focused on minority communities.
In some ways, it is not surprising that OneUnited is among the last banks to repay its TARP funds. A few months after the Treasury investment, the Investigative Reporting Workshop reported that OneUnited was the weakest bank to get money from the government, based on its low capital to asset ratio of only 1.8 percent.
Unlike many of its peers, OneUnited didn’t run into financial problems because of a heavy burden of poor loans or risky real estate investments, factors that dragged many banks into deep distress in the middle part of the last decade. Instead, OneUnited was victimized by the collapse of the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).
The two federally sponsored (but not federally insured) institutions bought trillions of dollars’ worth of mortgages and mortgage-backed securities, helping fuel the housing bubble. Freddie and Fannie sold bonds to finance their purchases, and when loan losses ballooned as the housing bubble burst, they slipped underwater along with many homeowners and financial institutions. Finally, in September 2008, the federal government stepped in and placed Freddie and Fannie into conservatorship, rendering their bonds virtually worthless.
In the third quarter of 2008, OneUnited was forced by regulators to write off $50 million in investments in Freddie and Fannie, putting a serious dent in the bank’s capital. In October 2008 the bank was placed under a “cease and desist order” by the Federal Deposit Insurance Corp. and the Massachusetts Division of Banks. The order, a sign of serious problems inside a bank, required OneUnited to increase its capital significantly. The $12 million federal investment in December 2008 helped bolster the bank as it tried to deal with the aftereffects of the crash.
In many ways, OneUnited was fortunate.
More than 300 banks failed between 2007 and 2010, the period most closely associated with the financial crisis. Hundreds more were forced to merge. In general, the banking industry has rebounded sharply from the crisis.
An analysis backed up by FDIC statistics found:
• There has been a continued contraction in the number of banks, which has fallen from 8,305 at the end of 2008, to just 5,406 at the end of 2018, a decline of 36.4 percent.
• As a group, banks earned just $10.2 billion in 2008; last year, helped by a strong economy and the 2017 tax cuts, they reported a profit of $236.7 billion, the highest ever.
• Nearly one bank in four lost money in 2008; last year just 3 percent were unprofitable.
• The number of banks on the FDIC’s “troubled list” has tumbled from a high of 884 at the end of 2010 to just 60 on Dec. 31, 2018.
• Bank failures have again become rare events. The FDIC did not take over any banks in 2018 and has closed only 21 since the beginning of 2015; 157 failed in 2010 and 140 in 2009.
• Bank assets grew from $13.8 trillion in December 2008 to more than $17.9 trillion at the end of 2018, an increase of more than 29 percent, more rapid growth than would be explained by inflation alone.
• Loans went from about $7.7 trillion at the end of December 2008 to more than $10 trillion in December 2018, a 30 percent jump, despite slow increases for several years after the 2008 crash.
• Deposits have increased a staggering 53.5 percent since the end of 2008. Some analysts believe this growth was partly fueled by people’s reluctance to invest after the market crash.
“The 2008/2009 financial crisis and the great recession did spur people to maintain more in deposit accounts rather than in stocks and bonds. It also spurred people to keep more savings for emergencies like a job loss,” said Ken Tumin, who writes a blog and newsletter about bank deposits.
However, unlike many of its peers in the TARP program and throughout the banking industry, OneUnited has struggled to bounce back. In the 10 years since it got the TARP money, OneUnited’s performance has lagged behind many banks, based on its quarterly reports to the FDIC:
• The bank’s profitability has been uneven. Last year, when the industry as a whole was earning $236 billion, or 1.35 percent of assets, OneUnited had a profit of only $510,000 or less than one-tenth of 1 percent of assets. In 2017, it reported losing $4.6 million.
• Its assets grew only 3 percent from Dec. 31, 2008, to Dec. 31, 2018.
• Its deposits actually shrank by 3 percent in that same period despite the huge deposit growth in the industry.
• Its loans did grow faster than the industry average, up 34 percent in the last decade.
• Its capital-to-asset ratio increased from 5.6 percent to 6.5 percent. The industry average on Dec. 31, 2018, was 11.3 percent.
OneUnited declined to make an executive available to discuss its TARP investments. Instead, Teri Williams, president and owner of the bank, said through a representative: “OneUnited Bank is in full compliance with its obligations to the U.S. Department of Treasury and continues to be committed to repaying TARP.”