If you listen to Madison bank CEOs, their decision to accept federal bailout money is a sign of their financial health.
"As opposed to a bailout, think of this as the government putting a stake in the ground," says Greg Smith, chief financial officer at Marshall & Ilsley Corp., which, while Milwaukee-based, leads the Madison area in deposits. "It's a positive reflection on the strength of this company."
M&I, as it's commonly called, is in line to sell $1.7 billion worth of stock through the federal government's Troubled Asset Relief Program, part of the recently crafted financial bailout.
Earnings reports show that M&I lost almost $400 million in the second quarter of 2008. Its third-quarter performance was better, but still disappointing; the bank's net income fell 62.2% over the same period in 2007, from $219.9 million to $83.1 million.
M&I is among a handful of prominent Madison banks - including Anchor Bank, Associated Bank and U.S Bank - that are seeking a slice of the bailout pie.
The goal of the program is to increase banks' lending activity, easing the credit crunch that has kicked the legs out from under the U.S. economy.
Banks had until last Friday to apply for federal funds but are not required to accept the full amount for which they are eligible. Of the top five Madison banks that have applied for the funds, three - JP Morgan, M&I and U.S. Bank - have already decided to accept the full amounts (see chart). The rest have until the end of the year to decide.Qualifying banks can apply for up to 3% of their total risk-weighted assets, or $25 billion, whichever is less. Only publicly traded banks are eligible to participate in the program, leaving out private institutions like Park Bank.
Kurt Bauer, president and CEO of the Wisconsin Bankers Association, isn't surprised that banks are lining up for the loans: "When you are able to get investors for a very low cost, it's something you have to investigate."
Denis Collins, a professor of management and business ethics at Edgewood College, takes a harsher view. He says the banks in need of help were poorly managed and those not in need who are taking bailout funds are exploiting taxpayers.
As he puts it, "You've either made some bad loans or you're trying to make money off this bailout situation to make your profits look better."
U.S. Bank, which has the fifth-largest market share of deposits in the Madison area, has applied to sell $6.6 billion of stock to the Treasury despite emerging from the mortgage meltdown in much better shape than its peers. Though its profits have steadily declined, overall the bank has been holding its own and even managed to nominally increase its lending activity, according to earnings reports.
But most area banks filing for federal funds have taken notable hits from the mortgage meltdown.
Anchor Bank, which has applied for a $200 million federal stock purchase, announced a $23.3 million loss in its second quarter, because of mortgage defaults.
"This action was necessary due to the deterioration in a portion of our loan portfolio, driven primarily by the current condition of the real estate market and the challenges this presents to some of our borrowers," said Anchor president and CEO Doug Timmerman in a statement.
Associated Bank, with the Madison area's fourth-largest share of deposits, was also hit hard when its holdings in mortgage giants Fannie Mae and Freddie Mac tanked. The bank's third-quarter profit fell 47% from the same period in 2007, from $71.1 million to $37.8 million. It has received preliminary approval to sell $530 million in stock to the U.S. Treasury Department.
And M&I's expansion into new markets left its construction and development portfolio heavily exposed.
Besides its 195 offices in Wisconsin, M&I has offices in seven states, including 32 in Indiana, 52 in Arizona and 31 in Florida. Nearly $450 million in construction and development loans made in Arizona are "nonperforming," the bank reports. These loans constitute a quarter of the bank's $10 billion construction and development portfolio.
M&I has also seen heavy losses in Florida, where 15% of its loans, totaling $66.5 million, are currently in default, according to the bank.
The banking industry says using taxpayer money to buy bank stock - and exposing the public sector to their problems - is a wise investment.
"Our banks don't need to be bailed out," says Bauer, who sees the Troubled Asset Relief Program as a low-risk proposition. "They are investing directly into financially healthy institutions. From that perspective, I think it's a pretty good deal."
But in buying the stock of eligible banks, the program leaves taxpayer money vulnerable to the vagaries of the stock market. Although the U.S. Treasury Department stresses that the funds are only being given to healthy institutions, many of the banks in the federal funds soup line have seen heavy losses due to poor real estate investments.
And that, says Collins, is exactly why they shouldn't take the money.
"Any bank that takes bailout money is going to have a stain on it," asserts Collins, calling the funds a "scarlet letter." "Banks shouldn't be taking taxpayer money."