NEW YORK (TheStreet) -- Small banks around the country continue to cling to billions of dollars in government assistance five years after Congress signed the Treasury's Troubled Asset Relief Program -- or TARP -- into law.
TARP, like the direct injections the government made into faltering lenders like Bank of America (BAC - Get Report) and Citigroup (C - Get Report), was a deeply unpopular measure instituted by then Treasury Secretary Henry Paulson to pull the banking industry through what was the worst financial panic since at least the Great Depression. The bailout program also carries a name that doesn't reflect its eventual mechanics and goals when put into practice.
Paulson initially conceived TARP as a means to buy the soured mortgage and commercial real estate securities that plagued Wall Street in the fall of 2008. It was believed that taking impaired assets off of banks' books would help to shore up their balance sheets and restore confidence in the financial system. As the crisis worsened, Paulson altered TARP from an asset buying program into a direct injection of non-voting preferred capital into more than 700 banks across the country.
Effectively, the program acted as a recapitalization of the U.S. banking industry. And yet, even as banks like Lehman Brothers, Washington Mutual and Wachovia failed and lenders as large as Citigroup teetered on the brink of collapse, TARP was received skeptically by Congress, particularly the Republican party.
In fact, the first conception of the program was rejected by Congress in September 2008, forcing Paulson and Federal Reserve Chairman Ben Bernanke to go to Washington and warn of a looming economic collapse worse than the Great Depression. The bailout measure was only signed into law in early October under the Emergency Economic Stabilization Act, in a delay Paulson has said added a significant financial toll to the crisis.
In total, $245.1 billion in TARP money was invested in the banking system. As of Aug. 31, 2013, the Treasury has recovered $272.7 billion through repayments, dividends, interest, and other income -- a gain of $27.6 billion. Still, unlike other emergency measures instituted to pull the financial sector through the crisis, TARP is an ongoing program.
Overall, $3.3 billion in TARP investments remain outstanding, spread across more than a hundred institutions that still haven't achieved the financial health to repay bailout funds. Five years on, TARP's ongoing legacy signals a dual-speed recovery in the banking sector.
"The recovery in the banking sector has been uneven," Nancy Bush, a banking analyst at NAB Research, said in a September telephone interview. "The big banks obviously benefited from lot of the other liquidity programs."
TARP's biggest recipients such as "too big to fail" lenders like Bank of America and Citigroup have repaid their bailout funds at a profit to taxpayers.
Those banks, however, also were beneficiaries of other financial assistance during the financial crisis such as the Fed's various emergency liquidity programs such as the Troubled Asset Lending Facility and the Primary Dealer Credit Facility, which pumped trillions of dollars in needed cash into the coffers of the nation's largest banks.
In the wake of the crisis, most large banks have earned their way out of financial difficulty and, in fact, investors in the likes of Citigroup, Bank of America and insurer AIG (AIG) are now clamoring for meaningful dividend payments.
The nation's seven largest banks received $110 billion in TARP assistance -- with Citi and BofA also receiving additional funds -- and they returned Treasury a total of $136.1 billion in repayments of principal, dividends and interest.
In contrast, roughly 150 banking institutions across the country continue to hold a total of about $3.3 billion in TARP funds. Puerto Rican-lenders Popular (BPOP - Get Report) and First BanCorp (BPOP - Get Report), and Los Angeles-based Cathay General Bancorp (CATY) and Madison, Wis.-based Anchor Bancorp are the biggest outstanding holders of TARP money, according to September data from the U.S. Treasury.
Popular, the largest remaining recipient of TARP funds, continues to work on a repayment of its TARP funds and recently sold a stake in Evertec (EVTC), in a move analysts said augurs well for a repayment later in 2013 or early 2014.
The bailout of the banking sector drew a stiff response from regulators, who hope taxpayer money never again has to be put at risk to prop up a faltering financial sector.
The Dodd-Frank Act seeks in its multiple titles to reform derivative markets and trading activities that were at the heart of Wall Street's collapse, while other measures like the Consumer Financial Protection Bureau seek to ensure a fair banking industry for U.S. consumers. The Federal Deposit Insurance Corp. has implemented a so-called orderly liquidation authority to resolve failing institutions and the Federal Reserve stress tests and requires additional capital buffers for banks the regulator deems are systemically important.
The Fed, the Securities and Exchange Commission, FDIC and Office of the Comptroller of the Currency also have streamlined what was tangled regulatory oversight of the banking industry.
Still, it is TARP that often receives the deepest reservations from ordinary citizens and continues to be viewed as a necessary but flawed measure to pull through the 2008 financial panic.
"Do we ever really want to do this again," Bush, the NAB Research analyst said. "There has got to be a better way."
-- Written by Antoine Gara in New York.