In Michigan, Bank Lends Little of Its Bailout Funds

TROY, Mich. - The bad bets made by executives at Independent Bank of Michigan are on display in spots across the state: a defunct bowling alley, a new but never occupied shopping center and the luxurious Whispering Woods Estates, which offers prime lots for never-constructed dream homes.

Now it is the federal government making the big bet here.

The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank, which traces its roots back 144 years in Michigan. It is a small chunk of the giant rescue fund being wagered by Washington to encourage banks like Independent to resume lending and jump-start the frozen economy.

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But Independent, hard put to find good borrowers in a suffering economy, and fearful of making the kind of mistakes that got it into trouble in the first place, is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. “It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

This is not what the Treasury Department had in mind when it started this program, saying it would give the nation’s “healthy banks” enough money to start lending again, so that people could buy homes and businesses could invest and create jobs, thereby invigorating a disintegrating economy.

A close look at Independent Bank’s handling of its government money demonstrates just how much harder this has turned out to be, and the conflicting challenges that banks across the United States are confronting in the new bailout era. Like hundreds of other banks, it is caught between the government’s push to increase lending and its own caution.

As of Tuesday, 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention.

But it is the smaller community banks like Independent that are seeing the largest number of investments, with 186 banks so far getting allocations of less than $100 million. With little public attention, this money in recent weeks has been streaming out to community banks across the nation, in dollops as small as $1 million — the amount set aside for Independent Bank of East Greenwich, R.I. Ultimately, more than 1,000 banks are expected to take part in the program.

While most of the banks that have received money appear to be relatively healthy, dozens of other banks that received federal funds are, like Independent Bank of Michigan, financially stressed by a high volume of delinquent loans.

Bailout Is Questioned

Economists say the decision by banks like Independent to use the federal money for purposes other than lending, while perhaps disappointing, is not surprising, given that the Treasury Department did not honor its plan to give the money only to healthy banks.

“It’s a matter of logic — when you are in a perilous position, like many of them are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary policy economics professor at Princeton. “But this is a real flaw in the program.”

Some banking experts are even questioning if the bailout may be doing more harm than good, in some cases, by giving banks like Independent a cushion as they struggle to fix their problems, rather than forcing them to sink or swim on their own. It could also delay mergers of weaker banks with healthier ones.

“You are keeping a lot of troubled institutions in kind of a status quo state,” said Eric D. Hovde, the chief executive of a Washington-based hedge fund that invests in the banking industry. “They can continue on their merry ways.” In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers. The program is likely to be fundamentally changed under the administration of Barack Obama, who on Monday asked President Bush to request that Congress release the remaining $350 billion.

Some lawmakers have criticized the Treasury for allowing banks to use the government’s bailout money to acquire rival banks.

As additional evidence of the growing anxiety, bank regulators on Monday sent a notice to banks receiving federal money ordering them to disclose how they are using it. It also pushed them to emphasize new loans. “A lot of the money is already out there and the inspector general needs to get up to speed on how banks are using it,” said Senator Claire McCaskill, Democrat of Missouri. “We need to make sure we get this money back and the only way we can do that is with strong oversight on how this money is spent.”

Neel Kashkari, the interim assistant secretary at Treasury running the bailout program, said he was convinced that it was delivering the promised results by stabilizing banks while also encouraging them to help out their communities. Even if overall lending is not up, it is higher than it would have been without the program, he said.

“We’re still in a period of fairly low confidence,” he said. “So, banks are understandably nervous about extending a lot of new credit. And consumers are nervous about taking on new credit.”

Independent, which has 106 branches and $3.1 billion in assets, illustrates all of these complexities.

By no means is Independent the worst off among the country’s community banks. Some banks that sought TARP funds were considered so weak that Washington officials discouraged them from even applying. Other banks were rated slightly stronger but still were required to raise private capital before they were approved for federal help.

When it applied, Independent was considered “well capitalized” by federal standards. It had not been subject to any recent regulatory orders to change management or lending practices, for example.

CONTINUED : Still struggling

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