On second thought, never mind about that bailout

A man holds a sign with the words: "Need Food For Family, God Bless You, Will Work," at an intersection in Miami, Florida. US lawmakers are set to hand Barack Obama the first major win of his week-old presidency, overriding chiefly Republican objections to pass a highly questionable $825bln economic stimulus plan.

30 January 2008
By MATT APUZZO

WASHINGTON – A small but growing number of community banks are backing out of the government's bailout, which they see as fraught with hidden strings and government interference.

About 20 banks so far that applied for or had been approved to receive about $1 billion combined in taxpayer money have reversed course in the past month and refused to take the money. That's just a fraction of the hundreds of billions of dollars the government already has spent, but it shows that taxpayers aren't the only ones anxious about the financial bailout.

"The government's going to own a good portion of these banks," said David Heintzman, president of Stock Yards Bank & Trust in Louisville, Ky. The bank recently turned down $43 million in approved bailout money.

After Congress approved the $700 billion bailout in October, the government gave banks only a few weeks to decide whether they wanted to take part in the government investment program. Many applied to get a foot in the door, in case predictions of an economic collapse came true.

"We drank the Kool-Aid," said Michael Ross, president of Fidelity Bank in Dearborn, Mich., which applied for about $29 million in November.

But as details emerged, the deal didn't look so good. For Fidelity, taking the money would mean the government would have owned about 25 percent of the company's outstanding stock. Then Congress and the White House could start calling the shots, Ross said. He remembers the government's failure overseeing Freddie Mac and its sister company, Fannie Mae, the two housing companies so badly mismanaged they were taken over by the Bush administration.

"These are the guys who brought you Hurricane Katrina. These are the guys who were supposed to be watching Fannie and Freddie," Ross said. "I've not seen anything like this, where they really are talking about nationalizing banks."

Much of the criticism about the bailout has focused on the lack of oversight, which allowed banks to take money and refuse to say where it's going. Wall Street executives, who make millions of dollars and enjoy lavish perks like private jets, earned the ire of consumer watchdogs who said taxpayers were getting a raw deal.

But some community banks, which had little or nothing to do with the subprime mortgage crisis, say the deal didn't look great for them, either.

Congress wants banks to make loans, so businesses can expand and people can start buying houses again. But lawmakers also want them to make only trustworthy loans. But there are only so many good loans to make in a weak economy with high unemployment.

Explaining that to investors is easy. To politicians, it might looks like you're hoarding taxpayer money.

"Then what? Then they have a guy at our board meeting?" said William Campbell, president of Pamrapo Savings Bank, a Bayonne, N.J., bank that walked away from its $11 million bailout application.

The government also can force banks to cut dividends to shareholders, making a bank's stock less attractive to investors. President Barack Obama has said he wants to prohibit banks from buying other banks. And at any time, Congress can change the law and add new terms.

"Are you going to enter into a contract that will cost you millions of dollars if you can't live with the rules and you don't even know what the rules are?" said Steve Buster, CEO of Richmond, Calif.-based Mechanics Bank, which refused $60 million in bailout money. "I don't know of any other forum that parties can change the contract at will. This is not fair."

The banks that turned down the money said they were comfortable their own finances will allow them to weather the storm. For some, taking the money seemed riskier than turning it down.

"We finally said, 'Hey do we really want to go down this path?'" said Michael Blodnick, chief executive of Glacier Bancorp of Kalispell, Mont. "I understand a lot of banks do, and a lot of banks need to."