4 Mass. banks get $18m from US

Some recipients use funds to repay TARP, raising objections

By Todd Wallack
Globe Staff / August 18, 2011

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The US Treasury said yesterday that it is pumping $18 million into four small Massachusetts banks and taking shares in the financial companies as part of a controversial program to increase small business lending across the country.

The Obama administration says the Small Business Lending Fund will help boost the sluggish economy by providing relatively cheap capital to community banks to lend to small businesses to expand and hire. As with the Troubled Asset Relief Program, or TARP, which bailed out banks during the financial crisis, the government is buying preferred stock in the banks in exchange for the capital infusion.

The program is controversial because many of the banks are using the money to repay the federal aid they received under TARP, with better terms. For example, Mercantile Capital Corp., parent of Mercantile Bank and Trust Co. in Boston, plans to use half the $7 million it will receive to repay TARP.

The new money will likely cost Mer cantile just 1 percent a year in dividends, compared with the 5 percent it had been paying under TARP. Without the Small Business Lending Fund, Mercantile chief executive Charles Monaghan said, the bank would have had to limit the amount of new loans it could make “at a time when the economic conditions are begging me not to do so.”

“In that regard,” Monaghan said, “SBLF is particularly helpful in permitting Mercantile to assist its customers and the local economy to grow.”

So far, the government has awarded more than $1 billion to 80 banks — with nearly two-thirds of the money going to TARP recipients, which are required to repay those bailout funds in order to participate in the new program.

More than 900 banks have applied for more than $11 billion under the program, none of which have been rejected yet, according to the US Treasury.

“We think the funds will help provide a powerful spark for job creation,” Jason Tepperman, the Treasury official who oversees the program, said in a conference call with reporters yesterday.

Congress authorized the administration to distribute up to $30 billion to community banks under the small business fund, compared with $700 billion for TARP, which was open to small and large banks alike.

But several Republicans in Congress, including Senator Olympia Snowe of Maine, have derided the program as another government bailout for the financial industry and pointed out that many banks are simply using the funds to repay federal aid they already received under the Troubled Asset Relief Program. Some critics have nicknamed the program “TARP Jr.” or “Son of TARP.”

The Small Business Loan Fund “has always been more about giving Treasury the opportunity to rebrand an unpopular TARP program than actually stimulating small business lending,” said Neil Barofsky, former special inspector general for the Troubled Asset Relief Program and now a senior fellow at New York University School of Law.

In addition to Mercantile, the government said it provided $4 million to Island Bancorp Inc. of Edgartown; $4 million to New England Bancorp Inc. of Hyannis; and $3 million to Rockport National Bancorp Inc. in Rockport.

Another bank, Central Bancorp Inc., the parent of Central Co-operative Bank in Somerville, said earlier this month that it had preliminary approval to get up to $10 million from the program to replace the TARP money it received.

Most of the biggest banks that received TARP money, such as Bank of America Corp. and Wells Fargo & Co., have paid back the government, but hundreds of smaller banks have struggled to do so. More than half the banks still holding TARP funds have applied for the small business lending program in part as a way to exit TARP.

Many political leaders believe that boosting lending to small businesses is a key way to spur hiring and help lower the nation“s unemployment rate, which has been stuck at around 9 percent. Small businesses, which account for more than half of US private sector employment, have the potential to create millions of jobs when they expand, but typically have a harder time getting loans, particularly in tough times.

Massachusetts Treasurer Steven Grossman has pledged to place more than $200 million in state deposits with local banks to encourage them to lend to small businesses. So far, the treasurer“s office has deposited $121 million in 27 banks, including Mercantile.

Bank executives say the Small Business Lending Fund has many advantages over TARP. For instance, bankers say it doesn“t have the same baggage as TARP, which was widely denounced as a government bailout, even though the Treasury has made money on the TARP investments in banks, through the significant dividends the banks paid.

Tepperman, the Treasury spokesman, said the program is “entirely different” from TARP. For example, the program isn“t open to banks in the worst financial condition or those, like OneUnited Bank in Boston, that have repeatedly missed dividend payments under TARP. OneUnited received $12 million from the government in 2008 after intervention by two Democrats in Congress, Barney Frank of Massachusetts and Maxine Waters of California.

Todd Wallack can be reached at Follow him on Twitter at @twallack.