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Wed. May. 13, 2009

No Such Thing As Free (TARP) Money *

Several banks have learned the hard way that when you get the U.S. government’s money, even in the form of a loan, as a bonus you get the government’s “help” running your business.  Needless to say, this is not very appealing to most businesses. Looking at the country’s deficit, the government doesn’t specialize in running anything in the black. So what’s a company to do when they realize they’re in a bad relationship?

Kelly King, Chairman and CEO of BB&T (BBT), a large U.S. regional bank and vocal critic of the government’s bank bailout plan, described its participation in the TARP program as “destructive.” King went on to say “Our plan is to repay the TARP funds as soon as it is humanly possible. It creates excessive controls, it has a negative impact on our people and our strategies and it runs a great risk of politicizing the lending process, which is very unhealthy.”

On May 11th, BBT announced that it would sell $1.5 billion of stock and reduce its dividend by 68 percent so that it can repay a $3.1 billion investment. Goldman Sachs & Co (GS), JPMorgan (JPM) and Morgan Stanley (MS) are arranging the stock offering.

Having previously increased its dividend for 37 consecutive years, this is a tough pill for a once-proud Dividend Aristocrat to swallow.  King said the decision marked “the worst day in my 37-year career,” and pledged to increase the payout when he can.  Like most dividend cutters, BBT’s shares plummeted falling over 7.5% on the day of the announcement and another 7.5% on the following day.

BBT wasn’t the only one running from the government’s “help”. Two other large U.S. banks that passed the government’s “stress test” announced stock offerings on Monday to raise capital in order to repay their TARP debt.  U.S. Bancorp (USB), the parent company of U.S. Bank, said Monday that it has launched a $2.5 million public offering of its common stock and Capital One Financial Corp. (COF) also announced a public offering of 56 million shares of its common stock.

As with all individual income stocks that cut their dividends, I immediately sold my entire position in BBT after reading the announcement.

Full Disclosure: No position in the aforementioned stocksSee a list of all my income holdings here.


7 Responses to “No Such Thing As Free (TARP) Money *”

  1. greg says:

    Why take the money in the first place, if they plan on cutting the dividend and selling more stock, to pay it back; fast. Why didn’t they do that in the first place?
    Because they did think they were getting free money. That they thought would slide between the cracks. And the ceo/board members could stuff in their pockets.

  2. Chris says:

    I am not sure I buy the argument that they don’t want TARP money because of government interference in their business. It seems like executives are concerned more about their personal compensation than what is best for the company. I would think the most destructive part of TARP is the negative publicity portrayed to customers and damaging the banks brand, but it is shocking that most banks do not point out these concerns.

  3. I eliminated financial companies from the mix of stocks I own, many years ago, probably back with the S&L mess back in the late 80s, early 90s. I just don’t trust them, especially when their business model only involves moving around money, and borrowed money at that, plus with the Enron mess, Citicorp and accountants were part of the fraud.

    One thing I always wondered about Buffett, was that he invested in so many financial companies. He would always say he only invested in businesses he understood, but even he got tricked by these companies during this mess. Sure, banking and insurance are ways to get rich, but as I see it, it really is a massive Ponzi scheme, camoflaged by doing some helpful moving around money. I only trust them with FDIC insured CDs, with the government protecting the little guy. Otherwise, I see their stocks as pure speculation.

  4. Marty from North Dakota says:

    If you’ve had a chance to read part or all of “Meltdown” by Tom Woods, you’ll better understand how our economic troubles came to be plus you’ll have a chance to see a way out. As of a few days ago, every single person including babies owe more than $90,000. So us how easy it is: pay up!

  5. Regarding “Meltdown”, I could only take a few minutes of Woods talking about the book, a few minutes ago on BookTV. His gibberish about how unfettered free market capitalism is so great was enough to know he was off kilter. Sorry, I think Ron Paul, etc and their channeling of dead Austrian economists is right out of cuckooland.

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