September 5, 2010 in Business

Bert Caldwell: Costs high, benefits higher in saving Sterling

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The successful recapitalization of Sterling Financial Corp. may well be the best economic news of 2010 for Spokane.

Thanks in part to that “bailout” we all say we hate.

In raising $730 million, the corporate parent of Sterling Savings Bank assured the retention of more than 600 local jobs. Many more were potentially in jeopardy across a five-state, 178-branch system assembled during a succession of mergers that produced $12.7 billion in assets.

But relentless expansion also took Sterling into Bend, Boise, Southern California and other markets among the hardest hit by collapsing real estate values. The set-aside of $223.8 million for loan losses pushed Sterling’s 2008 earnings into the red, snapping a streak of profitable years going back to its formation as a savings and loan in 1983.

To help cope with those losses, Sterling in December had received $303 million in additional capital by tapping the U.S. Treasury’s Troubled Asset Relief Program. The centerpiece of the federal government’s financial rescue package, TARP invested more than $200 billion in the nation’s banks before the borrowing window was closed by the financial reform bill passed in July. Much more money went to AIG, Chrysler, GM and other companies on the verge of ruin but “too big to fail.”

Sterling was the biggest TARP beneficiary in the Northwest. It was also the region’s biggest home-grown bank. Mighty Washington Mutual Bank, undone by scandalously reckless lending practices, was history.

Washington banks, including the corporate parents of Inland Northwest Bank and Washington Trust, received almost $1 billion in TARP money. Several of those not considered healthy enough to qualify for TARP have since been taken over the Federal Deposit Insurance Corp. and the Washington state Department of Financial Institutions.

Had Sterling failed, the Treasury probably would have lost 100 percent of its $303 million. Instead, the department consented to accept a fraction of that amount as an inducement to new investors. That was a turning point in the recapitalization effort. Within weeks, institutional investors Thomas H. Lee Partners and Warburg Pincus Equity Partners X, L.C., were in, to be followed by 30 individuals, among them new Sterling Chairman Les Biller.

The Treasury will end up owning slightly less than 10 percent of Sterling. Until all 4.2 billion shares of the recapitalized bank begin trading, putting a precise value on that holding would be guesswork. But the special inspector general appointed to monitor TARP said in a July quarterly report that the Treasury would take a $227.3 million “haircut” on its Sterling investment, assuming a 75 percent markdown. The discount will be more like 80 percent.

The FDIC stood to lose much more. Closing Everett-based Frontier Bank in April sapped an estimated $1.3 billion from the deposit insurance fund, and Frontier was less than one-third the size of Sterling.

Last week, the FDIC announced its deposit insurance fund had improved to a negative balance of $15 billion.

So, with either the Treasury or the FDIC likely to take a bullet if Sterling did not remain open, Treasury will take the hit. If the department chooses to keep its shares and Sterling’s new management team can return the bank to its glory years of uninterrupted profitability, it may well be that the Treasury will recover more of its investment.

The Congressional Budget Office last month estimated losses on the total $475 billion TARP outlay would amount to $66 billion, about one-half the cost of the savings and loan rescue effort of 20 years ago. That’s good news for taxpayers and reason for many to get down from their high horses regarding Wall Street bailouts.

Yes, the fat cats took us for a ride. Make that take us for a ride. We saved their bacon. But the money center banks, excepting Citigroup, have repaid their TARP money in full, plus dividends and capital gains. The hundreds of troubled banks on FDIC’s watch list are, like the struggling savings and loans of two decades ago, out here in the hinterlands.

Bailing got Sterling back on dry ground and helps keep at least 10 other Washington and Idaho banks above water, employing and lending in cities and towns all over the Northwest.

Four comments on this story so far. Add yours!

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  oneanddone on September 05 at 4:50 a.m.

  You can NOT be serious - as someone was fond of saying. Capitalism does not work that way Bert. You pays your money and you takes your chances. It won’t work any other way. The American electorate is appalled at what is happening in Washington re: Tarp. But, happily, a LOT of current congressmen are about to lose their cushy jobs because of it. And anyone who supports any sort of government bailout should lose theirs as well. Business should never expect taxpayers to pay for their greed and stupidity. And since it’s already taken place, business should pay through the nose to again make the taxpayer whole.

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  liarsinnews on September 05 at 8:49 a.m.

  oneanddone: Great opine. I could not agree more. Its too bad some of the bankers that received taxpayer money, instead should have been put up in the Iron Bar Hotel.

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  gocougs73 on September 05 at 9:44 a.m.

  I’m not going to defend those that made poor business decisions at Sterling or any other bank that has struggled. They got away from basic banking principles and chased opportunities that created more short-term income. Bad ideas - not a doubt about that. Those at CitiGroup, Lehman, etc made many ridiculous decisions that tend to unfortunately be cast on smaller banks. But those in the community banking world simply got caught up in the wave of real estate growth and made very poor (not criminal) decisions.

  To insinuate that the actions of the community bankers were criminal is a reach. Do you think that some of the local business (non-bank) owners whose businesses failed are criminal? Not likely. They too made bad decisions but did so in an environment where they were not placed under additional scrutiny due to programs like TARP. Just because the banks got government assistance leads to the instant vilification of those individuals. As Bert rightly points out, TARP has actually been a good investment overall for the Treasury. Simple as that. The taxpayers provided high cost loans to the banks to get them through these times. To let all of them fail would have far reaching and detrimental impacts on the economy as a whole.

  As Bert clearly points out, no government assistance would have cost the government billions - accepting a loss on the TARP investment in this case cut the government’s losses. Plain and simple business decision. Those at the bank that made these decisions are long gone (and so is the value of the bank stock they held so much of). In the end the banks are a key component to our economy and as other businesses struggle, helping keep certain banks afloat is the best option. Like it or not, keeping Sterling in place bodes well for our regional economy.

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  de3 on September 05 at 4:31 p.m.

  Why did we reach a state where it is essential for taxpayers to back stop “too big to fail” businesses? That is not capitalism, that is not a free market.

  The Sterling executives have yet to thank the taxpayers for their very generous contribution of giving the Sterling corporation $303 million to buy just $60 million of stock. Instead, about a week ago, the executives patted themselves on the back for “their” rescue of the failed bank.

  Again, why have we reached a situation where some businesses are too big to fail, have become immune to risk management that other businesses must adopt - or die - and we now defend a taxpayer bail out as better than the alternative? That seems a bit like extortion - save me from my own incompetence or I bankrupt the country.