Banks to Buy in Light of TARP

TARP, the “Troubled Asset Relief Program,” has been the minds of many financial sector analysts ever since the Emergency Economic Security Act of 2008 allowed banks to tap the US Treasury for cash.  Whether TARP was necessary to stabilize the banking industry is for economic historians to decide. What matters now is that TARP is still alive and well – and should be considered if you’re thinking about buying a bank stock.

Over $204 billion in TARP funds have been distributed to 600 different financial institutions.  The initial controversy surrounding TARP related to larger financial institutions using taxpayer funds to purchase faltering banks. The money may not have led directly to the Wachovia, Washington Mutual, or Countrywide purchases, but JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) certainly found it easier to loosen their purse strings for acquisitions as a result.

What is probably not so well-known is how smaller banks actually used TARP money for its intended purpose:  to shore up their balance sheets and stay solvent. According to CNNMoney.com, roughly two-thirds of the TARP money went to community banks. Community banks have traditionally eschewed Federal assistance. But when times turned tough, a little help from Uncle Sam was welcome.

Last Thursday Treasury Secretary Timothy Geithner reminded Congress how smaller banks are faring in this economic crisis…and why:

“We’re a country of 9,000 banks, not just 20 banks. Fewer every day. But that’s sort of the necessary process of restructure and repair that we’re going through. And many of those banks came into this crisis with more capital than the big banks held, but many of them also had more concentrated exposure to commercial real estate and real estate.”

As Geithner might say, overexposure to real estate made community banks more vulnerable in this environment. That’s why we’re still staying clear of regional banks for now.  Larger, too-big-to-fail banks like Wells Fargo (WFC) are a different story. Late last month we recommended WFC. Although it dropped initially, Wells has been consolidating in a trading range between $26 and $29. We think it will break to the upside in the near future. Time will tell.