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Four Banks in Govt’s ‘Healthy Bank’ Bailout Struggle to Survive

• Pro Publica

The government has doled out billions to 687 banks over the past year through a program meant to bolster already “healthy” banks. But an increasing number of those are troubled. Four banks in particular are foundering, including one that has acknowledged its executives cooked its books.

As then-Treasury Secretary Hank Paulson explained last October, the Capital Purchase Program was aimed at boosting the overall economy by investing in banks that “will deploy, not hoard, their capital.” Each bank seeking the money first had to win approval from its regulator, but the Treasury Department made the final decision.

The fact that even a small percentage of the banks are in such dire condition less than a year later raises questions about how they were approved for funds in the first place.

Some analysts have criticized regulators for choosing apparently unhealthy banks, while others have said it’s an understandable consequence of the pressure regulators felt to speed the review process. One reason it’s hard to settle: Treasury has released only the general outlines of the bank reviews – the records for each individual review are kept secret.

CIT is the largest of the troubled banks. Despite receiving $2.33 billion from the Treasury last December, CIT has been treading water for months. The company has said that if its bondholders don’t agree to a restructuring plan it proposed earlier this month, it may file for bankruptcy protection.

The Treasury could lose the entire $2.33 billion in bankruptcy. Its investments in the banks were made in the form of preferred shares, and “preferred shareholders generally do not fare well” in a Chapter 11 bankruptcy, said Robert Lawless, a bankruptcy expert at the University of Illinois College of Law.

Bleak as the company’s prospects are now, they weren’t much brighter when regulators approved CIT for the investment. The company, which specializes in lending to small and midsize businesses, had been struggling since 2007 due to the tightening of the credit markets, which it relied on to fund its business. Over the course of 2008, its stock dropped more than 80 percent.

CIT’s plan to save itself began and ended with government help. First, t

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