STEVE INSKEEP, host:
Next, we'll report on some unintended consequences of last year's bank bailout.
NPR's David Kestenbaum has the story of one small bank that borrowed money from the government, paid it back promptly and lost nearly a million dollars in the process.
DAVID KESTENBAUM: Let me tell you about Centra Bank in West Virginia. Douglas Leech, the CEO, helped found the place back in 2000 by maxing out his credit cards and mortgaging his house. It is not a big multinational bank, it's a community bank. Leech says he's never done subprime loans.
Mr. DAVID LEECH (CEO, Centra Bank): When we make a loan, we can see the collateral, the businesses. We see them open their doors and close their doors in the evening. We go to church, to school with our neighbors. And that's where our business is being done.
KESTENBAUM: Also, he promises if you call an actual human being will answer before two rings.
(Soundbite of phone ringing)
Unidentified Woman: Thank you calling to Centra Bank. This is Megan. How can I help you?
KESTENBAUM: That was one ring. So, Centra was more than healthy, even with all the economic troubles. And when the government unveiled its TARP program to lend money to banks, Leech thought it sounded like a good idea. TARP was seen as a bailout for the big troubled banks, but it was also meant to help healthy banks keep lending.
Mr. LEECH: Receiving TARP funds was really like a merit badge, kind of, in the Boy Scouts. It was being made available to only the strong banks. And you in fact may not be looked at quite as favorably if you didn't receive the TARP.
KESTENBAUM: Centra filled out what Leech remembers as a three-page form, and pretty soon the Treasury Department wired the bank what amounted to a $15 million loan. The government got $15 million of preferred shares that paid 5 percent dividends. But, okay, you can just think of it as a loan at 5 percent.
The Treasury also got what are called warrants - and we'll get to those in a minute. But for the moment, everyone was happy. The bank had a little bigger cushion and more money to work with. But then, Leech says, Congress threatened to change the rules. There was talk about putting restrictions on how the TARP money could be used, restrictions on taking over other banks, for instance.
So, Leech called Treasury and said Centra wanted out.
Mr. LEECH: They said we understand. We're developing the process to exit the program. We don't have those details worked out. They told me that I was the first banker to call them.
KESTENBAUM: Centra wired back the $15 million plus a little interest to Treasury. That went fine. But then, there was the issue of those warrants.
Under many TARP contracts, the warrants give the government the option of buying stock in the bank at a set price. The idea was that if a bank recovered and its stock recovered, the taxpayers would make some money.
But Centra Bank is a private bank, and the way these warrants were set up to protect the taxpayer, the warrants let the government pay $750 for preferred stock worth $750,000.
Leech figured he'd just return the 750.
Mr. LEECH: Two days later, the lady that runs our wire transfer department came into me and said, Doug, we got a wire back from Treasury for $750. Simultaneously, my assistant delivered to me a letter from Treasury, indicating that in order for us to exit the TARP program the pathway was to wire $750,000 plus interest.
KESTENBAUM: So, not $750 - $750,000. Even though the bank had only held the money for six weeks, Centra had to pay the equivalent of a 60 percent annual interest rate on it. Ouch. If Centra had stayed in TARP longer, that loan would've actually been pretty cheap, but exiting early came with a real penalty. And in his case, Leech says, TARP backfired.
It was supposed to give banks extra capital, but Centra lost $750,000. This happened two weeks ago, and Douglas Leech has been to Washington. He talked to West Virginia lawmakers, including Congresswoman Shelley Moore Capito. Capito says she's not sure what should be done, but certainly what happened to Centra Bank feels unfair.
Representative SHELLEY MOORE CAPITO (Republican, West Virginia): And I think we need to look at it to make sure that we don't penalize people who are trying to do the right thing, pay the TARP money back, and in a lot of cases, our local lenders who are very healthy.
KESTENBAUM: Centra was the first bank to fully pull out of TARP, but Douglas Leech says other bank CEOs have been calling him also wanting out.
David Kestenbaum, NPR News.
INSKEEP: David is part of NPR's Planet Money team, which blogs in podcasts about the economy at NPR.org/money.
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