Nicolet Bank and TARP: Where did the money go?

What did Nicolet do with the capital?  While our press release adequately addresses this, I would like to comment in a more complete fashion.  In my opinion, there are two reasons why the public gets frustrated with the response of banks to questions about the use of the capital. The first is my opinion, the second is a fact.

A. Some banks are being deliberately evasive. My personal belief is that the infusion of capital into most of the big banks is a bailout. It is a necessary bailout in the sense that the industry cannot return to health until the big banks have written off their bad paper. Without TARP, writing off all their bad paper would leave them inadequately capitalized to survive and to face the additional problems which will come in the recessionary climate we are going to be in. For these banks, they are broke without TARP and they have exhausted their ability to raise private capital, because investors no longer trust banks understanding of their issues. Without TARP, we would be Japan circa 1992. Because these institutions are Toobtofs (Too Big To Fail) and they can’t raise enough capital privately to write off the rest of their bad paper, the alternative to TARP would be the “Don’t Ask Don’t Tell” regulatory approach that smothered the Japanese economy in the 1990s. The unspoken deal in Japan was the Regulators pretended the banks weren’t broke and the banks pretended the banks were not broke until they generated enough net interest margin to write their assets down.  As a small institution which has had to compete in a landscape dominated by Toobtofs, I am not happy about the bailout, but I accept that this is the least bad approach the Treasury can take. It makes it a little awkward to talk about. Citicorp was bailed out more than GM has been, but nobody is grilling Wall Street on their use of corporate jets.

B. It is honestly a little difficult to respond to questions about the use of a specific dollar that flows into a bank. The most truthful answers are a little more complicated than the public would like. Let me give a specific example. Between Dec 23rd and December 31st, Nicolet received stock investments of $24.5 MM, of which TARP was $15MM. During those 6 business days, we had total cash inflows of $194 MM and outflows of $194MM. TARP inflows comprised 7.7% of our total cash outflows. When the public asks, “where did our cash go?” there are $194MM worth of answers that are all equally true in a narrow sense. It is easy to truthfully answer the question in a way that will mollify the public by simply listing $15MM of loan advances which we made during that period. The optimist in me would prefer to address the intent of the question, which is a little more complicated.

Next blog post:  Why did Nicolet take TARP funds?

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