Beware Banks' Unfunded TARP Talk

This column originally posted on RealMoney.com on Jan. 30. For more information about subscribing to RealMoney, please click here.

"There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy." --Securities Exchange Bill of 1934

Colonial BancGroup's (CNB Quote) recent disclosure of potentially problematic terms tied to a previously announced government investment should give investors pause about basing investment decisions on companies' statements about government bailout applications.

Colonial on Dec. 2 said in a Securities and Exchange Commission filing that the Treasury had approved an application for a $553 million preferred equity investment through the Troubled Asset Relief Program, or TARP. Shares of the $26 billion Montgomery, Ala., holding company responded by rallying 50%, closing at $3.08 that day.

Investors wondering why Colonial hadn't made any further announcements likely got their answer when the company reported earnings after the market close on Jan. 27. In the report, Colonial mentioned that its preliminary approval to receive $553 million (a revised number) in TARP money was contingent upon raising an additional $300 million in capital on its own.

The problem is the company never mentioned this in its Dec. 2 filing. In an environment where the public equity market was pretty much closed to banks, and the competition for private money was fierce, this might have raised concern to some investors who believed receiving the TARP money was a mere formality.

Investors in BankAtlantic Bancorp (BBX Quote), which has not updated the status of its Nov. 14 application for $124 million in bailout funds, and E*Trade Financial (ETFC Quote), which has not yet received word from the government since its Nov. 7 application for $800 million, might want to take heed.

Colonial BancGroup

Colonial on Jan. 27 reported a fourth quarter loss of $825 million, which included a non-cash goodwill charge of $575 million. Excluding the non-cash items, the operating loss for the fourth quarter was $291 million, or $1.45 per share. Not surprisingly, shares were down 46% on Jan. 28, which was a great day for many other bank stocks.