DEALTALK-Thrifts think twice about TARP rescue funds

(For more Reuters DEALTALKS, click [DEALTALK/])

By Paritosh Bansal

NEW YORK, Nov 10 (Reuters) - A policy reversal by the U.S. government nearly 20 years ago that left several thrifts insolvent is making some institutions think twice before applying for funds under the current financial bailout.

The companies are worried the government may change the rules in a way that could hurt them.

In the 1980s, during the savings and loan crisis, regulators encouraged investors and healthy institutions to take over failing thrifts by changing an accounting rule related to acquisitions to let buyers circumvent normal capital requirements.

The change allowed the healthy institution to recognize the target's negative net worth as an asset known as "supervisory goodwill," and write down its value over 40 years. It improved the impact of the acquisition on the buyer's capital.

But Congress eliminated supervisory goodwill in 1989, leaving a number of merged thrifts short of capital. Some failed, many subsequently sued and some cases are still ongoing.

In the latest bailout package, the U.S. Treasury has earmarked $250 billion of its $700 billion Troubled Asset Relief Program (TARP) to inject capital into financial institutions. Half went to nine large banks, including Bank of America Corp (BAC.N: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research) and Goldman Sachs Group Inc (GS.N: Quote, Profile, Research). The remaining half is being injected into smaller institutions.

But some banks and thrifts are concerned about limitations under TARP, such as those on dividends, stock repurchases and management compensation, and how they could be changed in the future, experts said.