Irwin Financial Corp., which desperately needs capital, is proposing that the Treasury Department create a program for companies that are too weak to qualify for a government infusion under existing rules.

The struggling $4 billion-asset Irwin applied for the Troubled Asset Relief Program seven months ago, but it is losing hope fast.

"We think, absent a change in whatever policy is applied, we are unlikely to be approved for Tarp," Matt Souza, the Columbus, Ind., banking company's chief administrative officer, said in an interview. "We've delivered to Treasury and regulators a proposal that modifies the current capital programs. In this proposal, we suggest that banks be eligible to receive capital if they are determined to be viable institutions upon the receipt of capital from Treasury and the private sector" — rather than allowing only the strongest to qualify.

Souza said that Irwin's proposal could prevent bank failures, ease the burden on the Federal Deposit Insurance Corp.'s Deposit Insurance Fund and attract private capital into the industry.

He also said the program would correct the inequity of regulators' shoring up large troubled institutions while letting smaller banks flounder.

Observers called the Irwin proposal intriguing but said it is unlikely to gain traction.

Some contend that, rather than making it easier for troubled community banks to gain access to Tarp, regulators have been getting more choosy lately about who qualifies.

"The banks that are approved for Tarp capital are those that don't need it. And increasingly, it is going to the ones with pristine health," said Robert Klingler, an associate at the law firm Bryan Cave LLP in Atlanta. "The regulators have already made it very clear that they have no intention of saving every troubled community bank."

Neither does the Treasury need a new program in which lining up private capital facilitates Tarp approval, Klingler said, because it has already agreed to such arrangements where appropriate.

In December Flagstar Bancorp Inc. in Troy, Mich., said that a $250 million investment by the private-equity firm MatlinPatterson Global Advisors LLC had clinched a $266.6 million infusion by the Treasury. Bridge Capital Holdings in San Jose, Calif., also raised $30 million in private capital so it could secure $23.8 million through Tarp.

In those cases, the outside investment was roughly equal to the amount the Treasury kicked in, but Irwin's proposal calls for letting the private capital be only one-third of what the government would contribute.

Before the Treasury started its Capital Purchase Program as a Tarp initiative in late October, Irwin began trying to raise $50 million of capital. It got $34 million in commitments from private investors, with the bulk coming from the diesel engine maker Cummins Inc.

But these investors have since made their help contingent on the company's ability to obtain government capital, Souza said. Irwin has not said how much Tarp money it requested. When it applied in November, Irwin was eligible for about $150 million. Given the company's reduction in assets since then, it would be eligible for about $100 million now.

Souza would not say whether regulators told Irwin to raise an equal amount of private capital. But he said they have been open to discussing the possibility of the new program.

"I can't say what the outcome will be. That is up to them. But we are considering their willingness to discuss it with us to be positive," Souza said.

On a conference call with investors last week, Will Miller, Irwin's chairman and chief executive officer, said the program it is proposing would not be "a unique, one-off deal" for Irwin. "Our proposal is, they really need to rethink the criteria for the program," he said.

However, Souza acknowledged that the discussions could result in the Treasury simply bending the rules for Irwin. "We are asking for a program that hasn't been done before," he said. "Is it a new program or an exception? That's one and the same."

Though Irwin's proposal is self-serving, the company is not alone.

Last week the Conference of State Bank Supervisors called for the Treasury to loosen its standards for Tarp approval.

The trade group made the request after Treasury Secretary Timothy Geithner said in a speech that banks with less than $500 million of assets would get another chance to apply for government capital.

Mike Stevens, the group's senior vice president for regulatory policy, said that requiring a bank to be viable without Tarp is illogical and inequitable. "It's not a standard they apply to the larger banks," he said. "We believe that, if an institution can prove to be viable with an investment, then they should be eligible as well."

Calls to the Treasury were not returned.

Some gave the idea only a slim chance of winning over regulators. "I think it is a long shot given how busy they are on Tarp issues right now," said Oliver Ireland, a partner in Morrison & Foerster LLP. "The idea of customizing transactions and programs opens the door to all kinds of things. Just as a practical matter, there are severe resource constraints that don't really allow for ad hoc programs."

Should the proposal fail, Souza said, Irwin would continue to seek other sources of capital, shrink assets and aspire to rebuild capital through earnings.

But in the annual report filed with the Securities and Exchange Commission, Irwin's external auditors warned that capital constraints cast substantial doubt on the company's ability to survive.

At the end of the first quarter, Irwin was undercapitalized, with a total risk-based capital ratio of 1.5%. Its bank and thrift units were adequately capitalized.

Its first-quarter loss of $94 million did not help either, said Ross Demmerle, an analyst at J.J.B. Hilliard, W.L. Lyons Inc.

Demmerle said the company will probably see its entire common equity wiped out this quarter, given the likelihood of another loss. He said it would still have equity in the form of preferred shares, which should probably be converted to common stock. "As an accounting entry, it will be technically insolvent."

That might be why the company has yet to secure Tarp funds, Demmerle said.

"All the banks that have gotten money so far have more common equity than Irwin," he said. "And I don't think the government wants to be the majority owner after an infusion. That is not what they are after."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.