Nowhere is the angst over the federal government's Capital Purchase Program more dramatic than in South Carolina, whose governor has accused the state's largest banking company of trying to con Uncle Sam.
Gov. Mark Sanford, a Republican, held a press conference Monday to accuse South Financial Group Inc. of Greenville of planning to use a capital injection from the Treasury Department to cover a retirement package for its former chief executive, Mack I. Whittle Jr.
"The federal government, and by extension taxpayers, are being gamed," Mr. Sanford wrote in a letter to Treasury Secretary Henry Paulson. "I think it's dangerous over the long run the way that taxpayers are being sapped, and this dynamic is playing out in South Carolina."
In a press release, the governor cited an $18 million payment for Mr. Whittle's "sooner-than-expected" retirement. On Oct. 24 the company announced that he would leave Oct. 27; previously South Financial had said he would retire by yearend. That led the governor to claim the retirement was moved up so South Financial could fund Mr. Whittle's "golden parachute" with federal bailout money.
The $13.7 billion-asset South Financial denied the accusations, saying late Monday that the terms of Mr. Whittle's retirement were consistent with the provisions of his employment agreement, and that the compensation restrictions of the Treasury's program are not applicable to Mr. Whittle's agreement.
"In the event that the bank participates" in the Capital Purchase Program, "it will comply with the letter and the spirit of the law," John C.B. Smith, who became South Financial's chairman Nov. 3, said in a press release. "Although Governor Sanford made no attempt to discuss these matters" with the company "prior to his press conference, we would welcome the opportunity to discuss this matter with the governor, as we believe that a strong" South Financial "is in the best interests of South Carolina."
The controversy could undercut South Financial's bid for federal aid.
In its third-quarter 10-Q filing last week with the Securities and Exchange Commission, South Financial said that it would request $115 million to $347 million under the Treasury's program.
The company was closed Tuesday for Veteran's Day, so calls for comment were not returned. Attempts to reach Mr. Whittle, who founded South Financial in 1986, were unsuccessful.
Several sources said South Financial's board likely asked Mr. Whittle, 59, to retire early because a transition management team was named after a strategy of making condo development loans in Florida resulted in three quarterly losses, including a higher-than-expected third quarter loss of $25 million, or 43 cents a share. Its provision increased eightfold from a year earlier, to $84.6 million.
Excluding several one-time charges, the company reported an operating loss of 40 cents a share, or 23 cents bigger than the average estimate of analysts polled by Thomson Reuters.
How banking companies use the bailout funds has become a hot debate as Democrats in Congress have accused the Treasury of being too lax in its approach. Some lawmakers have advocated forcing bankers to use the money to finance new lending. Banking companies accepting funds from the Treasury must accept limits on executive compensation, including a ban on golden parachutes.
Gov. Sanford jumped on that bandwagon Monday, criticizing the Treasury for revising its rescue of American International Group Inc. and providing "free money" to healthy companies.
"While we continue to believe that the bailout was an incredibly bad idea in the first place, it's being made worse by loose rules and oversight that are putting taxpayers on the hook for billions more," the governor said in his release.
The Treasury is allowing the money to be used to foster consolidation.
PNC Financial Services Group Inc. used some of its funds to finance a deal for National City Corp., and some sources said South Financial may suffer a similar fate.
If the government ruled that South Financial was too weak to receive funds, it could be bought by a larger company, such as BB&T Corp in Winston-Salem, N.C., or SunTrust Banks Inc. in Atlanta.
BB&T received $3.1 billion from the Treasury, while SunTrust received $3.45 billion. Both companies were closed Tuesday for the holiday.