The Wall Street Journal reports that three banks that received TARP funds have stopped paying the required dividends to the Treasury. The Treasury says a “number” of banks have not been making their payments.

From the WSJ:

Pacific Capital Bancorp, a Santa Barbara, Calif., lender that got $180.6 million from the Treasury Department in November, has since posted net losses of $49.7 million. Pacific Capital said Monday that it suspended dividend payments on its common and preferred stock as part of a wider effort to save about $8 million per quarter. A bank spokeswoman confirmed that the U.S.’s preferred shares are included in the dividend freeze.

Seacoast Banking Corp. of Florida, of Stuart, Fla., and Midwest Banc Holdings Inc., of Melrose Park, Ill., have also halted their TARP-related dividends, citing the banking industry’s turmoil and a desire to fortify their balance sheets.

Treasury spokeswoman Meg Reilly said Monday that “a number of banks” that got taxpayer-funded capital under TARP are no longer paying dividends to the government. “Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base.”

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week.

“Here the government has given the banks money at great terms, but the fact that they can’t keep up with it is worrisome,” said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. “It tells you of the deep problems of community and regional banks.”

The banks are not technically in default as they are allowed to miss up to six payments before default occurs. Still it raises some troubling questions.

For instance, this money was only distributed late last year. Did the Treasury totally botch their due diligence with regard to the banks selected to receive the money or have the smaller regional and community banks deteriorated much more quickly than anyone anticipated? Given the lack of transparency in the disbursement of TARP funds, the question of political influence affecting the choices of recipients also raises its ugly head. Clearly something has gone badly wrong.

Let’s give Treasury the benefit of the doubt and assume that they did reasonable due dilligence and doled out the money to banks that were in fairly decent shape. If that’s the case and a number of these institutions are now in such dire shape that they can’t make their payments then one would assume that the banking system, at least the small regional and community banking system, is deteriorating rapidly.

That’s certainly at odds with the party line out of Washington. The meme that you are all familiar with is that the financial part of the crisis is past and now we just need to general economy to get back on its feet. Maybe that is true as it pertains to the large banks but this information certainly raises some questions about part of the system. It also makes me a bit queasy about the big banks.