The U.S. Treasury may pool stakes in small banks bailed out during the financial crisis to entice potential investors as the Obama administration winds down the Troubled Asset Relief Program.
“Some of the investments are smaller and it may not be possible to auction them individually,” Tim Massad, the Treasury Department’s assistant secretary for financial stability, said in an interview. “So one of the things we’re looking at is pooling those investments together.”
The Treasury’s plan reflects the challenge of unwinding holdings in lenders that are still trying to recover from the six-year residential real estate slump. By combining stakes of small banks, the department may be able to attract investors who would not want to buy shares of those banks individually.
Most of the 343 bailed-out banks still in TARP will be unable to repay $12 billion in taxpayer funds they hold, according to the Treasury. For those banks that don’t repay, the administration will try to sell its stakes in the remaining lenders through auctions, and if it can’t, will then pool together shares of different institutions, Massad said.
As of April 30, the Treasury’s biggest remaining bank investments were $968 million in Columbus, Georgia-based Synovus Financial Corp. (SNV:US); $935 million in Popular Inc. (BPOP:US), Puerto Rico’s largest lender; and a $700 million stake in Salt Lake City-based Zions Bancorporation. (ZION:US)
“These institutions should be attractive to someone out there at the right price,” said Phillip Swagel, former assistant Treasury secretary for economic policy in the George W. Bush administration and now a professor at the University of Maryland in College Park. “It is appropriate for the Treasury to find the price at which it can sell off these stakes, even if that involves crystallizing a loss on some of these TARP investments.”
Winding down TARP will extend “into next year and probably beyond that,” Massad said in the May 9 interview. Auctions will be conducted “in stages, which we believe will help build the procedures and the markets for auctioning these investments so there is good participation.”
The Treasury estimates that taxpayers will make a $20 billion profit from the bank portion of TARP. Most of that gain comes from funds repaid by firms including Citigroup Inc. (C:US), Bank of America Corp. (BAC:US) and JPMorgan Chase & Co. (JPM:US) That will offset losses that Massad said he expects from smaller institutions.
Community banks face “an uphill battle to exit TARP because they cannot find new capital” to replace government funds, TARP’s watchdog said in an April 25 report. “Many smaller and medium-size banks are still feeling the effects of the crisis and are not exiting TARP with the same speed as the larger banks,” the Special Inspector General for the Troubled Asset Relief Program said.
The Treasury began selling preferred stock in six banks on March 26 -- including Banner Corp. (BANR:US) of Walla Walla, Washington, and Charleston, South Carolina-based First Financial Holdings Inc. (FFCH:US) -- that were bailed out with $410.8 million in TARP funds. Overall, taxpayers got back $426 million -- $361 million through the auctions and $65 million in dividends and interest.
Investment firm Houlihan Lokey has been the Treasury’s financial adviser on managing and selling TARP bank stakes.
The Treasury is reducing bank assets as the Obama administration is trying to change public perceptions that the bailouts, which were started by George W. Bush after the 2008 crisis and continued under President Barack Obama in 2009, were too expensive or ineffective.
Treasury officials, in a presentation to reporters last month, said the bailout programs overall may earn a profit for taxpayers in the long term. That assessment includes the rescue of banks and automakers under TARP as well as Federal Reserve crisis measures such as large-scale asset purchases. The estimate excludes the $825 billion stimulus package passed in 2009. TARP itself is projected to lose about $60 billion, the officials said.
“The TARP program made capital available to banks, which helped them weather the crisis,” Massad said in the interview. “It worked. Our job now is to exit those investments, so we’re doing that in part by attracting private capital to these institutions through auctions or sales.”
The broader bailout program has become a more prominent campaign issue as Obama has sharpened his attacks against Republican candidate Mitt Romney, who supported rescue funds for banks while opposing help for automakers like General Motors Co. (GM:US)
The administration’s eagerness to unwind TARP is driven in part by the campaign, said Kip Weissman, a partner representing banks for Luse Gorman Pomerenk & Schick P.C. in Washington.
“The timing is dictated by politics,” Weissman said. “They are focused on the healthiest companies first and trying to get them to repay.” For banks that can’t do that, the approach will be “to pool a bunch of weak issuers together so that there’s value, there’s diversity and there’s sufficient size for investors to be interested.”
Under TARP, originally approved by Congress in 2008 as a $700 billion dollar program to rescue financial institutions, the Treasury put cash into banks in exchange for equity stakes. Many bailout recipients repaid TARP funds, plus interest payments on preferred shares.
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