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TARP4/5/10 - The US government has made more than $10bn so far on bank repayment of bail-out funds, suggesting taxpayers might turn a profit on the unprecedented help extended to the financial sector during the crisis.Goldman Sachs and American Express played a large role in boosting US Treasury coffers by agreeing to pay a favourable price for the warrants received in return for the aid. But the Treasury’s profits on its $250bn crisis-time investment in banks might quell the political backlash against the use of taxpayer funds to help companies like Citigroup, Bank of America, Goldman and Morgan Stanley. News of the government’s returns on its TARP comes as a high-powered commission into the causes of the crisis is due to grill Alan Greenspan, former chairman of the Federal Reserve, and Citi executives this week. Treasury still expects to lose $117bn on the entire program, which includes investments in the car industry and AIG, the insurer. The 49 companies that returned Tarp funds, which paid dividends on the government preferred stock and either repurchased or let Treasury auction the warrants, yielded a profit of $10.5bn. Goldman (20%) and American Express (23%) were among the biggest sources of profits after repurchasing warrants in July 2009. The government stands to make a further profit on its planned sale of its 27 per cent stake in Citicorp. However, investments in smaller banks might be loss-making, with some 28 lenders holding a total of $1.9bn in TARP funds being regarded as undercapitalised. 2/12/10 - It was one year ago on Feb. 10 that the world was saved. Markets were in free-fall, and the banking system was collapsing. $700 billion in TARP money didn't help. Nor did bailing out Bear Stearns and AIG, merging Merrill Lynch, or throwing Lehman under the bus. Nothing is precisely what Geithner did one year ago this week. Remember, he was the brand new Treasury secretary, on the job just a week or two after a bruising Senate confirmation process in which he was exposed for not paying all his income taxes. He declared that the top 19 banks would be given a 'stress test.' That's basically nothing. These banks have been regulated, tested, examined, poked and prodded by every government agency for years. Then he declared that any bank that failed the stress test would be required to raise more capital. Nothing, yet again. Banks were already scrambling to raise capital, and couldn't do it. That's why TARP was created, to provide them the capital they couldn't otherwise raise. It didn't help. But then came the really important nothing. Geithner declared that any bank that both failed the stress test and couldn't raise capital could have more TARP money. It would come in the form of mandatory convertible preferred stock. Geithner announced that should the conversion from preferred to common ever take place, the conversion would be based on the banks stock price yesterday -- that is, Feb. 9, 2009 -- minus 10%. If a bank failed the stress test, it must be in pretty bad shape. If it then couldn't raise capital, it must really be in terrible shape. So its stock price should collapse. If the conversion took place at that collapsed price, the preferred holder would get zillions of shares, perhaps ending up pretty much owning the company. But no, Geithner said. Instead, we'll do nothing. We won't be greedy. We'll take your price on Feb. 9 (minus 10%), not what will doubtless be a fantastically lower price. Think what that meant for banks. It meant that the U.S. Treasury, an entity with just about the deepest pockets in the world, stood ready to buy bank stocks -- no matter what terrible thing might happen -- at pretty much the current (at the time) price. That means every investor in the world could have total confidence that the crash in bank stocks was over, because there was an infinitely endowed buyer waiting in the wings, ready to buy -- even if the worst comes months or years in the future. Today the average stock price of the stress-tested banks is 76% higher than the price at which Geithner committed the Treasury to buy, if worse had come to worse. Some of the individual stock performances have been downright spectacular, with four beating the 100% level. The best is Fifth Third Bank, 254% higher, American Express, 147% higher, Bank of America, 135% higher, Goldman Sachs, 114%. The only bank whose stock is trading lower than the price at which Geithner committed the Treasury to buy is Citigroup, which is 7% lower. But even it has raised tons of new capital, and is paying off its TARP money. Now the funny thing -- in retrospect at least -- is that when Geithner announced this plan of doing nothing, markets absolutely hated it. They were hung up on the obsession with doing something. Doing nothing was just too zen. 1/14/10 - Obama proposed Wall Street pay a fee of up to $117 billion to repay taxpayers for the financial bailout, as he slammed bankers for their "massive profits and obscene bonuses. My commitment is to recover every single dime the American people are owed. And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people." Aiming to distance himself from Wall Street amid mounting public anger over big bonuses at the banks, Obama accused the bankers of being out of touch with hardship endured by ordinary Americans who are grappling with double-digit unemployment. The levy will recoup losses from a $700 billion taxpayer rescue of U.S. banks called the Troubled Asset Relief Program, or TARP, conceived in 2008 by Obama's predecessor, George W. Bush, at the height of the global financial panic. Forged after the collapse of U.S. investment bank Lehman Brothers and multibillion dollar rescue of insurance giant AIG, TARP helped stem the crisis by injecting public capital into the biggest U.S. banks and convincing investors no others would be allowed to fail. The Obama administration expects to raise $90 billion over the first 10 years, and thinks this will ultimately cover all losses from TARP, although at the moment these losses are being projected at $117 billion. 8/6/09 - Morgan Stanley paid the U.S. Treasury $950 million to redeem warrants to buy its stock, freeing it from the government's bank bailout program. Morgan Stanley paid back $10 billion that it had borrowed from TARP. The Wall Street firm said including dividends, it has now paid the government $1.26 billion, a 20 percent annualized return on its investment last fall. 7/22/09 - Goldman Sachs has paid $1.1 billion to buy back the warrants for common stock it previously granted to the U.S. government last year as part of the Troubled Asset Relief Program. The repayment comes as fellow bank J.P. Morgan Chase & Co. is still bickering with the government over the warrants and their value. Other banks, including U.S. Bancorp and BB&T, have already bought back their warrants for varying amounts depending on the size. In some instances, the price the government has received from banks for warrants has been criticized by analysts as being too low. Earlier this month, a congressional watchdog said the Treasury might be selling its warrants back to the banks at below market value, and urged greater transparency in the process. In this instance, Goldman Sachs paid the full price the government asked for the warrants. Goldman, Wall Street's largest surviving investment bank, paid back in June the $10 billion it got under TARP. The company last week said second-quarter earnings surged amid record results in trading and stock underwriting. Several weeks ago, Goldman offered to pay $650 million to repurchase the warrants. The government countered, saying it wanted $900 million. Tuesday, with Goldman's share price rising, which makes the warrants more valuable, the offer went up to $1.1 billion. Goldman agreed to pay back the higher price. Including the warrant purchase and dividends paid to the government on its preferred stock, Goldman has paid the government $1.42 billion beyond the government's $10 billion bailout investment in the company. Experts calculated the return on investment for taxpayers from the aid to Goldman to be 23% annualized. It is increasingly apparent that this may have been the best investment of taxpayer funds. 7/9/09 - A panel that oversees a $700 billion bank bailout package said that financial institutions buying out warrants they gave the government in exchange for capital injections are now buying back those stakes at well below their fair value. The Congressional Oversight Panel, which is charged with overseeing the Troubled Asset Relief Program, or TARP, said that a group of 11 small banks that have repurchased government warrants in exchange for taxpayer-funded assistance, have bought-out the stakes at 66% of their face value. The C.O.P., which employed three Harvard University valuation experts to conduct the analysis, said that taxpayers would have received $10 million more had the warrants been sold back to the banks at their face value. Experts said that the Treasury should consider selling the TARP warrants in an open, public auction, as an alternative that could possibly give taxpayers a better valuation for the stakes. This has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks that want to repurchase their own warrants. It also permits the banks to bid for their own warrants -- in direct competition with outsiders. As of June 30, the Treasury has received roughly $6.7 billion in dividend payments from TARP-funded financial institutions. 6/26/09 - Now that large banks have started paying back government aid, the U.S. Treasury Department is shedding light on its process for the banks to buy back outstanding warrants. The 10 large banks that have been cleared to repay Troubled Asset Relief Program (TARP) funds need to determine the fair market value (FMV)of the warrants by the end of next week. Within 15 days of repaying funds to the Treasury, a bank seeking to repurchase the warrants should submit a determination of fair market value to Treasury. Treasury will then respond within 10 days. If Treasury objects to the bank's plan and an agreement cannot be reached, the bank and Treasury Department will have independent appraisers step in to help determine a final price. If those appraisers can't agree, a third appraiser is hired and a composite valuation of the three appraisals is used to establish the fair market value. Additionally, a bank can decide against repurchasing warrants. In that case, Treasury said it would sell the warrants through an auction process over the next few months. The department is currently establishing guidelines for the auctions. Treasury added that it has no plans to hold onto warrants until their expiration. Morgan Chase, Goldman Sachs, Morgan Stanley, BB&T, U.S. Bancorp, American Express, Capital One, Bank of New York Mellon, Northern Trust and State Street have already paid back $68 billion in federal government aid. Note from Jeffrey : The key issue is if the FMV of the warrants are too high than the banks will dilue themselves of cash required to maintain reserve requirements. If the FMV is too low, you can expect taxpayer groups complain that the government bailed out the banks without any attempt to make the profits they were promised. 6/23/09 - At least three small, cash-strapped banks have stopped paying the U.S. government dividends that they owe because they got $315.4 million in capital infusions under the Troubled Asset Relief Program. Pacific Capital Bancorp, that got $180.6 million from the Treasury Department in November, has since posted net losses of $49.7 million. Seacoast Banking Corp and Midwest Banc Holdings have also halted their TARP-related dividends. 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. The halted dividends raise questions about the Treasury's assertions that the capital infusions represented sound taxpayer investments because they were only going to healthy institutions. Since last October, TARP's Capital Purchase Program has pumped about $200 billion into more than 600 banks across the U.S. The government got preferred shares that generally churn out annual 5% dividends for the first five years, followed by 9% a year until the capital is repaid. The dividends, which are supposed to be paid each quarter, were established to ensure taxpayer funds were being put to good use and weren't handouts. Under a provision in the TARP contracts between banks and the U.S. government, a bank usually can defer dividend payments for as long as six quarters, though it eventually will have to cover the entire amount. In a smaller number of contracts in which the Treasury got so-called noncumulative preferred stock, the bank can skip dividend payments without penalty. But if the bank misses six quarterly payments in a row, the Treasury Department can appoint two directors to the bank's board. 6/9/09 - The Treasury Department has approved 10 of the nation's largest banks to repay $68 billion in government bailout money. The Treasury said the banks, which were not named, will be allowed to repay the money they received from the $700 billion emergency rescue fund created by Congress last October at the height of the financial crisis. As market conditions have begun to stabilize, banks have been able to raise tens of billions of dollars from private sources and have begun looking to escape from under the government's thumb. While some big banks will be allowed to repay, the Treasury doesn't believe things have improved enough that the money won't be needed elsewhere. Treasury Secretary Timothy Geithner has said he plans to reuse returned TARP funds to assist other firms, including smaller banks, including those that have already received an initial TARP infusion. WSJ Opinion: The list of large financial firms expected to get the green light on repayment includes American Express, Bank of New York Mellon, Capital One, Goldman Sachs and J.P. Morgan Chase. A handful of community banks are also expected to soon repay their TARP funds. Already, about 22 banks have taken steps to repay TARP, returning about $1.8 billion to the government. The timing of the paybacks will be up to the individual banks and the Treasury, which must determine how to deal with warrants the government received as part of its initial investment. The warrants gave the government the right to purchase common stock at a set price for a period of 10 years. The Treasury is discussing how to value the warrants and could ultimately choose to sell them into the private market. Many banks have been eager to repay TARP in part to show investors they are healthy enough not to need government assistance. But many are uncomfortable with the restrictions that come with the government's investment, including on pay, dividends and stock buybacks. 6/3/09 - Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May. JPMorgan Chase and American Express Co. were told they need to boost common equity, less than four weeks after being informed they had enough to withstand a deeper economic slump. Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. The central bank’s further scrutiny signals concern at the political and economic dangers of having a bank boomerang back to government aid once it leaves the program. Fed approvals for an “initial set” of TARP repayments by banks among the 19 largest institutions are scheduled to be announced next week. The 19 largest U.S. banks have more than $200 billion of preferred equity shares owned by the Treasury. The TARP program became a stigma for banks after the government set compensation limits and began criticizing the expenses of companies receiving aid. 5/12/09 - U.S. Bancorp and Bank of New York Mellon conducted big stock sales as they look to repay taxpayer bailout funds, after the government concluded they have enough capital to withstand a deep recession. U.S. Bancorp sold $2.5 billion of stock, comprising 139 million shares at $18 each. Bank of New York Mellon sold about $1.2 billion of stock, 20 percent more than expected, comprising 42 million shares at $28.75 each. BB&T, which regulators concluded also does not need a bigger capital cushion, is expected to sell $1.5 billion of stock. The banks are among 19 large lenders that recently underwent federal "stress tests" to measure their capital needs, and were among nine deemed to have sufficient capital. U.S. Bancorp took $6.6 billion from the government's Troubled Asset Relief Program, known as TARP, while Bank of New York Mellon took $3 billion, and BB&T $3.1 billion. Capital One, which took $3.55 billion from TARP and also got a clean bill of health from the government, recently sold $1.55 billion of stock. Wells Fargo and Morgan Stanley, found under their stress tests to need more capital, sold a respective $8.6 billion and $4 billion of stock. TARP was designed to spur lending and improve the economy. Many banks now view the program as a burden because it imposes too many restrictions, including on pay, and suggests that recipients are weak. Banks say it is up to regulators to decide when TARP funds can be repaid. The government does not want banks to repay the funds, only to find later that they need more. Lenders hoping to escape TARP must also agree on prices to take back warrants to buy stock, which the government received in return for the infusions. Most banks pay 5 percent dividends on the government investments. 4/22/09 - The banking industry is aggressively lobbying the Treasury Department to make it less costly for financial institutions to get out of the Troubled Asset Relief Program. The move could prove controversial for the banking industry, which is busy deflecting criticism about higher fees it is charging consumers for credit cards and other products and services. At issue are "warrants" the government received when it bought preferred stock in roughly 500 banks over the past six months as part of TARP. The warrants allow the government to buy common stock in the banks at a later date so taxpayers can receive more of a return on their investment when the banking industry recovers. Many banks want to return their TARP money and, as part of that effort, want to expunge the warrants. To do that, banks must either buy them back from the government or allow the Treasury to sell them to private investors. Today, most of the warrants are essentially worthless, because their exercise price is higher than where most banks' stocks are trading. But the government believes the warrants still have value, since they give the Treasury the right to buy common stock at a set price for 10 years. Bankers say it is unfair to charge what amounts to a "prepayment penalty," which makes it additionally onerous to escape TARP. Bank representatives say the cost of buying back the warrants could be equivalent to paying 60% annual interest on short-term loans. That, they argue, would exacerbate banks' existing problems. To buy back warrants, banks must provide the government with a third-party valuation assessing their worth. If the government disagrees, the bank and the Treasury enter into a negotiation. If they can't agree, the Treasury must try to sell the warrants to private investors. 4/13/09 - U.S. banks that received money under the Troubled Asset Relief Program (TARP) are facing a probe over increases in rates and fees. The Congressional Oversight Panel, the body named by Congress to oversee the federal bailout, is working on a report examining instances of potentially inappropriate lending by banks that got taxpayer capital. "The people who are subsidizing the activities of the banks through their tax dollars are the same people who are furnishing the high profits through consumer lending," said Elizabeth Warren, chairwoman of the Congressional Oversight Panel. "In a sense, we're asking taxpayers to pay twice." The U.S. Treasury Department's $700 billion TARP was intended to provide lenders with more capital to spur lending and improve the economy. Since TARP was launched in October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates. 1/22/09 - As Obama sets about revising the $700 billion TARP program, among the issues it faces is widespread dissatisfaction with way the program has been implemented. Treasury and Federal Reserve officials have repeatedly said the TARP program was successful in its primary purpose, which was to bring the credit markets back from the precipice. The federal plan to invest in banks was controversial from the start. The Treasury said it would acquire preferred stock in banks, and sometimes warrants for common stock as well, but not any voting or management rights. At a hastily arranged meeting on Oct. 13, then-Treasury Secretary Henry Paulson basically forced the chiefs of the country's nine biggest banks to accept cash infusions. The government invested $125 billion in the nine. Citigroup and Bank of America subsequently returned for more money. A further $125 billion was committed under the Bush administration to buy stakes in some of the remaining 8,500 U.S. banks and thrift institutions. More than 250 have received cash or commitments so far, totaling about $68 billion. |
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