On October 28, 2008, Sterne Agee published an Industry Report on the current status of the TARP Capital program. We highlight below Sterne Agee’s conclusions regarding the “seemingly attractive terms” of the TARP Capital, but encourage bankers to read the entire Strene Agee Industry Report.
SEEMINGLY ATTRACTIVE TERMS. The basic terms of the CPP – up to 3% of risk-adjusted assets in preferred stock with a 5% coupon, augmented by 15% of the total in warrants – are more attractive, both in the amount of capital and its cost, than any bank can expect to find in the public markets today. Whether to fill a hole in the balance sheet, build an acquisition war chest, or simply provide a cushion against a longer, deeper recession than anticipated, the CPP is an attractive proposition. Any perceived stigma should be gone in light of the rush of the nation’s largest banks to participate, and managerial constraints, such as on executive compensation, do not strike us as terribly onerous. Constraints on dividend hikes and share repurchases are entirely academic for most banks in the current environment. The one big unknown, however – the reason why we say “seemingly” attractive terms – is the degree to which participation subjects a bank to heightened informal scrutiny of its business decisions. Politicians are already haranguing managements for T&E expenses, and the TARP checks haven’t even cleared yet; some healthy banks will likely pass on the TARP simply to avoid such headaches.
We have separately commented on our belief that TARP Capital participation should not lead to additional regulation uniquely on participating institutions, but we agree with Sterne Agee that this is an unknown.
To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.