Emphasizing the fact that the TARP Capital Purchase Program represents investments in financial institutions rather than any form of bailout, a recent SNL Interactive blog post (subscription required), illustrates that the Treasury Department earned a 12.74% annualized return on the CPP investments in the 21 banks that have returned all TARP funds.

The largest total returns to the Treasury have come from some of the largest recipients of TARP funds, namely Goldman Sachs Group Inc., Morgan Stanley and American Express Co., whose dividends on the government’s preferred shares and the redemption of warrants tied to the program yielded returns to Uncle Sam of 14.18%, 12.68% and 12.23%, respectively, according to SNL data.

Banks can redeem the warrants shortly after paying back TARP funds.  Banks send a valuation of the warrants, with the aid of a national investment bank, to the Treasury, which then decides whether or not to accept the price, negotiate it or contract a third-party for another valuation.  The aforementioned redemptions that generated outsized returns to the Treasury came in late July and early August after financial stocks have risen considerably from the levels seen in late May and early June when many of the first few warrant redemptions occurred.  Backlash in the media and from the Congressional Oversight Committee over the value of early warrant redemptions also caused the later transactions to be more favorable to the Treasury.

As explored in SNL’s post, the return to the Treasury (and cost to the TARP recipient) for public companies is largely tied to the value of the warrants received by Treasury, and therefore the price of the TARP recipient’s common stock.  Accordingly, for public TARP recipients, the total cost of the TARP investment remains variable and unknown.  Undertaking a capital raise (which may weigh on the common stock price) can, in turn, cause the institution to be able to strike a better price with the Treasury on the redemption of the warrants.

For TARP recipients that participated under the private company or Sub S term sheets, these fluctuations are irrelevant, as the Treasury exercises the warrant issued in connection with the Capital Purchase Program at closing in exchange for additional shares of preferred stock (or subordinated debentures for Sub S entities).  Accordingly, the total redemption cost for private and Sub S participates is fixed at the par value of those investments.