As I have repeatedly written on this site, without regard to other benefits associated with the Troubled Asset Relief Program (such as avoiding a further collapse of the global financial system), the TARP program, and particularly the Capital Purchase Program, was profitable for the U.S. Taxpayer. As a banking lawyer and son and grandson of community bank presidents, I’ll concede that I’m biased. But the numbers speak for themselves.
Even ProPublica acknowledges that TARP was profitable.
Overall, the TARP remains in the black, though just barely.
What does ProPublica means by “barely” profitable? Apparently, “a narrow profit of about $1 billion.”
I hate it when I only have a billion dollars in profit. That’s $1,000,000,000.00 to put it in context.
Ten years ago, on October 13, 2008, the U.S. Treasury Secretary Henry Paulson effectively locked the CEO’s of the nine largest banks in the United States in a conference room and demanded that they accept an investment from the U.S. Government. Although we had front row seats for much of the activity over the ensuing years, reading the New York Times summary of that meeting from the following day still provides a sense of just how shocking all of this was.
While the U.S. Treasury simultaneously announced its intention to also provide the possibility of investments in other banks, it was a long wait for details, particularly for privately held and Subchapter S Banks. Ultimately, over the course of the next 15 months, the U.S. Treasury invested $199 billion in 707 financial institutions across 48 states. As of October 1, 2018, the Treasury has received over $226 billion back in dividends, repayments, auction proceeds, and warrant repurchases.
Of the $199 billion in investments in 707 institutions, as of October 1, 2018, only three investments, reflecting $24 million in original investments, remain in Treasury’s portfolio. 264 institutions repaid in full and another 165 refinanced into other government programs. (The SBLF and CDFI funds were similar to the TARP CPP program, but were ultimately done under different congressional mandates. While not necessarily representative of an ultimate cash return on the Treasury’s investment, each of these funds has also provided a strong return to the Treasury.)
Out of the original investment of $204.9 billion in 707 institutions under the TARP CPP program, the U.S. Treasury currently only holds its original investment in 44 financial institutions representing a total outstanding investment of $422 million. In other words, the Treasury still holds its investment in about 6% of the financial institutions invested in through the CPP program, but those institutions represent only 0.2% of the amount invested. As the U.S. has already collected $225.9 billion in total TARP CPP proceeds, the ultimate disposition of the remaining 44 financial institutions will have no material impact on the $20 billion gain recognized by the U.S. Treasury through the TARP CPP program.
The 44 remaining TARP CPP investments range from $1 million to just over $50 million, with an average original investment of $9.6 million. 35 of the 44 remaining institutions have missed dividend/interest payments, with a total of $72 million in missed dividend payments (which includes $20 million in missed non-cumulative dividends that the institutions have no obligation to repay). Overall, the remaining portfolio investments have missed 11.5 quarterly dividend payments, but if you exclude the 9 institutions that remain current, the average investment has missed 14.5 quarterly dividend payments.
Out of the original investment of $204.9 billion in 707 institutions under the TARP CPP program, the U.S. Treasury currently only holds its original investment in 67 financial institutions representing a total outstanding investment of $641 million. In other words, the Treasury still holds its investment in about 10% of the financial institutions invested in through the CPP program, but those institutions represent less than 0.4% of the amount invested. As the U.S. has already collected $225.0 billion in total TARP CPP proceeds, the ultimate disposition of the remaining 67 financial institutions will have no material impact on the $20 billion gain recognized by the U.S. Treasury through the TARP CPP program.
The 67 remaining TARP CPP investments range from $470 thousand to just over $50 million, with an average original investment of $9.6 million. 53 of the 67 remaining institutions have missed dividend/interest payments, with a total of $106 million in missed dividend payments (which includes $20 million in missed non-cumulative dividends in which the institutions have no obligation to repay).
In addition to the 67 institutions where Treasury continues to hold the original CPP investment, the Treasury also holds common stock in four institutions in which Treasury originally invested approximately $386 million and trust preferred securities in one institution in which the Treasury originally invested $935 million. The average remaining institution received $9.6 million in TARP CPP funds, has missed 10 quarterly dividend payments, and currently owes an additional $1.6 million in missed dividend payments.
As of April 30, 2013, there were 154 institutions remaining in the TARP CPP program. Courtesy of the April 2013 Monthly Report to Congress, here are the current regional breakdowns of the remaining TARP CPP institutions.
As of May 3, 2013, the U.S. Treasury has completed auctions for TARP CPP investments in 126 financial institutions, representing an original principal investment of $2.7 billion. The Treasury continues to hold TARP CPP investments in 159 financial institutions, representing an original principal investment of $4.9 billion. (Note, the Treasury has already received over $17 billion more in repayments then it originally invested as part of the TARP CPP program; even if Treasury receives zero return on the remaining investments, it will still be a profitable investment for the Treasury.)
Out of the 53 investments that Treasury identified in December 2012 as having opted out of a pooled auction process, 17 remain in the possession of Treasury. The Treasury provided another opportunity for participating institutions to opt-out of a pooled auction process through April 30, 2013. While that deadline has passed, we do not sense any urgency to move forward with a pooled auction, particularly so long as the individual auctions continue to deliver good results for the Treasury.
In April, the U.S. Treasury completed its sixteenth round of individual auctions of TARP CPP securities. By my calculations, Treasury has now completed auctions of its investments in 126 financial institutions, with auction sales totaling approximately $2.4 billion at an aggregate discount of approximately 15%.
The 126 institutions originally represented $2.75 billion in investments in U.S. depository institutions, ranging from investments as small as $430,000 to as large as $267 million. When you combine the dividends that have been paid to the U.S. Treasury by these institutions, the Treasury has received a gross profit of approximately $110 million. The fact that Treasury has recovered, in the aggregate, a profit on these investments is fairly remarkable, considering that 27 of the auctioned institutions had each missed four or more quarterly dividend payments.
As shown in the chart below (click on the chart for a larger version), the volatility of the discounts has increased significantly in the later auction rounds.
One item to keep in mind when looking at auctions results is the amount, if any, of outstanding unpaid dividends or interest. While the intitial TARP CPP auctions included institutions that were current in their payment of dividends/interest (and purchasers were obligated to pay Treasury 100% of any accrued but unpaid dividends/interest at the time of purchase), subsequent auctions have included 27 institutions in which the institution has missed at least four quarterly dividend or interest payments. In these instances, Treasury has not required the purchaser to pay to Treasury any amount for these unpaid dividends and interest payments, and purchasers will be entitled to retain any payments subsequently made. Accordingly, in measuring the discount on these auctions, it is important to factor the unpaid dividends into the equation, either by adding the unpaid dividends/interest to the denominator (reflecting additional amounts owed to the holder) or subtracting the unpaid dividends from the numerator (assuming repayment in full of any unpaid dividends/interest). Although Treasury has frequently insisted on 100% payment of unpaid dividends in the restructuring context, we believe adding the amount of unpaid dividends to the numerator more appropriately measures the potential returns to purchasers.
As previously announced, Treasury is pursuing three basic options to exit the TARP program: (1) waiting for banks to repay; (2) selling investments (typically by auction); and, in limited circumstances, (3) restructuring investments to facilitate repayment or sale. Since March 2012, Treasury has completed 91 auctions and had an additional 49 banks repay Treasury at par value. Treasury indicated that, in the aggregate, its returns in the auctioned investments exceed the Treasury’s last estimate of their current value.
Treasury indicates that it will auction approximately two-thirds of the remaining institutions (or about 145 institutions) and expects the majority of the remaining banks to repay at par.
Treasury also provided a preview of banks that Treasury intends to auction starting late in January. Treasury stated that it was making this early announcement as a large number of the banks in light of potential regulatory concerns for investors associated with these investments. Specifically, Treasury indicates that, for a large number of the institutions, the TARP securities represent a large portion of the equity capital of the depository institution or that the institution is in arrears on dividend payments, causing the TARP securities to become voting securities, or both. Either of these scenarios can cause ownership of the securities to be subject to the Bank Holding Company Act or the Change in Bank Control Act.
In connection with the contemplated pooled auction of TARP CPP securities, Treasury has explicitly reminded potential participants that purchasers are responsible for compliance with the Bank Holding Company Act of 1956, as amended. The Form of Bid Letter includes a representation that each bidder is “aware of the potential implications of a purchase of any CPP securities under the Bank Holding Company Act, in particular, with respect to holding certain percentages of “voting securities” or more than one third of a financial institutions total equity.”
These statements have led to a number of questions regarding the impact of the Bank Holding Company Act vis-a-vis the TARP CPP securities.
We understand that the Federal Reserve Board is considering providing updated guidance specific to the CPP securities, but the contents of that guidance have not been finalized.
On July 9, 2012, the U.S. Treasury announced its intent to commence the fourth round of individual auctions of TARP CPP securities, commencing July 23, 2012. In this fourth round, Treasury has identified 12 institutions holding a total of approximately $346 million of TARP CPP securities.
Specifically, the fourth round will include:
First Western Financial, a privately traded bank holding company in Denver, Colorado, with approximately $21 million in TARP CPP securities (preferred stock).
CBS Banc-Corp, a privately traded bank holding company in Russellville, Alabama, with approximately $26 million in TARP CPP securities (preferred stock).
Exchange Bank, a privately traded bank in Santa Rosa, California, with approximately $47 million in TARP CPP securities (noncumulative preferred stock).
Market Street Bancshares, a subchapter S bank holding company in Mount Vernon, Illinois, with approximately $21 million in TARP CPP securities (subordinated debt).
Fidelity Financial Corp, a privately traded bank holding company in Wichita, Kansas, with approximately $38 million in TARP CPP securities (preferred stock).
Marquette National Corp, a privately traded bank holding company in Chicago, Illinois, with approximately $39 million in TARP CPP securities (preferred stock).
Premier Financial Bancorp, a publicly traded bank holding company in Huntington, West Virginia, with approximately $22 million in TARP CPP securities (preferred stock).
Diamond Bancorp, a subchapter S bank holding company in Washington, Missouri, with approximately $21 million in TARP CPP securities (subordinated debt).
Park Bancorporation, a privately traded bank holding company in Madison, Wisconsin, with approximately $24 million in TARP CPP securities (preferred stock).
Trinity Capital Corporation, a privately traded bank holding company in Los Alamos, New Mexico, with approximately $39 million in TARP CPP securities (preferred stock).
First Community Financial, a privately traded bank holding company in Joliet, Illinois, with approximately $24 million in TARP CPP securities (preferred stock).
Commonwealth Bancshares, a subchapter S bank holding company in Louisville, Kentucky, with approximately $21 million in TARP CPP securities (subordinate debt).
The prior individual TARP auctions have only included publicly traded bank holding companies, but the fourth round will include only one publicly traded bank holding company along with seven privately traded bank holding companies, three subchapter S bank holding companies, and one privately traded bank. The results of these auctions may provide further guidance as to the relevant market value for much of the remaining TARP portfolio, which largely consists of privately traded holding companies and banks (as well as subchapter S institutions). These institutions may trade at greater discounts, either because of reduced information available about the institutions, or because of the different terms of the various instruments.
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