TARP Auctions No Windfall

Washington — At 9 a.m. on Nov. 30, the Treasury Department began auctioning off its shares in seven community banks scattered across the country. Each of these institutions had taken money from the government in 2009 during the financial crisis.

By the time the bidding closed at 6 p.m. Monday, the Treasury had collected about $62 million.

Not a bad outcome. That is, until you consider the government’s original investment: $75 million.

It wasn’t the first time the government walked away with a loss. In 10 similar auctions conducted to date, Treasury has sold off its investments in 84 financial firms, accepting losses roughly $241 million.

As memory of the financial crisis fades, the Treasury has been working to rid itself of the albatross of the government bailout, officially called the Troubled Asset Relief Program (TARP). Thanks to repayments by the biggest banks in the country, which have largely returned their rescue funds with interest and dividends to spare, the program has been hailed in some quarters for saving the financial system.

But as the agency works to push much smaller banks out from under the government’s thumb, the Treasury has been far more tolerant of losses, say critics. Given the improving economy, the agency could make hundreds of millions of dollars by holding onto the shares in these bank a little longer, they say.

That’s small change in Washington, home to the trillion-dollar budget, but not insignificant as politicians wrangle over belt-tightening measures. After all, some critics note, doesn’t the Internal Revenue Service (IRS), an arm of the Treasury, doggedly pursue individuals for far less?

“Treasury has shifted its emphasis and is no longer focused on promoting financial stability,” said Christy Romero, special inspector general for the TARP. “Instead, Treasury wants to declare success and move on.”

Treasury officials say the bids the department has received reflect what the market is willing to bear at this point. Besides, they say, the ultimate goal is to wind down TARP in an efficient way.

Moreover, the government may have sold shares in these community banks at a loss, but these firms also paid $307 million in dividends to Treasury coffers, aside from the money recouped from the auctions. Overall, Treasury has turned a profit from its small bank investment.

“We want a competitive, transparent process, and that’s exactly what we’ve had with the auctions,” said Treasury Assistant Secretary Timothy Massad.

Some small banks have taken advantage of the auctions and purchased their own shares at a discount.

West Virginia-based Premier Financial Bancorp spent $9.2 million in July to buy back about half of its 22,000 shares at a discount of almost 10 percent. A month earlier, First Capital Bank of Glen Allen, Va., put up nearly $5 million to snap up half of its 11,000 shares at an 8 percent discount.

In its most recent quarterly report to Congress, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) raised concerns that the continued sell-off could discourage the remaining banks from settling up with the government at the full value of their shares.

“Taxpayers are being shortchanged on revenue they could be earning,” said Joshua Siegel, managing principle of StoneCastle Partners, a firm that invests in community banks.

Still, he said, “If we could increase the average price of these sales from 80 to 90 cents on the dollar, and let’s say there’s five billion left, that’s $500 million more. How many teachers could we employ?”

Siegel anticipates it will only get harder for Treasury to bring its shares to auction as many of the remaining banks are small and private, meaning they don’t have to disclose their problems in public statements.

“It’s not a natural investment for a lot of buyers,” he said. “There are very few people who focus on community banks and understand the credit and the market.”

At the height of the fiscal crisis in 2008, the Bush administration launched TARP to stabilize the financial system. The rescue plan, which authorized the Treasury to spend as much as $700 billion, ultimately disbursed $418 billion to financial institutions, auto companies and housing programs.

A majority of that money, $245 billion, went to banks, which were required to pay the government a dividend of 5 percent of the investment for the first five years and 9 percent thereafter. While banks did not have to pay back their funds immediately, many did so to avoid the dividend hike and shake off the stigma of a government bailout.

From a purely economic standpoint, the bank rescue went well. The Treasury recouped a total of $267 billion so far.

Overall, the TARP will wind up costing taxpayers about $60 billion, mostly due to the auto bailouts.

That the government is seeing money from the auction of small bank shares, even if at a loss, is good for taxpayers, said Robert Klingler, an attorney at Bryan Cave who represents TARP recipients.

The auctions, he said, are a “very efficient means of converting Treasury’s — and thus the taxpayer’s — investments in illiquid stock back into cash, where it can then be used for other governmental purposes.”

But considering that about 150 of the remaining banks have missed dividend payments, investors may shy away from auctions unless the shares are sold at a steep discount.

Those who do understand community banks may take advantage of Treasury’s desire to sell banks shares quickly. Opportunistic hedge funds or other big investors could acquire stakes through the auctions and make money, regardless of what happens to the bank.

“Auctioning small bank shares to private parties, who can then extract ‘a high’ dividend, is not necessarily treating small banks fairly,” said Damon Silver, a former member of the Congressional Oversight Panel for TARP. “Treasury allowed large banks to get TARP off their balance sheet in a number of different ways” and should be “focused on helping small banks get this very expensive capital off their books.”

Of the 707 banks that received bailout funds, the government still owns stakes in 230, most of which are smaller institutions which have a harder time raising money.

The Treasury’s Massad said the agency is still engaging in a multi-pronged approach to unwind TARP and many banks continue to repay their rescue funds on their own. The Treasury is also continuing to entertain restructuring plans to help smaller banks raise money to bolster their reserves in case of an emergency or financial crisis, he said.

Massad added that investors have shown great interest in the auctions, with each eliciting about 30 bids. And some of the buyers are working to strengthen the banks’ financial position after they purchase the shares, said Carter Bundy, a banking analyst at Stifel Nicolaus.

The inspector general, however, is worried that the Treasury is not analyzing the potential impact of these auctions on the financial stability of the banking system.

“Treasury has to take care in an en masse exit of hundreds of banks to ensure that the industry stays healthy,” Romero said.

“We wouldn’t want to roll back improvements that the community banking industry has just started seeing.”

Massad said the Treasury has no timetable for ending TARP, and there has been no pressure from Congress or the Obama administration to speed up the process.

“We are simply moving to get the government out of the business of owning stakes in private companies, which is important for long-term financial stability. And the way to do that is replacing government capital with private capital,” he said.