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The Treasury Department's recent auction of preferred shares in six banks may signal that the agency has finally found a path to end its bank investments under the Troubled Asset Relief Program.
April 12
WASHINGTON — The Treasury Department said Thursday it plans to auction off pools of the preferred stock it owns in small banks through the Troubled Asset Relief Program.
The strategy is part of a broader effort to help small banks exit Tarp, which still has 343 participants, Assistant Treasury Secretary Tim Massad said in a blog post Thursday.
"We expect that the sale of existing investments will be an ongoing component of the wind down of TARP's bank programs,"
Treasury held the first auctions last month, when it sold its preferred stock in six small banks. Although it recouped about $50 million less than its original investment, Massad said the auctions received strong interest from investors and the results were in line with Treasury estimates.
Future sale prices may be less than the original value, but Massad said Treasury has already estimated the value of the investments as less than par in its budget projections, and will only sell above a pre-set reserve price in order to protect taxpayer value.
The sales also allow small banks, many of whom don't have easy access to capital markets, to replace government capital with private capital.
"That means that the government is able to exit its stake, while the bank is still able to keep the capital on its books," Massad said. "The bank can then continue to use that capital to help them lend to families and businesses in their local communities."
Treasury still expects that some banks will be able to repurchase their shares in the next 12 to 18 months, and it will hold onto those investments in the meantime.
"A majority of the remaining banks do not fall in this category today, however," Massad said. "And we do not expect them to be able to repay Treasury in the forseeable future."
For those banks, the agency will look to other strategies, including proposals from banks that want to restructure their investments, typically in order to facilitate a merger or capital raise. In the past, Treasury has agreed to take a haircut on some of its investments in exchange for cash or other securities.
"Treasury has participated in approximately 20 such transactions, and we'll continue to do so going forward in limited cases," Massad said. "But only if the terms represent the best deal for taxpayers under the circumstances."
The extent to which Treasury employs each of the individual options — repayments, restructurings or sales of stock — will depend on market conditions, Massad said.
