Treasury Official Plots Tarp Endgame

WASHINGTON — More than five years after the financial crisis, the Troubled Asset Relief Program continues to be viewed skeptically by the public, who see it as little more than a bailout fund for banks and automakers.

But Charmian Uy, Treasury's chief investment officer for Tarp, said that history will ultimately be kind to the once $700 billion program.

"I always thought and still believe that Tarp will be judged favorably over time with perspective," she said. "I know it has a lot of bad connotations for a lot of people because it's viewed as a 'bailout' but without Tarp, my sense is the crisis would have been more severe."

Uy was pulled from the private sector to join the Treasury in mid-2012 and became CIO last year to help end the program once and for all. But her ties to it go back further as she served in numerous treasury and corporate planning roles for major companies that took Tarp funds, including American Express, General Motors and GMAC (now Ally Financial).

Last year marked a significant step in winding down much of what remains of Tarp. The last GM shares were sold, leaving Ally as the last company in the auto program. Only 86 banks, meanwhile, are still part of the Capital Purchase Program, out of the 700 banks that initially took funds.

In total, the Treasury has recouped nearly $433 billion — $10.8 billion more than the $422.2 billion disbursed as of Jan. 10. But some of that success comes due to the government's investment in AIG, which turned positive for the first time last year.

Many of the remaining investments are in banks that missed dividend payments. When Treasury has auctioned off the bank shares it owns, they typically fetch below Treasury's initial investment.

Pressure for banks to get out of the program is also about to increase. The dividend rate on outstanding funds from Tarp is scheduled to jump to 9% from 5% for many such institutions.

In interviews with American Banker, Uy shared her thoughts on how Tarp is working and the best exit strategies for institutions. Below are excerpts from the interviews:

Q: The Treasury most recently exited out of its remaining shares of GM. What is the status of the remaining Tarp funds at this point?
A: At the highest level, what we have left are the Capital Purchase Program, which has less than 90 banks in the portfolio, the Ally Financial in the auto portfolio and the Community Development Capital Initiative (CDCI) Program. So again, from a 20,000-foot level, the only remaining material investments are CPP, Ally, and CDCI.

Q: Can you talk about how the Treasury was working behind-the-scenes with GM and did the exit strategy work as intended?
A: So in December of 2012, GM repurchased 200 million shares of the 500.1 million shares that we owned at $27.50 a share. At the time, taxpayers got back $5.5 billion. [We] announced that we wanted to exit the GM position in 12 to 15 months. We did that through an orderly process by dribbling out the stock. So we basically sold the stock every day into the market slowly, not wanting to impact the stock price or the volumes traded; with the exception of when GM was included in the S&P index and we sold 30 million shares at one time. And then we just continued on with our dribble strategy.

We liked the dribble strategy because we truly believe that the company was on an upward trajectory and we were able to take advantage of the increasing volume and price over time. At the start, we projected until the end of Q1 to finish it, but the volumes and the trading patterns were such that we were able to exit sooner at good market prices. It was a very prudent, measured way to sell into the market. And it worked out.

Q: But wasn't there a loss from that investment overall?
A: There was a loss of about $10 billion. But recall that the purpose of the Tarp program was to save jobs, stabilize the market, and make sure that consumers as well as businesses had access to credit.

Q: What is the strategy now with Ally? Is the Treasury considering a similar dribble out pattern?
A:With Ally, what we have said is we want them to finish their strategic initiatives, which they've done a great job on so far. They needed to sell their international operations, which they have done except for China. And they needed to resolve the legacy mortgage liabilities, which now is behind them given that the re-organization plan has been approved by the bankruptcy court. So now we can think about how we want to exit. We've always said that we can sell our stock ether in an IPO or private transactions; or there can be asset sales. We haven't thought about a dribble-out strategy, but they've already repaid us about $6 billion for the mandatorily convertible preferred shares and share adjustment mechanism, and $12.3 billion in total. So we're in a much better position with respect to Ally. Now, we need to think about the remaining common shares. I don't think I can comment specifically on your question, but we are thinking about ways to address it. (Following the interview, the Treasury said Jan. 16 that  it plans to sell about $3 billion worth of common shares in Ally through a private offering as part of its wind-down strategy.)

Q: How would you characterize 2013 compared to 2014 in terms of your role and the treasury's efforts with Tarp?
A: This past year has been very, very successful. From the beginning of the year until the end, there was such a big amount of Tarp funds that we have recovered. In fact, 2013 was the first time we were able to exceed the amount of dollars that we dispersed for Tarp when you include Treasury's proceeds from the sale of its AIG shares. We have been very successful with the strategies that we have articulated including repayments, making sure that we collect on repayments, and that we have a robust auction platform for the banks. We were also able to close out the restructuring proposals for some of the banks. So we've been able to make a lot progress in the bank portfolio for the first time. We have less than 90 banks remaining and the biggest bank accounts for more than half of the outstanding amounts: Banco Popular in Puerto Rico.

I would characterize 2013 as a significant year in terms of progress in winding down the investment portfolio, and we will continue our exit strategy for Ally and the bank portfolio. We have our work cut out for us, but we know what we want to do, and we're going to continue with the work that we started in the last couple of years.

Q: There was some public perception - particularly when the Treasury began doing auctions of its bank investments - that the Treasury was trying to get out of Tarp as quickly as it can. What is your response to that?
A: First of all, the Treasury was never of the mind that we needed to do a fire sale of the assets. We're not a hedge fund. We're not in the business of making absolute returns in the portfolio. So we actually can be more thoughtful and more deliberate in our disposition strategy. I think it would be incorrect to say that the Treasury was in a hurry or very keen on disposing all these assets in a hurry.

Many of the banks have voluntarily repaid as they've grown stronger over time, and we've also done auctions, but if you look at the magnitude, it's a small part of the way we collected money from all our investments. Q: How have the auctions panned out, particular since there was some concern that banks could stop paying dividends once an investor won a bid after an incident occurred in late 2012?

As of December, we've now had 22 auctions, we've seen very good bids for the investments we've auctioned and continued success. Over time, it has evolved as we've developed the investor base for the auction platform. We've now been able to gradually migrate to auctioning private companies instead of just public companies. And then gradually migrate from those who are current payers to even noncurrent payers. It depends on the security that you're talking about, but on balance, we've been able to evolve this auction platform such that we've been able to get good bids for the investments in these banks.

Q: Is there a timeline for when you would like to have the auctions complete?
A: It's hard to say because there will be banks who either are working to repay us, or are still working through a recapitalization and we're still working through auctions. Of the roughly 90 banks still in the CPP program, we still expect several to repay us and we still have a bunch of them we expect to auction. It really depends on the situation of the banks but we're very thoughtful of the cadence of that. We started the first auction roughly 20 months ago, so it's a slow progression. We waited to see that the auction platform developed first so now we've been relatively successful, but it took time.

Q: Many of the banks still holding Tarp are coming up on the fifth year in 2013 in which the cost of Tarp will go from 5% to 9%. What are you hearing from these banks about hitting that marker when capital will essentially become more expensive?
A: To be fair, these banks always wanted to repay so to the extent they are able to raise capital and get regulatory approval, they will. The question is really whether they can get the capital and whether the regulators will allow them to do so. We cannot force them to pay the dividends or repay the Tarp securities so it's really their decision as to whether they want to redeem the security or not.

Q: The Treasury is weeding through auctions in the CPP program but has it figured out an exit strategy for the banks in the CDCI program?
A: We're still in the process of formulating a strategy with regard to that portfolio. We talk with the banks in that program quite a bit. We actually went down to Mississippi during the summer to talk with bankers and trade groups about the program and potential exit strategies. The pervading theme is it's hard to find replacement capital. This is a 2% security that counts as capital from a regulatory standpoint, so it's quite difficult to find something that's similarly attractive in the private market.
But we're optimistic that over time, they will get stronger and hopefully be contributing to the CDCI mission to develop community-based businesses. We want to be supportive of that mission mandate so we're willing to be patient. We have been patient and even in the strategy formulation we're always mindful of what they think and what inputs they give us.

Q: Looking back, was there anything that could have been done differently with the Tarp program if, god forbid, the government had to do this again?
A: There probably are things that we can improve upon but I will need the benefit of perspective after a period of time and distance in order to articulate what those might be.

Q: Many outsiders expect the auctions to generate less returns or activity as the final banks are more so noncurrent dividend payers than current. Are you estimating the same?
A: It's very encouraging how some of these investments in these noncurrent institutions actually have attracted the bids that they did. On balance, clearly most of the banks that remain have missed a few dividends so naturally it's more difficult to predict how the investors will bid because they're very idiosyncratic. Some of these banks missed many dividends but we received pretty good bids - more than 97.5% back in one case. But it's difficult and complicated to determine why we received more than 90% on one noncurrent bank but then 60% back on another noncurrent one, for example.

Q: At that time when Tarp first started, where were you and what were your thoughts about the program? Has that evolved since?
A: I was working for Amex in corporate planning. I always thought and still believe that Tarp will be judged favorably over time with perspective. I know it has a lot of bad connotations for a lot of people because it's viewed as a 'bailout' but without Tarp my sense is the crisis would have been more severe. And there are lessons learned. There are risk management, compliance, governance best practices and rules that need to be followed. So to me, it was a way to get us out of that morass of the financial crisis.

Q: Do you think that factors such as the prolonged quantitative easing and the Dodd-Frank Act have had an impact on Tarp and its performance?
A: It's long-standing Treasury policy not to comment on monetary policy, and my office has not done an academic study to correlate QE or the Dodd-Frank Act with the success of auctions or the ability of banks to repay us.