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Small Banks Get Theirs Too: Treasury’s Quiet Bailout

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Aug. 22: This column has been corrected.

Quietly, the Treasury Department is engaged in another bailout of the banks. This time, it's America's small banks that are the lucky duckies.

The federal government still holds investments in hundreds of small banks around the country in the Troubled Asset Relief Program, otherwise known as the bailout. In an effort to wind down TARP, the government is trying to sell off its holdings of preferred stock of the remaining smaller banks.

The problem is that the Treasury Department isn't getting great bids on some of the bank paper, even on the shares of banks with strong profits and strong capital. When the government sold its holdings in MetroCorp Bancshares of Houston this month, the bank itself bought back most of it — at 98 cents on the dollar. Wilshire Bancorp of Los Angeles bought back its paper at 94 cents on the dollar. The Treasury Department sold preferred shares of Ohio-based First Defiance at 96 cents, and Peoples Bancorp of North Carolina at 93 cents. All of these are regarded as healthy.

Who makes up the difference? Taxpayers, of course.

Treasury officials say that is what the market is willing to bear. But the government doesn't have to sell now, and it doesn't have to settle for less than a full repayment.

Why should healthy banks or hedge fund investors get a gift so that the Obama administration can score some political points by raising the number of banks that have left the program? For all the generous breaks that the government gave the gargantuan banks in the bailout, they all at least paid TARP back at 100 cents on the dollar. Why shouldn't the small ones pay 100 cents on the dollar like the big boys?

Sure, the bank portion of TARP has been profitable so far. The Treasury Department estimates that it will make almost $22 billion from its bank support programs. That includes an estimated $3 billion loss from the smaller banks' paper.

“We are winding down the program, at a profit to taxpayers. The program was successful in what it was designed to do,” which was to save the financial system, said Timothy G. Massad, the Treasury Department's point man on TARP. The agency is focused on “what is the way to maximize value, given that it is a temporary program,” he said. “The government is not in the business of running an investment fund and is not in the business of owning stakes in private companies.”

In the auctions, the government has been mainly selling shares it has left of the bigger and healthier small banks. Given that it has sold these shares at discounts, it bodes ill for the stock of the weaker ones that the government still holds, many of which are closely owned and more difficult to unload. Indeed, the Treasury Department didn't get a sufficient bid for some the items in its most recent auction.

Unfortunately, this quiet bailout could get worse if the government continues with its plan.

Treasury officials are contemplating a plan to pool a bunch of these small-bank preferred shares in order to accelerate the sales. The ostensible logic is that a pool — akin to creating shares in a bank mutual fund — will widen the number of potential buyers and raise prices.

Instead, however, this is likely to deepen the discounts. Any large potential investor would still not find it worth the time to analyze each bank in the pool. Rather, the bidder is likely to apply a discount to anticipate any losses.

The potential taxpayer losses from selling shares at too deep a discount could be in the hundreds of millions. Granted, that's not huge when measured against the size of the TARP program, the profits it has made already or the federal budget. But it is big as an absolute figure. It seems likely that some of these losses could be avoided.

You have to feel for the Treasury Department a bit here. It has been assailed from every side for the way it has run TARP. Recently, critics have wondered what its plan was for ending the program. Now that it has a program, critics are attacking that, too.

But much of these problems are of the government's own making. The difficulty the Treasury Department faces is a reminder of just how good the TARP terms were for the banks. Everything that makes the bonds unattractive now for investors made the preferred stock wonderful for banks.

The dividend was a comfortable 5 percent. It will soon bump up to 9 percent, but that is still not onerous for many small, privately held banks. Moreover, some banks in the program can skip the dividend payments at any time. If they miss a payment, they have no obligation to make it up. And the preferred shares never expire, so the banks could keep them as long as they want.

It's a measure of how ungrateful the banks were that even on these generous terms, they still howled about the program and wanted out. Mainly that was because of certain restrictions on executive compensation.

So what's going on here with the Treasury Department? Compass Point Research and Trading, a broker dealer that has been analyzing the auctions, put it delicately in a recent note: "The current administration is very motivated to unwind its crisis-related investments."

Translation: The world has moved on, and the Obama administration seems to be counting on being able to run down the program as quickly as possible without too much scrutiny. TARP is one of the least popular government programs these days (and that's saying something). A job managing TARP no longer burnishes résumés, if it ever did.

But it sure is too bad that, after saving the banking system, taxpayers won't get the best returns we can.

Correction: An earlier version of this column referred incorrectly to the ability of banks to skip dividend payments under TARP. Not all banks can skip the payments; banks that are bank holding companies cannot.

If it were a bank or a broker running the program, the answer to the question would be pretty simple:  They believe that the 95% return today is worth more than a 100% return tomorrow, due to inflation or some other investment opportunity.

In other words, which political candidates are any of those small banks supporting, and which ones look like they’ll be acquired in the near future?

ELLIS L GUTSHALL

Aug. 22, 2012, 4:55 p.m.

I agree with the writer on why the rush and why should the Treasury sell the shares at a discount. What I do not agree with is his inference that once again the banks are getting a bailout. Banks owe the full amount and cannot redeem the shares for less unless the Treasury decides to do so. The auctions are public auctions and there is no prohibition on a bank bidding on its own shares. Again, it is the Treasury initiating these auctions, not the banks. If no one bid 100%, the Treasury could say “no thanks” but it has not, as it has a different agenda than just getting back its principal.

When he says “Why should healthy banks or hedge fund investors get a gift so that the Obama administration can score some political points by raising the number of banks that have left the program?”, he should be questioning the Obama administration, not the banks or the hedge funds. If a hedge fund buys 100% of Bank A, as an example, and buys it at 90% on the dollar, Treasury/tax payers lose 10%. As the new owner, the hedge fund can still require the bank to pay par, or 100%, and the hedge fund makes all the profit on the deal and the bank makes nothing.

So my bottom line feedback: Treasury is the only one calling these shots to sell and at what price, and the market bidders are just responding. Why would a buyer offer to pay more than the seller was willing to take. He needs to call this question on the Obama administration, not the small banks.

“In other words, which political candidates are any of those small banks supporting, and which ones look like they’ll be acquired in the near future? “

The answer is posted above from the first poster.

The banks selected for Uncles Generosity are banks that have donated to the Democratic Party. And will continue to do so thanks for the bail out Uncle you get the discount back in Super pac money.
This is somethng the next President and the new DOJ need to look at for criminal prosecution..

The Treasury buying votes and rasing money with tax payer dollars.
That is the real truth here..
Chicago Politics at its best…. Omama needs to go home folks

Vote NO GO OBAMO in NOV

johneurope, your theory is a real stretch.  I’ve lived in the Midwest and Interior West for six decades.  Small bankers abound, and I met many.  I’ve never met one who wasn’t a Republican.

Geezer63 is correct.  I too grew up in the Midwest.  Tell us where the “Democratic” banks are, johneurope? 

That’s like an oxymoron out here!

“plan to pool a bunch of these small-bank preferred shares”

Just like they did the mortgages.  They run the same scams over & over.

There is no repuplican party or democrat party but just one corrupt party according to the 60 minutes story where the politicians are becoming multimillionaires with insider trading tips from the war corporations.

Wonder why obama has not ended the wars & brought the troops home as he and the democrats promised 4 years ago.

Right along with promising to prosecute wallstreet and the bankers for fraud & corruption, but they got bailed out instead, called the best & brightest & deserved their bonuses after they were elected.

While everyone else loses their jobs, homes & families are destroyed.

Carola Von H.

Aug. 23, 2012, 8:58 p.m.

Paraphrasing John: There is no Republican or Democratic Party, just one corrupt Crony Capitalist Party with several factions.

“So what’s going on here with the Treasury Department? Compass Point Research and Trading, a broker dealer that has been analyzing the auctions, put it delicately in a recent note: “The current administration is very motivated to unwind its crisis-related investments.”
  ::: johneurope But not the Green Energy Loosers we get to keep them why??:::

“Translation: The world has moved on, and the Obama administration seems to be counting on being able to run down the program as quickly as possible without too much scrutiny. TARP is one of the least popular government programs these days (and that’s saying something). A job managing TARP no longer burnishes résumés, if it ever did. “

“But it sure is too bad that, after saving the banking system, taxpayers won’t get the best returns we can. “

What did Rham say “never let a crisis go to waste.”.
ref 60 years in midwest, really a lot of territory and one hell of a lot of banks.

This is a Move to garner money for the DEM Pac. Kick back city; both parties are the same with this but this is a very obvious play by Geithner and the party.

Obama and Geithner Know Obama is lost in 2012 so milk the system for a few dolllars more…  POINT HERE; these do not need to be sold then why do it?

Was politics mentioned???? Who stands to gain???

OBAMA PAC and his banker friends the ones he seems to hate soooooo much…...
They both winn right, by stealing from the tax payer again….

Yes Obama wants it gone, but no sale of the Green energy dogs he picked strange isan’t i!t Sell the good stuff at a real good discount but let the taxpayer keep the dogs on the books. Why is he not un winding them???  No stretch of the imigination here

As I said criminal Investigation needed by new DOJ. I will push for one my self often…...

frank nuciforo

Aug. 24, 2012, 11:49 a.m.

TARP has to be viewed on a portfolio basis; there will be winners and some losers. Overall it appears the Treasury has done a reasonably good job of return on it’s investment (bailout), as many more buy-backs resulted in rich premiums over par. The alternative of course would have been not to invest in the smaller institutions and risk them being closed by the regulators and sold at a much deeper discount thereby draining the Fed’s insurance fund.

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Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)