On Tuesday, the Treasury Department released an update on its
strategy initiated early this year of exiting its remaining
Troubled Asset Relief Program (TARP) investments in banks through
the Capital Purchase Program (CPP). Currently, 218 banks remain
in TARP's Capital Purchase Program out of a total 707 and there
remains $7.5 billion in debt to be paid to taxpayers.
The $700 billion TARP, which was initiated in 2008 to aid the
nation's financial industry, has surfaced as a success story. Of
the total $700 billion bailout money, banks and other financial
institutions received $245 billion. Moreover, $268 billion
including dividends and interest payments has been recovered by
the government to date, reflecting positive return for taxpayers
worth $23 billion.
Development till Now
The Treasury's strategy implemented in March 2012 outlined three
options for the recovery of bailout money from the remaining
banks and financial institutions. These included the divesture of
investments or restructuring of the investments to make repayment
easier rather than waiting for these banks to repay.
Since March 2012, the Treasury auctioned its investments in 91
banks for taxpayer proceeds worth $1.5 billion. However, these
banks have already paid more than $300 million, including
dividends and interest to taxpayers since their investments.
Moreover, through the period from March 2012 to December 2012, 49
banks have repaid bailout money at full par value of the original
CPP investment for taxpayer proceeds worth $6.9 billion. Further,
three other investments were restructured.
Therefore, banks are persistently repaying at par and Treasury
anticipates further repayments going forward.
Strategy to Follow Ahead
Treasury anticipates auctioning CPP's preferred shares or
subordinated debt in about two-thirds of the remaining banks in
2013, bulk of which are expected to repay at par. Moreover, it
can also opt for restructuring the investments or wait for them
to repay themselves, which might take longer to recover the
money.
As per the Treasury department, the strategy which it is
following to recoup investments would be beneficial for
financially troubled banks, which are struggling to repay debts.
Moreover, the Treasury's plans are subject to market conditions
and can be revised when required.
Notably,
Synovus Financial Corporation
(
SNV
), with $967.9 million of repayment for bailout funds is the
biggest bank left in TARP. The company, with a fourth-quarter
pretax charge of approximately $155 million on the sale of
distressed assets is trying to improve its balance sheet to repay
TARP as early as the second quarter of 2013.
Among other TARP programs,
American International Group Inc.
(
AIG
), the major recipient of bailout funds concluded the final leg
of its government bailout loan repayment as the U.S. Federal
Reserve completed the sale of the remaining 15.9% ownership in
the company. Accordingly, the leftover 234.2 million shares were
priced at $32.50 a share, for a total amount of about $7.61
billion. However, the Fed will continue to retain the warrants in
order to buy AIG stock in the future.
AIG has successfully lessened the Treasury's ownership from 92%
in January last year to 15.9% in September 2012, when the Fed
raised $20.7 billion from the company's stock sale. The latest
share-sale released AIG of the $182.3 billion rescue loan taken
$70 billion from the Treasury and remaining from the Federal
Reserve Bank of New York (FRBNY) in September 2008, during the
peak of the financial crisis.
After the abovementioned sale, the overall positive return on the
Federal Reserve and Treasury summed to $22.7 billion, with
Treasury gaining a positive return of $5.0 billion and the
Federal Reserve - $17.7 billion.
Conclusion
Considering the effectiveness in easing credit and capital market
pressures, restoring confidence in the financial system and
recovering the injected money at a lower-than-expected cost, it
can be concluded that the government's highly criticized bailout
program has finally emerged as a winner.
While most of the major financial institutions including
Bank of America Corporation
(
BAC
),
Citigroup Inc.
(
C
) and others have repaid their TARP loans in full, a substantial
amount is yet to be recovered. Hence, the ultimate success of the
TARP is still to be gauged.
AMER INTL GRP (AIG): Free Stock Analysis
Report
BANK OF AMER CP (BAC): Free Stock Analysis
Report
CITIGROUP INC (C): Free Stock Analysis Report
SYNOVUS FINL CP (SNV): Free Stock Analysis
Report
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