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A Tale of Gains and Losses

By: Bill Poquette

Many community banks in recent months have been buying back preferred shares issued to the Treasury Department under the Troubled Asset Relief Program. And itís a good thing, too, because the dividends they are required to pay jump from 5 percent to 9 percent late next year for those who signed on early. Another good thing is that all six investments of more than $10 billion into TARPís Capital Purchase Program have been paid in full, as have 19 more between $1 billion and $10 billion.

On the other hand, 325 of the programís 707 total participants still owe taxpayers $13.8 billion. Unpaid dividends or interest of $455 million is due from 203 financial institutions, some of which have missed as many as 13 payments. And Treasury has auctioned off the preferred stock of more than 30 banks at a discount.

On July 25, the Treasury Departmentís special inspector general for TARP issued a quarterly report to Congress on the programís status through June 30. Depending on oneís viewpoint, the numbers are encouraging or troubling.

According to SIGTARP, Treasury reported that $191.1 billion of the CPP principal (or 93.3 percent) had been repaid as of June 30. That repayment tally includes $245 million in proceeds from an auction held from June 11 through June 13 of preferred stock in seven banks, but does not include $204.4 million in proceeds from an auction held from June 25 through June 27 of preferred stock in another seven banks. On Aug. 21, Treasury announced public offerings of the preferred stock it held in five more institutions.

The repayment amount also includes $363.3 million in preferred stock that was converted from CPP investments into the Community Development Capital Initiative and therefore still represents outstanding obligations to TARP, and $2.2 billion that was refinanced in 2011 into the Small Business Lending Fund, a non-TARP program, according to the SIGís report.

As of June 30, Treasury had received approximately $11.7 billion in interest and dividends from CPP recipients. It also had received $7.7 billion through the sale of CPP warrants that were obtained from TARP recipients.

Of the 382 financial institutions that have exited the CPP, 165, or 43.2 percent, did so through other government programs ó 28 of them through CDCI and 137 through the SBLF, SIGTARP reported. Only 164 of the banks that exited, or 42.9 percent, fully repaid CPP otherwise. In addition, three CPP banks merged with other CPP banks; Treasury sold its investments in 33 institutions at a loss; and 17 institutions or their subsidiary banks failed, meaning Treasury lost its entire investment in those banks.

TARP has been controversial since its launch in late 2008, and it still is. Widely viewed as a big bank bailout, arguably it averted the failure of a few systemically critical financial institutions. It also injected needed capital into some regional and community banks. Unfortunately for many of the latter group, prices paid for acquisitions are being discounted by the amount of TARP preferred shares and the low interest rate environment is restricting their ability to meet dividend payments or buy back the stock.

Boon or bane? Take your pick. TARP is a government program conceived in the Bush Administration and executed mostly in the Obama Administration. Thereís ample credit/blame to go around.

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) September 2012 by BankNews Media