Treasury's patience may be waning. As part of the Capital Purchase Program, the central component of the TARP, Treasury bought preferred shares in banks, and then waited for them to earn enough, or raise enough new capital to buy back the shares at face value.
But three and a half years after starting the program, Treasury is losing its patience. Instead of waiting for banks, Treasury is selling shares of some banks that it owns directly into the market — at whatever price the market will bear. This tactic reduces returns to Treasury (and taxpayers) in two ways. First, the public sales don't attract bids for the full value. Second, Treasury pays investment banks underwriting fees to execute the transactions, which further undermines returns. Last week, for example, we noted that Treasury sold shares in six banks through public sales. Treasury had put in $410.5 million and received $361.8 million in return. That's a loss of $48.7 million.
On March 29, a similar story unfolded with Central Pacific Bank of Hawaii. In January 2009, Central Pacific based in Honolulu, took $109 million in Capital Purchase Program funds. Treasury bought 135,000 shares of preferred stock for $135 million. The bank continued to struggle, and in February 2011 had to be recapitalized by outside investors. As part of the recapitalization, Treasury swapped its 135,000 preferred shares for 5.6 million common shares. Here's a chart of the company's stock.
In June, seeking to recoup some of its "investment," Treasury held a public offering of Central Pacific , selling 2.85 million shares at $12.75 each. That brought in about $36 million, and left Treasury with about 2.77 million common shares. In the last few quarters, Central Pacific's stock has muddled along. On March 29, Treasury announced that it had "executed an underwriting agreement" to sell its remaining 2.77 million shares at $13.01 per share ($13.15 before the underwriters' commission). That brought in another $36 million.
The upshot: Treasury paid $135 million for a stake that it ultimately sold for $72 million. The loss to taxpayers on this deal: $63 million.
On the same day, taxpayers got a slight bit of somewhat better news. As part of TARP, Treasury created the Legacy Securities Private-Public Investment Program. Under the PPIP, Treasury lent money to and invested in vehicles formed by investment firms that would in turn purchase toxic securities. One of them, the Invesco Legacy Securities Fund, in March managed to pay back the last of the $1.16 billion that Treasury had put into it. On March 29, it paid a $3.4 million profit distribution to Treasury.
Every little bit counts.
Daniel Gross is economics editor at Yahoo! Finance
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