On December 18, 2012, the Treasury provided an update on the wind down of the TARP bank investment programs and also announced the future auction of 53 TARP investments, approximately 25% of the remaining pool of investments.

As previously announced, Treasury is pursuing three basic options to exit the TARP program:  (1) waiting for banks to repay; (2) selling investments (typically by auction); and, in limited circumstances,  (3) restructuring investments to facilitate repayment or sale.  Since March 2012, Treasury has completed 91 auctions and had an additional 49 banks repay Treasury at par value.  Treasury indicated that, in the aggregate, its returns in the auctioned investments exceed the Treasury’s last estimate of their current value.

Treasury indicates that it will auction approximately two-thirds of the remaining institutions (or about 145 institutions) and expects the majority of the remaining banks to repay at par.

Treasury also provided a preview of banks that Treasury intends to auction starting late in January.  Treasury stated that it was making this early announcement as a large number of the banks in light of potential regulatory concerns for investors associated with these investments.  Specifically, Treasury indicates that, for a large number of the institutions, the TARP securities represent a large portion of the equity capital of the depository institution or that the institution is in arrears on dividend payments, causing the TARP securities to become voting securities, or both.  Either of these scenarios can cause ownership of the securities to be subject to the Bank Holding Company Act or the Change in Bank Control Act.

These auctions will represent the first auctions of institutions that are in material arrears on dividend payments.  (Treasury has previously auctioned two institutions that had missed a total of three dividend payments: Baraboo Bancorp had missed one dividend, and sold at a 33% discount, while Community West Bancshares had missed two dividends, and sold at a 27% discount.)  The 53 institutions included in Treasury’s announcement include 19 institutions that have missed at least 10 dividend or interest payments.  In addition, the 53 institutions include five of the 25 largest remaining TARP investments in Treasury’s portfolio.

As a continued (and frankly natural) evolution of Treasury’s auction process, Treasury formally announced that all potential investors, prior to placing bids, must consult with the Federal Reserve and/or applicable bank regulators to confirm whether any filings, notices or other actions are necessary to comply with federal banking laws.  If any prior nonobjection or approval is required, Treasury requires receipt of such nonobjection or approval prior to bidding. In addition, Treasury announced that it will permit bidders to submit “all-or-nothing” bids.

We have extensive experience advising TARP institutions that are being auctioned, as well as both bank and non-bank purchasers of TARP securities.  Please contact any member of the Bryan Cave banking team if you’d like to discuss further.