On May 3, the Treasury Department announced (via blog post) its intentions with regard to the 343 banks that remain in the TARP Capital Purchase Program. Specifically, Treasury identified three approaches: (1) allow repayments over the next 12-18 months; (2) limited restructurings in the context of mergers or capital raises; and (3) auctioned sales of the TARP securities, either for individual banks or in pools. These intentions are flexible and sufficiently vague to allow Treasury to moderate from these plans, particularly if political pressures necessitate. However, they also provide a road map (at least a current road map) of the path that Treasury anticipates using.
Treasury invested a total of $245 billion under the TARP bank programs, and has already recovered $264 billion through repayments and other income. This represents a $19 billion positive return, without providing any value to the remaining investments. Every additional dollar recovered is an additional return for the US taxpayers.
Of the 364 remaining investments, Treasury notes that most are smaller, community banks. Treasury is careful to point out that these banks have just as much desire to repay TARP, but have generally found it harder to raise funds from private investors in the capital markets and have often been particularly hard hit by troubled real estate loans.
Notably, Treasury now indicates that it intends to continue to hold the TARP securities of those banks that Treasury believes will have the ability to repay over the next 12 to 18 months. This could suggest that those banks that Treasury believes could obtain regulatory approval to repay will not be provided the opportunity, at least in the short term, to participate in a public auction (and therefore repurchase their securities at a discount to par value). The Treasury also indicates that they will communicate “regularly” with the group of banks that they think can repay over the next 12 to 18 months and will share with them Treasury’s “expectations” for repayment. Treasury has expressly indicated that its expectations regarding which banks will be able to repay may change over time.
On March 29, 2012, the Treasury announced the pricing of the public offerings of TARP preferred stock in six banks. In aggregate, the Treasury took a 12% discount to move the TARP investments off the books of the Treasury, selling preferred stock with an aggregate liquidation value of $411 million for $362 million.
While Treasury took a loss on these six investments (at least partially because of Treasury’s desire to go ahead and move the investments rather than hold them for future payment), it is important to remember that the total TARP CPP portfolio has already returned a profit to taxpayers. Including the results of these auctions, Treasury has recovered $260 billion from repayments, dividends, interest and other income, compared to the $245 billion initially invested.
Details of each of the six auctions are provided below.
- Banner Corporation, Walla Walla, WA – Auction proceeds of $108 million against an original investment of $124 million. The discount to the liquidation value of the shares was 11.5%.
- First Financial Holdings Inc., Charleston, SC – Auction proceeds of $56 million against an original investment of $65 million. The discount to the liquidation value of the shares was 12.6%.
- MainSource Financial Group, Inc., Greensburg, IN – Auction proceeds of $52 million against an original investment of $57 million. The discount to the liquidation value of the shares was 6.9%. MainSource had previously indicated that it intended to place one or more bids itself, and was ultimately successful in repurchasing 36.9% of its TARP preferred stock in the auction. Specifically, MainSource redeemed $21 million in liquidation value preferred stock for $19.6 million, and will still have approximately $36 million outstanding, now in the hands of private parties.
- Seacoast Banking Corporation of Florida, Stuart, FL – Auction proceeds of $40 million against an original investment of $50 million. The discount to the liquidation value of the shares was 18.0%.
- Wilshire Bancorp, Inc., Los Angeles, CA – Auction proceeds of $58 million against an original investment of $62 million. The discount to the liquidation value of the shares was 5.6%. Wilshire had previously indicated that it intended to place one or more bids itself, and was ultimately successful in repurchasing 96.5% of its TARP preferred stock in the auction. Specifically, Wilshire redeemed $60 million in liquidation value preferred stock for $56.6 million, and will still have approximately $2.2 million outstanding, now in the hands of private parties.
- WSFS Financial Corporation, Wilmington, DE – Auction proceeds of $47 million against an original investment of $53 million. The discount to the liquidation value of the shares was 8.5%.
As it had previously indicated, on March 26, 2012, the Treasury Department announced the commencement of a modified dutch auction for the sale of the preferred stock it holds in six institutions:
- Banner Corporation, Walla Walla, WA (“Banner”)
- First Financial Holdings Inc., Charleston, SC (“First Financial”)
- MainSource Financial Group, Inc., Greensburg, IN (“MainSource”)
- Seacoast Banking Corporation of Florida, Stuart, FL (“Seacoast”)
- Wilshire Bancorp, Inc., Los Angeles, CA (“Wilshire”)
- WSFS Financial Corporation, Wilmington, DE (“WSFS”)
The link to each institution takes you to the preliminary prospectus on file with the SEC.
MainSource and Wilshire have both indicated that they have received regulatory approvals to submit one or more bids in the auction, while Banner, First Financial, Seacost and WSFS have each indicated that they do not intend to bid in their respective auctions.
On March 14, 2012, Treasury issued a press release announcing its intent to sell the preferred TARP CPP interests in six financial institutions on or about March 26, 2012. Specifically, the Treasury plans to sell its preferred stock positions in Walla Walla, Wash.-based Banner Corp., Charleston, S.C.-based First Financial Holdings Inc., Greensburg, Ind.-based MainSource Financial Group Inc., Stuart, Fla.-based Seacoast Banking Corp. of Florida, Los Angeles-based Wilshire Bancorp Inc. and Wilmington, Del.-based WSFS Financial Corp.
Consistent with prior discussions, Treasury is commencing activities to exit the federal government’s involvement in the TARP CPP program, with an initial focus on large investments in relatively healthy, public institutions. The Treasury’s results in this initial round of auctions is likely to influence policy and expectations going forward. If Treasury is only able to get 70 to 80 cents on the dollar in the auctions for these relatively healthy and public institutions, its appetite to engage in further sales could be severely limited (while the willingness/ability to settle individual TARP investments for a discount – either directly by Treasury or via a third party purchaser – may significantly increase).
The TARP investments selected by Treasury are each among the largest 50 TARP investments that currently remain outstanding, and represent approximately 2.5% of the currently outstanding TARP CPP investments. All six financial institutions selected by Treasury are presently current in their dividend payments (although Seacoast Financial had previously deferred its TARP dividends).
On March 12, 2012, Treasury released its February 2012 Dividends and Interest Report providing an updated look at the status of TARP CPP funds, including the first update following the February 2012 dividend due date under the terms of the TARP CPP investments. As of February 29, 2012, there were 163 TARP recipients that had missed at least one dividend payment (excluding any TARP recipients that have filed bankruptcy or who have been placed into receivership).
As a result of the missed dividends, Treasury has appointed a total of 13 directors to eight different institutions. In addition, the Treasury has appointed observers to an additional 39 institutions.
Although the Treasury has the right, under the terms of the TARP investments, to appoint two directors once a TARP recipient misses six dividend payments, Treasury has focused its efforts on the largest recipients. This likely partially reflects that it is not necessarily easy to identify qualified individuals who are willing to serve as directors of troubled financial institutions. Directors appointed by Treasury have the same rights and responsibilities as all other directors, and are not provided any additional legal or financial protection or benefit due to their appointment by Treasury. Treasury has only appointed one or more directors at institutions that have now missed at least nine quarterly dividend payments, and event amongst that group, have generally focused on the larger recipients, with a focus on those who are behind over $3 million in dividend payments. Based on the Treasury appointees that we’re aware of, the Treasury has identified highly qualified independent bank directors, that can act as a real benefit to the institution they’re being appointed to. As a general matter, they tend to be well-credentialed outside directors, frequently former bank executives that understand the condition of the bank. Technically, Treasury only has the right to appoint the directors at the holding company level, although we understand that Treasury has requested that they also be appointed to any subsidiary bank boards – and that most TARP recipients with appointed directors have done so, perhaps reflecting the quality of the appointed directors.
On February 15, 2012, Broadway Financial Corporation announced that it had reached a definitive agreement with the Treasury Department pursuant to which Treasury will exchange preferred stock in the company for new common stock valued at a discount of 50% to the aggregate liquidation preference of the outstanding shares of preferred stock held by Treasury. As previously noted, while Treasury is unwilling to consider a blanket discount on the repayment of TARP, it remains open to restructuring its investment to facilitate additional capital, so long as it is treated equitably with other investors.
Although exact terms of the agreement are not yet publicly available, the company’s press release indicates that Treasury has agreed to convert its TARP CPP investment in the company into common stock at 50% of its liquidation value and the accrued unpaid interest on such investment at 100% of the accrued amount. The conversion is condition on a number of factors, including: (i) the exchange of the Company’s other preferred stock at the same 50% discount; and (ii) at least $5 million being raised in new common equity.
The company has previously announced that it had an agreement in principal with its senior bank lender to exchange a portion of its senior line of credit, which is in default, for common stock at 100% of the face amount to be exchanged and to forgive the accrued interest on the entire amount of the senior line of credit. In the company’s 3rd Quarter Form 10-Q, the company indicated that these conversions would result in the issuance of approximately 7.5 million new shares of common stock, which in turn would constitute approximately 80% of the pro forma outstanding shares.
While the TARP CPP program has returned a financial profit, as the Treasury has recovered 103% of its investment in the form of dividends, repayments and gains on sale of warrants, about 350 banks remain in the TARP CPP program. In this election year, it appears increasingly likely to us that Treasury is seeking means to eliminate the government’s continuing investment (and resulting entanglement) in financial institutions.
According to multiple sources, Treasury is looking to exit from the TARP CPP program in the “near-term” or by mid-year 2012. As we’ve previously noted, Treasury has hired Houlihan Lokey to advise it on exit strategies, paying Houlihan Lokey $375,000 a month for advice. We understand that Houlihan Lokey has now talked with about a third of the remaining banks, and is expected to talk to the remainder over the next several weeks. These discussions have generally been cordial, and equal parts information sharing and information gathering.
We expect Houlihan Lokey to present Treasury with multiple options, including: individual auctions, pool sales, and potential restructurings.
Under the terms of the preferred stock investments, Treasury can’t require repayment, and institutions will still need regulatory approval to make a payment. We’ve separately heard that the FDIC has inquired about repayment of TARP in reviewing a bank’s strategic plan, suggesting that the bank regulators may “force” repayment in connection with approving changes to business plans, etc. Treasury has initiated off-site examination of TARP compliance programs of the remaining TARP participants, but we understand that this function is at least nominally separate from Treasury’s investment decision and not intended to motivate banks to repay the TARP funds.
Geithner Meets with Eurozone Finance Ministers
On Friday, Treasury Secretary Timothy Geithner met with seventeen European finance ministers in Poland to discuss the eurozone’s debt crisis. Jean-Claude Juncker, president of the Eurogroup, announced the group decided to delay till October a decision on whether to pay out the next tranche of a multi-billion euro loan to Greece. The two-day meeting of Europe’s Economic and Financial Affairs (ECOFIN) Council — hosted by Polish Finance Minister Jacek Rostowski and the president of the National Bank of Poland — comes ahead of G20 and IMF meetings later this month. The European Central Bank, along with the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank, also announced that three U.S. dollar auctions would be held between October and December.
Senate Committee Passes Increased Funding for SEC and CFTC
On Thursday, the Senate Appropriations Financial Services Subcommittee passed its FY 2012 funding bill giving banking and commodities regulators large budget increases to help them implement sweeping new financial regulations. The bill, which will now go to the full U.S. Senate for a vote, gives the Securities and Exchange Commission a fiscal 2012 budget of $1.407 billion, an increase of roughly 19 percent from its current fiscal 2011 budget of $1.185 billion and the Commodity Futures Trading Commission an estimated 19 percent increase in its funding, jumping from $202 million to $240 million for fiscal 2012. That bill would also split oversight of the nearly $600 trillion over-the-counter derivatives market between the two regulators and give the SEC greater authority to regulate hedge funds, credit-rating agencies and municipal advisers. However, the fate of the bill remains uncertain because House Republicans oppose many of the Dodd-Frank provisions which increase the need for expanded SEC and CFTC budgets. Earlier this year, the House Appropriations Financial Services Subcommittee passed a bill that would reduce the CFTC’s budget to $171.9 million but maintain the SEC’s funding at its FY 2011 level. With the end of the year approaching, House and Senate leaders are bracing themselves for another omnibus bill that combines all the unpassed appropriations bills into one major bill. The House and Senate will most likely fail to pass similar Financial Services Appropriations bills which will cause the bill to be wrapped into the omnibus thereby reducing the chance of large increases for the SEC or CFTC.
Fitzpayne Nominated for Treasury Legislative Affairs Chief
On Wednesday, the White House announced that President Obama intends to nominate Alastair Fitzpayne as the next assistant secretary of Treasury for legislative affairs. Fitzpayne has been Treasury’s deputy chief of staff since January 2009. He was a legislative assistant to former Sen. Evan Bayh (D-Ind.) from 2001 to 2006. From 2007 to 2009, he served as a senior policy adviser to Rep. Rahm Emanuel (D-Ill.).
House Republicans Introduce Disaster Funding Bill
On Wednesday, House Republican leaders introduced a stopgap spending bill to keep the government operating though mid-November and provide $3.65 billion in short-term federal assistance to replenish strained disaster reserves. The funding resolution would impose a 1.4 percent cut on most agencies and Cabinet departments, including Defense, to stay within 2012 spending caps set in August. FEMA and the Corps of Engineers would immediately benefit from a first installment of $1 billion in emergency funds to avoid any disruption in aid for these last weeks of the 2011 fiscal year ending September 30. The second $2.65 billion represents a down payment toward FEMA’s 2012 budget. With two weeks left in fiscal 2011, FEMA’s disaster reserve fund has dwindled to $377 million and the agency has been operating since late August on an “immediate needs” basis, forcing delays in longer-term recovery projects around the nation. Senate Democrats, who have been pursuing their own much larger $6.9 billion disaster aid package, said they did not support the current House approach, but left open the possibility of agreement if House Republicans consider more disaster aid. The House is schedule to vote on its bill next week.
FDIC Approves New Systematic Risk Rules
On Tuesday, the FDIC approved new sets of rules that the largest banks will have to follow in drafting plans in the event of their own collapse. The panel also approved contingency planning guidelines for insured banks. The new rules, which were authorized in the Dodd-Frank Act, are designed to eliminate the need for bailouts by giving the FDIC power to liquidate large firms whose failure could threaten the financial system. Banks with at least $50 billion in assets will have to file such plans, as will any firm designated as systemically important by the Financial Stability Oversight Council. The final rule changes the filing timeline from an April draft proposal released by the FDIC and Fed, moving toward a tiered phase-in based on the total of non-bank assets held by firms. Companies with more than $250 billion in non-bank assets are required to file the plans by July 1, 2012. Firms with non-bank assets between $100 billion and $250 billion would be required to file by July 1, 2013, and all other firms would be required to submit plans by December 2013. The agency also approved unanimously a separate rule dictating resolution plans for FDIC-insured banks with more than $50 billion in assets. The rule, which the agency began drafting before the completion of the Dodd-Frank Act, would apply to 37 banks and thrifts. Thirty four of those firms would be required to file resolution plans with the Fed because of the size of their parent company. The rule takes effect January 1, 2012, and would be subject to a 60-day public comment period.
More Information
If you have any questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463
Bernanke Signals No New Fed Stimulus
On Friday, Federal Reserve Chairman Ben Bernanke offered an upbeat assessment of the domestic economy that offered little indication of any immediate monetary stimulus by the Fed. However, Bernanke did acknowledge that the nation faces significant challenges, including high unemployment and an unsustainable federal debt. Bernanke also offered an unusual critique of the government’s fiscal policy, criticizing the political battle over raising the debt-ceiling. While Bernanke failed to signal any future Fed action, he did say the issue of potential action would be discussed at the next meeting in late September.
Treasury Department Announces OFAC Settlement with JPMorgan Chase
On Thursday, the Treasury Department announced that JPMorgan Chase has agreed to pay $88.3 million as part of a settlement over a series of transactions involving Cuba, Iran and Sudan. The Treasury Department’s Office of Foreign Assets Control (OFAC) said in a news release that JPMorgan processed wire transfers totaling around $178.5 million for Cuban nationals in late 2005 and early 2006, violating United States embargo laws. The bank was also fined for a 2009 incident in which it made a $2.9 million loan to a bank that had ties to Iran’s government-owned shipping line, a violation of United States sanctions against Iran. The third violation occurred in 2010 and 2011, when the bank failed to give up documents about a wire transfer that referred to Khartoum, the capital of Sudan. According to the release, the agency gave JPMorgan a list of documents believed to be possessed by JPMorgan. In response, JPMorgan, which previously said it had no such documents, produced more than 20 of the items in question.
S&P President Resigns
On Tuesday, McGraw-Hill, parent company of Standard & Poor’s (S&P), announced that S&P President Deven Sharma will step down from his position by the end of the year and be replaced by Douglas Peterson, the chief operating officer at Citigroup. McGraw-Hill said Sharma’s decision was not influenced by the United States’ credit rating downgrade or an investigation by the Justice Department over S&P’s rating of its subprime securities. The company said the decision to replace Sharma took place over six months ago when the Board of Directors decided to split the company into four divisions due to increasing pressure from investors.
(more…)
Trade Deals Stalled in Senate
On Tuesday, the White House struck a deal with Senate Democratic leaders on the Trade Adjustment Assistance program which has stalled the three pending trade agreements with Colombia, Panama and South Korea for the past five years. However, on Thursday, Republican members of the Senate Finance Committee blocked the trade measures during a markup session because of their opposition to the agreement between the White House and Senate Democrats. The trade assistance program was expanded in 2009 to boost payouts and include service-sector employees as well as factory workers, but those added benefits expired in February. The deal between Senate Democrats and the White House, which Republicans opposed, would extend the additional benefits until 2014.
Fed Announces Final Rule on Debit Card Swipe Fees
On Wednesday, the Federal Reserve Board announced final rules that will limit debit card swipe fees, as mandated by the “Durbin Amendment” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Fed’s original proposed rule capped the fees at 12 cents per transaction, but the Board passed a final rule that increased the cap to 21 cents per transaction, plus 5 basis points on the amount of the transaction for fraud costs, plus 1 cent for fraud prevention costs. Financial institutions with $10 billion or less in assets, governmental benefit cards, and certain prepaid cards are exempted under the Fed’s rule.
Greece Passes Austerity Program, Awaits Second Bailout
This week, the Greek parliament passed unpopular austerity and privatization programs thereby fulfilling the preconditions for receiving a second bailout. However, on Friday, European finance ministers cancelled a planned meeting for Sunday and indicated they may take as long as two more months to finalize the details of Greece’s long-term bailout. Nevertheless, the ministers are expected to approve a short-term loan installment that will keep Greece from bankruptcy over the summer.