Robert Miller/THE WASHINGTON POST - The U.S. Treasury Department has routinely been auctioning off its shares in smaller banks at significant losses.
“Taxpayers are being shortchanged on revenue they could be earning,” said Joshua Siegel, managing principle of StoneCastle Partners, a firm that invests in community banks.
Still, he said, “if we could increase the average price of these sales from 80 to 90 cents on the dollar, and let’s say there’s 5 billion left, that’s $500 million more. How many teachers could we employ?”
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Siegel said he anticipates it will only get harder for Treasury to bring its shares to auction as many of the remaining banks are small and private, meaning they do not have to disclose their problems in public statements.
“It’s not a natural investment for a lot of buyers,” he said. “There are very few people who focus on community banks and understand the credit and the market.”
The advantage of auctions
At the height of the fiscal crisis in 2008, the George W. Bush administration launched TARP to stabilize the financial system. The rescue plan, which authorized the Treasury to spend as much as $700 billion, ultimately disbursed $418 billion to financial institutions, auto companies and housing programs.
A majority of that money, $245 billion, went to banks, which were required to pay the government a dividend of 5 percent of the investment for the first five years and 9 percent thereafter. While banks did not have to pay back their funds immediately, many did so to avoid the dividend hike and shake off the stigma of a government bailout.
From a purely economic standpoint, the bank rescue went well. The Treasury has recouped a total of $267 billion so far. Overall, TARP will wind up costing taxpayers about $60 billion, mostly due to the auto bailouts.
That the government is seeing money from the auction of small bank shares, even if at a loss, is good for taxpayers, said Robert D. Klingler, an attorney at Bryan Cave who represents TARP recipients.
The auctions, he said, are a “very efficient means of converting Treasury’s — and thus the taxpayer’s — investments in illiquid stock back into cash, where it can then be used for other governmental purposes.”
No timetable, no pressure
But considering that about 150 of the remaining banks have missed dividend payments, investors may shy away from auctions unless the shares are sold at a steep discount.
Those who do understand community banks may take advantage of Treasury’s desire to sell bank shares quickly. Opportunistic hedge funds or other big investors could acquire stakes through the auctions and make money, regardless of what happens to the bank.
“Auctioning small-bank shares to private parties, who can then extract [a high] dividend, is not necessarily treating small banks fairly,” said Damon Silver, a former member of the Congressional Oversight Panel for TARP. “Treasury allowed large banks to get TARP off their balance sheet in a number of different ways” and should be “focused on helping small banks get this very expensive capital off their books.”
Of the 707 banks that received bailout funds, the government still owns stakes in 230, most of which are smaller institutions that have a harder time raising money.
The Treasury’s Massad said the agency is still engaging in a multipronged approach to unwind TARP and many banks continue to repay their rescue funds on their own. The Treasury is also continuing to entertain restructuring plans to help smaller banks raise money to bolster their reserves in case of an emergency or financial crisis, he said.
Massad added that investors have shown great interest in the auctions, with each eliciting about 30 bids. And some of the buyers are working to strengthen the banks’ financial position after they buy the shares, said P. Carter Bundy, a banking analyst at Stifel Nicolaus.
But Romero is worried that the Treasury is not analyzing the potential effect of these auctions on the financial stability of the banking system.
“Treasury has to take care in an en masse exit of hundreds of banks to ensure that the industry stays healthy,” Romero said. “We wouldn’t want to roll back improvements that the community banking industry has just started seeing.”
Massad said the Treasury has no timetable for ending TARP, and there has been no pressure from Congress or the Obama administration to speed up the process.
“We are simply moving to get the government out of the business of owning stakes in private companies, which is important for long-term financial stability. And the way to do that is replacing government capital with private capital,” he said.
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