November 2009 Archives

All three banks have redeemed the common and preferred stock they gave the government under the Troubled Asset Relief Program by returning the money they received plus dividends.

Pricing the warrants, however, has proved a more difficult task. Earlier this year, Treasury announced a policy under which banks that have already bought back the stock they sold the government submitted their own valuation of the warrants. Treasury then had 10 days to accept the bank's valuation or initiate a two-stage cooperative appraisal process.

California-based Westamerica Bancorporation said it had completed the repayment of $83.7 million it received under the Troubled Asset Relief Program. It paid off half of the debt in September. Like all companies received bailout assistance, it also paid accrued dividends.

Union Bankshares Corp., based in Virginia, said it too had redeemed stock shared it gave the government in exchange for $59 million in aid. The company raised money in a public offering earlier this year in anticipation of exiting the bailout program.

Lincoln National Corp., a large insurer based in Pennsylvania that became a bank holding company in order to become eligible for TARP aid, said it expected Treasury approval to repay its $950 million in bailout funding as early as 2010.

"When we get to the point that we want to repay, we are pretty confident the conversations will go well," CEO Dennis Glass told investors Tuesday. He said that repayment could begin next year, allowing the company to once again pay a dividend to investors.

Indiana-based Fidelity Federal Bancorp received $6.6 million in assistance, in exchange for which it gave Treasury an equal value of preferred stock and warrants.

Community Pride Bancorp of Minnesota was also approved to join the Troubled Asset Relief Program, taking home $4.4 million in taxpayer assistance. It gave the Treasury subordinated debentures and warrants in trade.

Illinois-based HPK Financial Corp. received $5 million in aid, for which it gave the Treasury stock and warrants. The announcement marked the company's second round of bailout finding, having asked for and received $4 million in May of this year.

Neil M. Barofsky, the inspector general for the Troubled Asset Relief Program, harshly criticized the bank - then led by current Treasury Secretary Timothy Geithner - for having "refused to use its considerable leverage" to negotiate down AIG's obligations to counterparties demanding payment on housing-related investment products.

The counterparties included some of the nation's largest financial institutions. Among the largest were Merrill Lynch, UBS, Bank of America Corp., and Goldman Sachs. In total, AIG's creditors received full payment of more than $62 billion.

At the time, AIG was threatening to go into bankruptcy. In his report, Barofsky said that the perception that the government would not allow AIG to fail allowed the counterparties to present a strong front in demanding full satisfaction of the debts.

This understanding was supported by Geithner's erroneous belief that he was unable to force the counterparties to accept "haircuts," or discounts on the amount due, Barofsky said.

According to the report, Geithner's Federal Reserve, having already extended $85 billion in credit earlier in the year, considered itself a creditor of AIG and thus had trouble adopting its role as regulator. In addition, the Fed believed that the law prevented it from asking concessions of foreign-owned banks and it did not want to treat them differently than domestic ones.

The automaker said it ended the third quarter with $42.6 billion in cash on hand and would make a $1 billion payment to the Treasury Department in December. It said it would make similar quarterly payments going forward.

"It's a commitment of the entire leadership team of the company to repay the taxpayers," Fritz Henderson, the company's chief executive, said in press conference.

The move comes soon after the company emerged from bankruptcy proceedings that wiped out a significant amount of debt. It has also slashed operating costs and benefited from the federal government's cash for clunkers program, which gave tax incentives for customers to buy cars.

General Motors borrowed a total of $50 billion from the government at the height of last year's financial crisis. Of that, $13.4 billion remains in an escrow account, $6.7 billion remains on the company's books, and the balance was converted into a large ownership stake held by the government, the New York Times reported.

Despite the company's interest in clearing its debt obligations, there was no indication that the company intended to redeem the government stock position any time soon. In a recent report, the Government Accountability Office said that taxpayers should expect to see losses on its stock investment because it was unlikely the share price would recover sufficiently.

"We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic," Neil M. Barofsky said yesterday at the Bloomberg Washington Summit. "It's almost certainly going to be a loss."

Barofsky, appointed to examine fiscal and ethical issues related to the Troubled Asset Relief Program, has been critical of the effort. In a report last month, he charged the government with creating a moral hazard and being "less-than-accurate" in reporting on its initial investments in nine large financial institutions.

Under the terms of the $700 billion program, participating banks give the government stock and related products in exchange for cash. Were the value of the shares to increase before the bank redeemed them, it is possible that the taxpayers could make a profit.

Many of the largest participants, however, have rushed to return the money, mainly to avoid the increased regulatory strictures that come with it. Those efforts have preempted any chance of large future profits for the government.

Of the 19 financial institutions and automakers eligible for the Capital Assistance Program, only GMAC, the auto lender, requires further financial aid, Treasury said.

The program was initially created to support companies that were forced under the terms of the overall bailout initiative to submit to stress tests of their stability. Aside from GMAC, all passed their examinations in May of this year and have no further need for government money.

The Obama administration initially estimated that the CAP program would require up to $750 billion in additional expenditures. It later withdrew a budgeting request to Congress, and government officials in recent months have signaled general confidence that the overall bailout program would be less expensive than initially feared.

GMAC, the only company in the group not to meet Treasury's standards, will receive between $2.8 billion and $5.6 billion in additional bailout funding, according to recent report by the Wall Street Journal. The Treasury said yesterday that any such funding would come from the Troubled Asset Relief Program, the master bailout initiative, and not from CAP.

RLJ Western Asset Management LP is the latest of seven investment groups to join the Public-Private Investment program. The partnership is controlled by Robert L. Johnson -- best known as the founder of the BET television network and as the owner of the Charlotte Bobcats professional basketball team -- and by Western Asset Management, an affiliate of Legg Mason Inc.

Details of the agreement weren't released, but investors must commit a minimum of $500 million in order to participate. Under the terms of the PPIP program, the Treasury will match private investments in the program and provide additional financing at low cost.

So far, seven firms or partnerships have joined the program, raising a total of $4.09 billion in private-sector capital. The Treasury Department's matching investment and loan guarantees bring the program's total purchasing power to $16.36 billion, the government said.

Creating a market for housing-related assets has been a primary goal for the Treasury since the credit markets froze up late last year. By backing loans used to buy them, the government hopes to move them off the books of traditional banks and free them up to resume normal lending activity.

The Congressional Oversight Panel said the Treasury Department's expanded efforts to guarantee loans and deposits at federally regulated banks had a "significant role" in stabilizing credit markets.

These efforts, which included expanding the amount of deposits covered by the Federal Deposit Insurance Corp. and guaranteeing as much as $300 billion in assets held by Citigroup Inc. in late 2008, "have exceeded the total value of TARP, making guarantees the single largest element of the government's response to the financial crisis," the panel reported.

At its high point this year, the government was guaranteeing $4.5 trillion in assets. Because few if any of these guarantees have been called on, the government stands to make a profit on fees connected to the program.

Nevertheless, the effort was a major risk, the oversight panel said, noting that if the markets had collapsed further, "taxpayers could have suffered enormous losses." In addition, the panel said that the loan guarantees had created a moral hazard that might encourage banks and other institutions to take large risks out of the belief the government would back their positions.

The panel urged the Treasury to provide more details about the rationale behind guarantee programs, the alternatives that may have been available and the reasons they were rejected. It also said the agency should provide more information about whether these programs have achieved their objectives.

The Dallas-based bank had hoped to raise as much as $140 million from the offering, more than enough to redeem the $92 million in stock it gave the Treasury Department in exchange for assistance under the Troubled Asset Relief Program.

At the time, PlainsCapital was seen as a bright star in the banking industry, and experts said the bank's willingness to initiate a stock sale was a sign of its underlying strength.

"If they had any hesitation, if they saw their asset quality was deteriorating or any sign their bank was going to go through tough times, they wouldn't have done this," Dan Bass, an investment banker with Houston-based Carson Medlin Co. told the Dallas Morning News when the offering was announced.

That assessment has been called into question by the bank's decision not to follow through. Bank executives blamed current market conditions for the change of heart.

Angelo, Gordon & Co. L.P. and GE Capital Real Estate will invest in the Treasury's Public-Private Investment Program, the department announced. It did not specify the size of the investment.

Under the program, the Treasury guarantees loans used to purchase the assets, which include the mortgage-based derivatives many believe contributed to last year's financial crisis.

Creating a market for these assets has been a primary goal for the Treasury since the credit markets froze up. By backing loans used to buy them, the government hopes to move them off the books of traditional banks and free them up to resume normal lending activity.

Nevertheless, the PPIP program has come under fire as demand for the securities has improved since last year's the financial meltdown. Some critics have questioned whether the assistance amounts to a giveaway to the financial industry.

General Motors and Chrysler have succeeded in reducing debt and production costs, cutting brands and rationalizing their dealership networks to weed out underperforming operators, the Government Accountability Office said in a new report.

These efforts, the GAO said, were a good start. But the report added: "Whether and to what extent these changes will improve Chrysler's and GM's profitability and long-term viability remains to be seen."

The GAO noted that the two companies, having gone through bankruptcy proceedings earlier this year, were still preparing new financial statements to account for the change in corporate identity, and so no hard conclusions could be made about recent operations.

GAO also said that the current economic environment made it difficult to assess the companies' long-term futures, saying that "whether enough time has passed for the impact of the structural changes to be seen is unlikely, especially given that the automakers have not completed restructuring, the economy is still recovering, and new vehicle purchases remain at low levels."

The online brokerage said in a regulatory filing with the Securities and Exchange Commission that it had raised enough money in a recent round of stock sales that it no longer needed the $800 million it had applied for under the Troubled Asset Relief Program.

The company also recently completed a $1.74 billion debt exchange that cut its interest payments in half.

In its filing with the SEC, E*Trade said it was responding to an inquiry from the Office of Thrift Supervision about whether it would join the program, perhaps suggesting concern by the regulator after almost a year had passed without final action on the company's TARP application.

After months of negotiations with creditors and federal regulators, the business-financing giant announced it had submitted a Chapter 11 prepackaged bankruptcy plan.

Under the plan, bondholders will receive 70 cents for each dollar of liabilities. Overall, the company owes $64 billion to creditors and has $70 billion in assets, the New York Times reported. Roughly $800 million in debt was due to mature over the weekend and early this week.

Without a prepackaged bankruptcy, lenders stood to make back only seven cents on the dollar, CIT executives told the paper.

But while the filing is good news for most bondholders, American taxpayers stand to take a complete loss on the $2.3 billion that the Treasury Department invested in CIT through the Troubled Asset Relief Program. In exchange, CIT gave the government stock and warrants, all of which are likely to become worthless as a result of the bankruptcy reorganization.