Treasury to Exit Banks' TARP in 2013

On Tuesday, the Treasury Department released an update on its strategy initiated early this year of exiting its remaining Troubled Asset Relief Program (TARP) investments in banks through the Capital Purchase Program (CPP). Currently, 218 banks remain in TARP’s Capital Purchase Program out of a total 707 and there remains $7.5 billion in debt to be paid to taxpayers.

The $700 billion TARP, which was initiated in 2008 to aid the nation’s financial industry, has surfaced as a success story. Of the total $700 billion bailout money, banks and other financial institutions received $245 billion. Moreover, $268 billion including dividends and interest payments has been recovered by the government to date, reflecting positive return for taxpayers worth $23 billion.

Development till Now

The Treasury’s strategy implemented in March 2012 outlined three options for the recovery of bailout money from the remaining banks and financial institutions. These included the divesture of investments or restructuring of the investments to make repayment easier rather than waiting for these banks to repay.

Since March 2012, the Treasury auctioned its investments in 91 banks for taxpayer proceeds worth $1.5 billion. However, these banks have already paid more than $300 million, including dividends and interest to taxpayers since their investments.

Moreover, through the period from March 2012 to December 2012, 49 banks have repaid bailout money at full par value of the original CPP investment for taxpayer proceeds worth $6.9 billion. Further, three other investments were restructured.

Therefore, banks are persistently repaying at par and Treasury anticipates further repayments going forward.

Strategy to Follow Ahead

Treasury anticipates auctioning CPP’s preferred shares or subordinated debt in about two-thirds of the remaining banks in 2013, bulk of which are expected to repay at par. Moreover, it can also opt for restructuring the investments or wait for them to repay themselves, which might take longer to recover the money.

As per the Treasury department, the strategy which it is following to recoup investments would be beneficial for financially troubled banks, which are struggling to repay debts. Moreover, the Treasury’s plans are subject to market conditions and can be revised when required.

Notably, Synovus Financial Corporation (SNV - Analyst Report), with $967.9 million of repayment for bailout funds is the biggest bank left in TARP. The company, with a fourth-quarter pretax charge of approximately $155 million on the sale of distressed assets is trying to improve its balance sheet to repay TARP as early as the second quarter of 2013.

Among other TARP programs, American International Group Inc. (AIG - Analyst Report), the major recipient of bailout funds concluded the final leg of its government bailout loan repayment as the U.S. Federal Reserve completed the sale of the remaining 15.9% ownership in the company. Accordingly, the leftover 234.2 million shares were priced at $32.50 a share, for a total amount of about $7.61 billion. However, the Fed will continue to retain the warrants in order to buy AIG stock in the future.

AIG has successfully lessened the Treasury’s ownership from 92% in January last year to 15.9% in September 2012, when the Fed raised $20.7 billion from the company’s stock sale. The latest share-sale released AIG of the $182.3 billion rescue loan taken $70 billion from the Treasury and remaining from the Federal Reserve Bank of New York (FRBNY) in September 2008, during the peak of the financial crisis.

After the abovementioned sale, the overall positive return on the Federal Reserve and Treasury summed to $22.7 billion, with Treasury gaining a positive return of $5.0 billion and the Federal Reserve - $17.7 billion.

Conclusion

Considering the effectiveness in easing credit and capital market pressures, restoring confidence in the financial system and recovering the injected money at a lower-than-expected cost, it can be concluded that the government’s highly criticized bailout program has finally emerged as a winner.

While most of the major financial institutions including Bank of America Corporation (BAC - Analyst Report), Citigroup Inc. (C - Analyst Report) and others have repaid their TARP loans in full, a substantial amount is yet to be recovered. Hence, the ultimate success of the TARP is still to be gauged.