WASHINGTON – The Treasury Department is stepping up efforts to unwind its remaining commitments from the 2008 bailout.
While the government is all but rid of investments in large financial institutions that received Troubled Asset Relief Program (TARP) funds, 380 small and medium-sized institutions still hold roughly $17 billion in TARP capital, according to American Banker, an affiliate of Credit Union Journal.
Treasury sent a letter to those institutions this week, saying it had hired an investment advisory firm, Houlihan Lokey Capital Inc., “to explore options for the management and ultimate recovery of our remaining…investments.” Even though banks have another two years before the dividend rate on TARP funds skyrockets, the letter sent an unmistakable, albeit subtle, message: it’s time to start thinking about how to repay the money.
“They’re saying to the 380 remaining banks, ‘We want to light a fire under you to figure out how you’re going to get rid of TARP,’ because they want to wrap the program up,” V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker, LLP, told American Banker.
The move follows criticism from a special TARP watchdog, which issued a report in October saying Treasury lacked a broad plan for weaning community banks off the program. The report noted that Treasury is contractually blocked from forcing banks to repay their funds, but encouraged it to begin engaging remaining participants about how they will stand on their own two feet.
Despite Treasury’s nudges, however, it remains unclear exactly how banks are supposed to exit. Unlike large institutions, which have greater capital access, the smaller ones still in the program face a variety of different circumstances. The healthiest may have no problem buying back shares, while other still-fragile institutions may favor a more gradual unwinding of government capital – such as converting preferred shares to common stock – or no change at all. Regulators, too, are reluctant to see small banks repay government capital if it might weaken its capital position, American Banker noted.
