Industry leaders want the Treasury Department to let banks repay rescue funds without any charge to repurchase warrants extended under the Troubled Asset Relief Program.
When the Treasury injected $250 billion into hundreds of banks, most gave the government warrants to buy stock in the companies later. But now some banks want to extricate themselves from the program, arguing that restrictions such as compensation limits were unfairly added afterward by Congress and the Obama administration.
Because the government changed the terms, and the investment is less than six months old, bankers say they should not have to pay the Treasury to repurchase the warrants.
It "doesn't seem fair to us that a bank would have to pay that much more to get out of the program now, particularly when regulators forced the banks to get into the program," said Mark Tenhundfeld, senior vice president of the American Bankers Association's Office of Regulatory Policy.
The trade group sent Treasury Secretary Timothy Geithner a letter Thursday requesting that a waiver of the requirement for banks to repurchase the warrants.
Diane Casey-Landry, the group's chief operating officer, wrote that a public backlash against Tarp recipients is forcing banks to repay the money, and that the warrant requirement is getting in the way.
"For a very short-term investment, this amounts to an onerous exit fee, not a proper return on investment," she wrote.
The amount — and value — of the warrants depend on the type of institution. Public companies were required to issue warrants equal to up to 15% of the initial government investment. Nonpublic companies were required to issue warrants equal to 5% of the initial investment.
To repay the warrants, the bank and the Treasury must agree on a market price. If they cannot reach an agreement within 10 days, an independent appraiser must set the value.
To date the Treasury has not exercised the warrants for any public company, but it has done so for nonpublic firms.
In her letter, Casey-Landry argued that the government should waive the warrant requirement, because it changed the terms of the initial investment. "While the terms of the agreement were known to participants prior to closing, what was unknown to all was that a program designed to shore up public confidence in banks would have precisely the opposite effect in many cases."
Bankers also say repaying the warrants could prove expensive and could even leave some banks with a capital hole.
"Paying back the Tarp money and having to pay the Treasury off on the warrants could have a significant impact on bank capital," said Cam Fine, president of the Independent Community Bankers of America. "It could in some cases prevent a bank from paying back Tarp, even though a bank wants to pay it back. Those banks, given the circumstances, should be allowed to give that money back without exercising those warrants."
Bank executives discussed the issue with President Obama at an April 10 meeting. The industry has also approached lawmakers and regulators about the issue.
Fine, who was at the White House meeting, said Obama did not say where his administration stood on the issue, though some lawmakers appeared sympathetic to the industry's concerns.
Some observers say bankers will not win this fight.
"Unfortunately, the government has a really good case that the fees for the redemption of the warrants are contractually required, and that's clear from the papers, and furthermore, the banks were well aware of it when they signed the papers," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC. "We know there was some pressure" to take the money. "Nonetheless, the fees were clear."
Gil Schwartz, a partner at Schwartz & Ballen LLP, said it would be politically dangerous to appease the banks.
"By leaving the warrants unredeemed, the Treasury exposes itself to political criticism that it's continuing to provide assistance to the banks," he said.
Fine said the issue is likely to become more prominent. "It's not totally ripe yet, because there aren't enough banks wanting to pay back Tarp to bring this to a boil, but it's building."