WASHINGTON — The Treasury Department is using a new strategy to recoup its investments in the Troubled Asset Relief Program.
The agency announced Wednesday that it plans to auction off its preferred stock in six Tarp banks. The banks include the $4 billion-asset Banner Corp. of Walla Walla, Wash.; the $3.1 billion-asset First Financial Holdings Inc. of Charleston, S.C.; the $2.7 billion-asset MainSource Financial Group Inc. of Greensburg, Ind.; the $2.1 billion-asset Seacoast Banking Corporation of Florida in Stuart, Fla.; the $2.7 billion-asset Wilshire Bancorp Inc. in Los Angeles; and the $4.3 billion-asset WSFS Financial Corp. in Wilmington, Del.
Treasury's combined investment in the six banks totals $410.8 million.
The auction, which will be held March 26, is part of the agency's ongoing effort to manage its outstanding investments in smaller institutions.
Banks typically repay their Tarp investments by repurchasing the preferred shares. While Treasury has converted its preferred investments to common stock — only in certain cases, and often at a discount — this is the first time it is auctioning off its preferred stock positions to facilitate repayment.
The agency notified banks in a letter last November that it had hired investment advisory firm Houlihan Lokey Capital Inc. "to explore options for the management and ultimate recovery of our remaining… investments." The public auction of preferred stock is one of several options that was considered.
The letter followed criticism from the Tarp special inspector general, which issued a report in October saying Treasury lacked a broad plan for weaning community banks off the program.
Treasury currently has approximately $16 billion of investments outstanding in 361 institutions. It has recovered $259 billion of the $245 billion initially invested through repayments, dividends, interest and other income, but more than half of the original 707 participants have yet to repay the money.
A report released last week by the Government Accountability Office also raised concerns about the number of banks still in the program, and noted that the number of institutions that are missing interest and dividend payments has risen sharply.
"Institutions that continue to miss payments and problems institutions may have difficulty ever fully repaying their CPP investments," said the GAO, which is required to report on Tarp's progress every 60 days.
The auctions, which will be registered public offerings, will be modified Dutch auctions, meaning a market price is established by allowing investors to submit bids at specified increments, similar to the process Treasury has used to auction warrants.
More detailed guidance will be available in prospectuses that the issuers will file prior to the auctions, Treasury said.