Treasury to Take Aggressive Step to Guide Remaining Banks Out of Tarp

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WASHINGTON — The Treasury Department plans to auction pools of securities in nearly two-thirds of the banks left in the Troubled Asset Relief Program, its most aggressive move yet to get small banks out of the program.

In a letter obtained by American Banker, the agency notified approximately 200 banks on Tuesday that it plans to include them in a series of auctions to unload its remaining bank investments under Tarp.

The agency has held two auctions to sell off its stakes in individual banks, and has said that it planned to auction pools of securities in banks that might not attract enough investor interest on their own. The auctions are set to begin in the fall, according to the letter, which was sent to banks on Tuesday afternoon.

"Treasury will continue to proceed with auctions of individual investments," the letter said. "In many cases, however, because the relatively smaller size of Treasury's remaining investment makes it more difficult to conduct an individual auction, we believe that a pooled auction may represent the best approach to attract new private capital for community banks and recover taxpayer dollars."

The banks that received the letter represent about $2 billion of the Treasury Department's approximately $11 billion remaining investment in Tarp's Capital Purchase Program. In total, 335 institutions are left in the program.

The pooled auctions are expected to include many more institutions than the individual auctions, although Treasury has not decided on the number of auctions it will hold, according to people familiar with the matter.

At least one auction will be held in the fall, with possibly one or two more by the end of the year. The process could even stretch into the first or second quarter of next year, they said, disputing the suggestion by some political analysts that Treasury is trying to wind down the program before the November elections.

Critics, including the special inspector general for Tarp, have said the agency hasn't done enough to come up with a detailed plan to help the remaining banks exit the program.

"Treasury believes that the approach we have outlined today will help support the objectives of winding down Tarp, recovering taxpayer dollars, and helping community banks attract private capital to replace temporary government support," the letter said.

Unlike the individual auctions, which allow multiple bidders to obtain portions of the preferred stock at a set clearing price, all of the securities in a pooled auction will be awarded to a single, highest bidder.

Treasury will also give banks the opportunity to opt out of the pool if they decide, with regulatory approval, to bid on their own remaining shares. A bank may also designate a single outside investor, or group of investors, to bid on the remaining shares. In both cases, the bids must be received by Aug. 6, and must meet a minimum price level set by Treasury.

Under the terms of the Tarp securities purchase agreements, the agency cannot require banks to repurchase their own investments, the agency noted.

"As such, we believe that permitting banks or their designees to submit bids as part of this process helps strengthen demand for these securities and taxpayer recoveries," the letter said. "Securities of banks which have opted-out of the pooled auctions will be individually auctioned or sold in a negotiated sale, the timing and execution of which will depend on size of investment and number of securities to be considered."

Treasury has held two auctions — one in March, and one last week — to sell its stake in 13 individual banks. The agency said it will continue to hold auctions of individual banks throughout the summer.

Officials have said there has been significant investor interest in those auctions, with each eliciting approximately 30 bids. The agency plans to launch an aggressive outreach and marketing effort to attract investors to the pooled auctions, people familiar with the matter said.

It will also continue to work with remaining banks, some of which they expect will be able to eventually redeem their shares on their own, while others may pursue restructurings or could be included in future individual auctions.

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