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 funds, 380 small and medium-sized institutions still hold roughly $17 billion in TARP capital.
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," said V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker, LLP.
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.
"The regulators are still very focused on capital, and they would be loath to have a bank prepay if they had any concerns about the capital level," said Kip Weissman, a partner with Luse, Gorman, Pomerenck & Schick. "That doesn't mean that they're not telling banks to start planning now."
While noting Treasury's contractual restrictions, the letter made clear its preference for winding down the Capital Purchase Program, the main TARP vehicle through which Treasury invested in commercial banks.
"As you know, under the terms of the" investment agreement, "Treasury cannot require banks to repay the CPP investments, and there has been no change to these terms. In addition, any CPP repayment requires regulatory approval," Sloan Deerin, the director of the CPP, wrote in the Nov. 30 letter. "As has been our policy, however, we encourage CPP institutions that have regulatory approval to repay their TARP investment. Replacing government capital with private capital is an important component of fully restoring financial stability."
Deerin signaled the letter was the start of an engagement process for Treasury and the remaining recipients to discuss the transition from public to private support.
