Treasury Likely to Accept Bigger Discounts in Tarp Auctions

Article excerpt

Byline: Jackie Stewart

The Treasury Department appears increasingly willing to accept bigger haircuts in future bank stock auctions.

During its latest auction of preferred stock and subordinated debt tied to the Troubled Asset Relief Program, the agency accepted a 60% discount on the shares of five banks, taking its biggest hit to date. Big discounts will likely be the norm in future auctions, industry observers say.

Treasury "is clearly getting down to more of the problem banks," says Robert Fleetwood, a partner at Barack Ferrazzano Kirschbaum & Nagelberg. "I don't see discounts as terribly negative. They'll continue to try to exit the program as quickly as they can."

The government and most remaining Tarp banks are eager to end the program. The Treasury has held 19 auctions since March 2012, and several banks have voluntarily exited Tarp to avoid a fast-approaching dividend hike.

In a July 25 auction, Treasury recouped 39% of the $325 million it invested in First Banks in Clayton, Mo.; First Intercontinential Bank (FIEB) in Doraville, Ga.; Community Pride Bank in Isanti, Minn.; Universal Bancorp in Bloomfield, Ind.; and Virginia Company Bank (VGNA) in Newport News. The previous 18 auctions had an average discount of 14%, according to SNL Financial.

The Treasury failed to sell about 11,800 preferred shares in the $6.4 billion-asset First Banks.

The Treasury has yet to report a steady drop in pricing, though industry experts say several factors could force deep discounts. Generally, remaining Tarp banks are less attractive, or have greater performance challenges, compared to banks included in earlier auctions.

Some Tarp banks have "limped along for a number of years," says Kevin Petrasic, a partner in the corporate department at Paul Hastings. "So investors might not have the patience to see their true return," especially when other investment opportunities exist.

Treasury officials declined to discuss the pricing of future auctions. A source familiar with Tarp who asked to be unnamed told American Banker that discounts should be expected because future auctions will likely feature banks that are behind on paying Tarp dividends.

Tarp has so far resulted in a net gain for taxpayers, with pricing holding up better than expected, says Timothy Massad, Treasury's assistant secretary for financial stability.

Pricing and profitability remove some pressure to push for higher prices and could influence decision-making as Treasury weighs bigger returns against a desire to exit Tarp, industry experts say. Since many remaining stakes are small, "whether you get 90% vs. 60% ... doesn't move the needle too much," Fleetwood says.

Previously, Tarp banks could avoid having shares sold in pooled auctions by bringing Treasury a designated bidder. Those bidders helped establish baseline prices, says Jason Zgliniec, a partner at Schiff Hardin. …