Thursday, April 16, 2009

“It almost makes the Treasury look like a payday lender.”

TO BE NOTED: From Bloomberg:

"U.S. May Retain Grip on Banks With Warrants After Share Buyback

By Rebecca Christie

April 17 (Bloomberg) -- The Treasury may retain a stake in many U.S. banks even after they buy back the shares the government currently holds.

The government will continue to hold warrants, attached to every capital injection it has made, even after any share buybacks, Treasury officials said. Banks seeking to escape the government’s grip want to retire the warrants -- which give the right to buy stock in the future at a preset price -- at the same time they acquire the government-owned preferred shares.

The officials said the U.S. would give up the warrants only after subsequent talks with appraisers and the banks to agree on a price. As long as the warrants remain, lenders would continue to face some federal constraints, including limits on hiring non-American citizens, the officials said. Lenders would be freed of restrictions on executive pay and dividends, they said.

“When this program was created, everything was done so fast, I don’t think people were contemplating they would be exiting this quickly,” said Diane Casey-Landry, chief operating officer of the American Bankers Association.

Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the Treasury’s rescue program. The warrants issue may be the latest complication in a $700 billion effort to unfreeze credit that has sparked an outcry among both lawmakers and some bankers.

Most of the funds from the Troubled Asset Relief Program distributed so far have been used for buying stakes in financial companies. Warrants apply to all elements of TARP, and officials are still wrestling with how to include them in their plan to finance purchases of distressed assets.

Toxic-Debt Programs

Treasury representatives are working with the Federal Deposit Insurance Corp. and potential participants in the toxic- debt programs on how to apply the warrants requirement.

Lawmakers pressed for warrants in the TARP law enacted in October as a way for taxpayers to benefit from future profits of companies getting help. When exercised, the government can buy newly issued shares from the company at a pre-determined price.

It’s unclear how much the warrants may be worth and valuing them may prove contentious. Bankers said the warrants, under current market conditions, may turn out to be expensive for those looking to exit the rescue programs quickly.

“If you look at the cost of those warrants and turn it into an annual percentage rate, it’s enormous,” said Camden Fine, president of the Independent Community Bankers of America. “It almost makes the Treasury look like a payday lender.”

Goldman Share Sale

Goldman Sachs Chief Financial Officer David Viniar said in an April 14 interview that “there’s a prescribed process for how you do it -- where you propose a price, they accept or not, you negotiate and then you hire appraisers and come up with an agreed-upon valuation.”

“We’ll figure it out, we don’t know” the cost, Viniar said. Goldman Sachs raised $5 billion this week in a share sale in order to help pay back the $10 billion it took from the government in October.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 his firm could repay U.S. government rescue funds “tomorrow.” He called the receipt of the $25 billion in TARP money last year “a scarlet letter.”

JPMorgan spokesman Joseph Evangelisti declined to comment on the warrants.

For the top 19 banks, any TARP repayments will have to wait until after the so-called stress tests conclude, a Treasury official said. U.S. regulators are reviewing the biggest banks to gauge whether they have enough capital to survive a deeper economic slowdown. A Federal Reserve official said yesterday that the results are planned for release May 4.

To repay, a bank must apply to the Treasury. The request then goes to the bank’s regulators, who review the soundness of the institution. If the bank is deemed in good shape, it’s allowed to buy out the government stake.

Some smaller banks are already in the process of repaying their TARP funds. Of the six who have repaid so far, five have outstanding warrants that need to be addressed."

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