'TARP babies' struggle to pay back government
Banks trying to return bailout funds find doing so isn't quite as quick and easy as they might have hoped, due to problems on how to handle warrants.
NEW YORK (Fortune) -- Bankers itching to put TARP in the rearview mirror are finding it hard to make a quick getaway.
Seven banks have repaid funds they received under the Troubled Asset Relief Program, Treasury Secretary Tim Geithner said this week. But that doesn't mean they're free and clear of the bailout plan -- or its supposed stigma.
Instead, some banks find themselves laboring to dispose of what once seemed like a minor detail -- the stock purchase warrants they sold the government when taking Treasury funds. Warrants give investors the right to buy a stock at a specified price in the future - within 10 years, in the case of TARP recipients.
Old National Bancorp (ONB) of Evansville, Ind., repaid a $100 million TARP loan in March. But seven weeks after it first filed papers to end its TARP funding, the bank is still waiting for the government to act on a plan to repurchase its warrant.
"The government doesn't always move at the pace we'd want it to," CEO Bob Jones said Tuesday.
The lobbyists have taken note. The American Bankers Association trade group last week sent Treasury Secretary Tim Geithner a letter calling for the government to eliminate the warrant-repayment provision altogether.
The ABA said repurchasing the warrants amounts to an "onerous exit fee" for banks that have already repaid in full the funds they got from Treasury - particularly for banks whose shares aren't listed on big U.S. stock exchanges. They must pay Treasury 5% of its investment to cancel the warrants.
One banker who agrees with the ABA's position is John Fahey, vice president at Centra Financial of Morgantown, W.Va. Centra got $15 million from Treasury in January.
But after Congress imposed new executive pay and corporate governance rules in February's stimulus legislation, Centra wired Treasury $15 million to buy back its preferred stock. Fahey said he found the new rules to be "cumbersome."
Case closed? Not quite. Centra, whose shares aren't listed on any major stock exchange, still had to do something about the warrant it sold Treasury to buy Series B preferred shares.
Centra sold the warrant to Treasury for $750 -- $1 for 750 preferred shares. But when it came time to repurchase the warrants, Treasury - apparently citing the 5% rule - demanded $750,000, Fahey said. That works out to a price of $1,000 for each preferred share.
"Our stock has not moved since we got the money, but we ended up paying them a $999-a-share premium," Fahey said. "Our gripe is we're not being treated the same as the listed public companies."
Treasury said it couldn't comment on individual cases.
For their part, the listed companies aren't exactly turning cartwheels about all the twists and turns of repaying the warrants.
February's stimulus legislation - which gave TARP recipients the right to repay funds without raising new capital or observing any waiting period - specified that Treasury must liquidate a bank's warrants at the current market price after it repays its TARP preferred stock.
But when the market price is below the strike price called for in the warrant, as in the case of Old National and most other banks, institutions that want to repurchase their warrants must present Treasury with an appraisal of its fair market value, which Treasury will then respond to.
Jones of Old National has done this and said he expects to hear back from Treasury within two weeks. He said he expects the cost of settling the warrant to have little impact on the bank's financials.
Even when a bank decides it won't repurchase its warrant, clarity can be a long time in coming.
One bank that has chosen this route -- Bank of Marin Bancorp (BMRC) of Novato, Calif., which repaid a $28 million federal loan in March -- says it isn't sure what will happen next.
"We'll be interested to hear what they do with our warrant," said CEO Russell Colombo.
Treasury must attempt to liquidate the warrant, the stimulus legislation says. But the ABA decries this as well, saying in its letter that selling the warrant to a third party could unfairly dilute a bank's shareholders.
Treasury didn't comment on the ABA letter, though Geithner said Wednesday he sees "a lot of value" in having strong banks repay TARP funds.
The back-and-forth comes as regulators prepare to share the results of their stress test on the 19 biggest banks. Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) are among the big banks that have said they want to repay TARP funds, assuming they get the go-ahead from their regulators.
Meanwhile, skeptics of federal bailout plans are warning that TARP amounted to a huge subsidy to already powerful financial sector insiders. There's little doubt that a decision to ease warrant-repayment terms would cause further outcry.
A spokesman for Goldman Sachs, which has been the most vocal about its desire to return TARP funds once it gets the regulatory go-ahead, said the bank "recognizes its obligation to U.S. taxpayers" to fully repay TARP assistance, including warrants.
"Taxpayers have the right to expect an appropriate return on investment," spokesman Michael Duvally said. He adds that Goldman hasn't participated in any lobbying on the warrant terms.
Scott Talbott, a spokesman for the Financial Services Roundtable lobbying group in Washington, said none of his group's members have faced warrant issues yet, though he added that "we are concerned that what is happening with the first seven could happen to [our] members when they repay."
As for Centra, Fahey said executives have talked with legislators in its three-state service area about the prospect of a measure that would put public and private banks on equal footing -- and provide Centra with a refund on its $750,000 warrant buyback.
And despite what he sees as the outrageous terms of that transaction, he still sees some advantage to having escaped Treasury funding.