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Thursday, April 01, 2010 10:52 AM ET
Treasury reaps 8.5% return from companies exiting TARP
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Data feature produced by S&P Global Market Intelligence research groups in cooperation with the news department to highlight emerging trends and topics of interest.

Banks' repayments of TARP preferred stock and warrants continue to turn a profit for the U.S. Treasury Department, according to analysis by SNL Financial.

As of March 30, the government has made an 8.5% annualized return on the 49 companies that have exited the Capital Purchase Program and the Target Investment Program, which was created to provide additional funding to Citigroup Inc. and Bank of America Corp. SNL defines "exiting" the programs as completely redeeming the preferred stock and repurchasing the warrants. Institutions that had their warrants auctioned by the Treasury are also considered to have exited the programs, as are institutions that declared bankruptcy.

The proceeds from both TARP warrant repurchases and auctions have largely fueled the profitability of the programs. The redemptions of the preferred shares alone generally only provide the government a 5% return, which comes from the dividends. American Express Co.'s and Goldman Sachs Group Inc.'s warrant repurchases in July 2009 helped create some of the largest annualized company returns at 23.3% and 20.0%, respectively. According to Linus Wilson, a finance professor at the University of Louisiana at Lafayette, Goldman Sachs' warrant represented one of the best deals for the American taxpayer, as reported by Bloomberg News on July 22, 2009. Wilson said that based on his calculations, Goldman Sachs paid 98% of the value of the warrants.

Overall, 64 institutions have fully redeemed their preferred stock issued under TARP. Of those, 39 have repurchased warrants, while seven have had their warrants auctioned by the Treasury. In sum, institutions that have exited the programs, plus those 18 that have fully redeemed their TARP preferred stock but still have their warrants held by the Treasury, returned 7.6%, as of March 30.

Companies that made partial redemptions and Citigroup, which still has common shares held by the Treasury, were excluded from the analysis. SNL also excluded losses or redemptions from programs other than the CPP and the TIP, such as those associated with American International Group Inc. and the automobile companies.

To calculate the Treasury's return, SNL compiled the institutions' dividend payments and proceeds from warrant sales and calculated each as a percent of the amount of preferred stock invested. The dividend and warrant percentages were annualized and then added together to create an estimated return for each company. To approximate aggregate profitability, the returns for each company were weighted by the amount each company received under TARP. These weighted returns were then added together to estimate aggregate return.

Click here for a template detailing SNL's calculations.

SNL Image

SNL Image

Banks began to return their government money about a year ago, as the negative stigma associated with holding TARP funds grew and rule changes like executive compensation restrictions were put into place. On March 31, 2009, the first five banks repurchased their preferred stock issued under TARP. The companies that redeemed were Signature Bank, Old National Bancorp, IBERIABANK Corp., Bank of Marin Bancorp and Centra Financial Holdings Inc.

Redemptions of TARP funds streamed in throughout 2009 with large redemptions taking place in mid-June and December. On June 17, 2009, 10 companies, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., redeemed more than $68 billion in TARP funds. Similarly, 13 banks redeemed nearly $91 billion in December 2009. Bank of America Corp.'s $45 billion redemption was the largest in December 2009, followed by Wells Fargo & Co.'s $25 billion repurchase and Citigroup's $20 billion repayment.  

While not included in this analysis, Citigroup should provide the Treasury with additional profit. The Treasury originally invested $25 billion in preferred stock, which Citigroup later converted into common stock at $3.25 per share. With the company's common stock trading at $4.09, the Treasury has an unrealized gain of approximately $6.5 billion as of March 30.

Despite the healthy returns from the CPP and the TIP, the Treasury's profit has been hampered by losses. The Treasury declared a full loss on its $2.3 billion and $4.1 million investments in CIT Group Inc. and Pacific Coast National Bank, respectively. CIT filed for bankruptcy Nov. 1, 2009, and Pacific Coast National's unit was placed into receivership by the FDIC on Nov. 13, 2009. The Treasury will also likely soon declare its losses on the Nov. 6, 2009, failure of UCBH Holdings Inc., which received $298.7 million in TARP funds.

 SNL Image

As banks continue to fail, TARP participants will likely be among them, which will further increase Treasury losses. As of Dec. 31, 2009, at least 28 bank holding companies with approximately $1.9 billion in TARP funds had adjusted Texas Ratios of more than 100%. The adjusted Texas Ratio indicates a bank's ability to absorb losses by measuring nonperforming assets and loans 90 days past due, excluding government guaranteed loans, as a percentage of tangible equity and reserves.

Furthermore, 74 TARP participants have missed February's dividend payment.

The U.S. government estimated the costs of the CPP and the TIP, along with the other TARP programs, in a recent analysis by the Congressional Budget Office. The report released March 17 estimates a gain of approximately $5 billion from the CPP and the TIP over the life of the programs, based on data calculated on a net present value as of Feb. 17.

A March 2 report by the Treasury puts the net return at approximately $17 billion for the two programs on a present-value basis, as of Sept. 30, 2009.

The CBO report notes that together, all the TARP programs will ultimately cost taxpayers' money. The CBO report projects a total price tag of $109 billion for TARP, which includes the investments in the automobile industry and AIG. The estimate has decreased significantly from the CBO's prior-year March estimate of $356 billion.

SNL methodology details

To assess the profitability of the repurchases of the CPP and the TIP, SNL compiled the preferred stock redemptions, preferred dividends and warrant proceeds of companies that have fully redeemed their TARP preferred shares. SNL excluded other TARP programs, such as those relating to AIG, the automobile companies and home modification. SNL also excluded companies that have only partially redeemed their TARP preferred stock.

Additionally, SNL did not factor in Citigroup's redemption as the company still has outstanding common stock that it converted from $25 billion of its preferred stock issued under TARP.

SNL calculated the dividends as a percentage of the preferred stock investment and then annualized the percentage. SNL repeated the same process for the warrant proceeds. The annualized dividend and warrant percentages were then added together to give an estimated return for each company.

The annualization of the warrants may overstate the estimated return for companies that repurchased or auctioned the warrants in less than a year. Conversely, the annualization may understate the estimated return for companies that repurchased or auctioned the warrants after more than a year.

To approximate aggregate profitability, the returns for each company were weighted by the ratio of the amount each company received under TARP to the total amount received under TARP by all the companies being analyzed. These weighted returns were then added together to estimate aggregate return.

SNL also factored in losses for the three bankrupt companies that received funds from CPP. SNL declared losses for companies filing for bankruptcy or failing. Pacific Coast National and UCBH Holdings failed prior to filing for bankruptcy. Similar to the method for companies redeeming TARP, SNL estimated a return on investment for the losses on the preferred stock issued under TARP. The preferred dividends paid by the companies' were included in the return on investment. However, the return on investments for losses was not annualized. SNL then weighted the return by the amount the Treasury invested.

For companies with multiple redemptions, SNL modified the dividend calculation by treating each preferred stock redemption as an individual investment. The redemption was annualized and then added together with other annualized redemptions. The cumulative dividends were then divided by the summation of these annualized redemptions.

SNL used the same methodology for the annualized dividend rate of Bank of America, which had multiple infusions from the Treasury. Bank of America's annualized dividend rate is above 5% due to the company issuing $20 billion in TARP preferred stock with a dividend rate of 8%.

SNL's examination did not include administration costs or other associated costs. The March 2 Treasury report states that TARP had budget obligations of $248 million for fiscal year 2009.

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