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March 30, 2012 1:59 am
The US Treasury has sold its preferred stock in six small banks, booking a $50m loss as the government faces questions on how it will profitably unwind its remaining stake in 350 financial institutions.
The Treasury sold its positions through an auction, its first for bank preferred shares purchased through the 2008 bailout initiative known as the troubled asset relief programme. The department received roughly 88 cents on the dollar on its combined $411m investment in the lenders, in line with the Treasury’s expectations, said Matt Anderson, an agency spokesman.
The agency had received dividend and interest payments on its preferred shares, which means it actually earned a small net profit on the investment.
Some observers hailed the auction as a success for the Treasury and the banks themselves. The agency was able to exit its investment while the banks ended up paying their new investors yields ranging from 5.3 to 6.1 per cent, according to Chip MacDonald, a banking specialist at Jones Day, a law firm.
“None of these banks could have issued preferred stock at those levels,” Mr MacDonald said. The Treasury “did exceptionally well”.
The loss on the sales reflects the illiquid nature of shares in small lenders, the precarious financial position many of them are in and the difficult prospects many of them face as the industry is expected to consolidate in the coming years.
Alvarez & Marsal, the turnround specialists, estimates that the number of US banks will shrink by about a third over the next decade as returns on equity remain low and the cost of increased regulation bites into bank profits.
The Treasury continues to own a roughly $11bn stake in nearly 350 small banks, the vast majority of which are the kind of financial institutions that Alvarez & Marsal expects to either fail, be purchased or merged with their competitors.
Just 180 of them are publicly traded, the Treasury said. The healthiest have probably already exited the programme, observers said. Privately owned lenders face a steeper climb in attracting enough investor interest to exit Tarp.
In January, the government auditor overseeing Tarp criticised the Treasury, claiming “there appears to be no concrete plan to help struggling community banks”.
Of the 371 banks left in Tarp as of December 31, 197 had missed paying dividends or interest to the Treasury, the special inspector general for Tarp noted, an indication of the financial difficulties many of them face.
The auditor warned that the lack of strategy risks imperilling the banks, as their required dividend rate under the taxpayer bailout jumps from 5 per cent to 9 per cent from the beginning of next year.
The overall bank bailout has yielded taxpayers about $259bn on obligations of roughly $250bn. Virtually all of that profit has come from the biggest US banks.
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