Bank Holding Companies Repurchase Warrants from U.S. Treasury

On June 9, 2009, the U.S. Treasury announced that the following bank holding companies (BHCs) would be allowed to repay their TARP funds. On June 17, all of these BHCs repaid their funds. To exit this program completely, they also had to repurchase the Treasury’s warrants to buy back their stock. For the exception of Capital One and JP Morgan Chase, all of these BHC’s have repurchased their warrants. In December, the U.S. Treasury will auction off stock warrants from Capital One and JP Morgan Chase. Due to the restrictions imposed with the TARP funds – primarily how much banks can pay their most highly compensated executives – many banks were eager to exit the TARP Program.

Click on the bank links to see their press releases about repurchasing warrants issued to the U.S. Treasury:

U.S. Big Banks Repay TARP Funds on June 17, 2009

On June 9, 2009, the U.S. Treasury announced that 10 bank holding companies (BHCs) were considered financially stable enough to repay their TARP funds. For the exception of Morgan Stanley, all of the BHCs listed below passed the stress test. Northern Trust, which was not part of stress testing and therefore not included in this post, was the 10th bank.

June 17 was the first day that these banks were eligible to start repayments. By the end of the day, all 10 banks had repaid their TARP funds. To exit this government bailout completely, they must also repurchase the Treasury’s warrants to buy back their stock. Although these BHCs have notified the Treasury about their intentions, none of these banks have repurchased their warrants.

Click on the bank links to see their press releases about TARP fund repayments to the U.S. Treasury:

The remaining recipients of TARP funding that failed the stress test and haven’t won approval to repay the government are: Bank of America, Citigroup, Fifth Third Bancorp, GMAC, KeyCorp, PNC Financial Services, Regions Financial, SunTrust Banks and Wells Fargo. These BHCs have until November 9, 2009 to implement their capital plan that was submitted to the U.S. Treasury on June 8, 2009.

Treasury Allows 10 BHCs to Repay their TARP Funds

On June 9, 2009, the U.S. Treasury announced that 10 of the bank holding companies (BHCs) that underwent the stress tests will be allowed to repay their TARP funds. In total, these 10 banks owe the Treasury $68 billion.  Combined with the $1.9 billion received to date from other banks, the Treasury will receive nearly $70 billion in repayment of TARP funds. Tim Geithner, Secretary of the Treasury, said “These repayments are an encouraging sign of financial repair, but we still have work to do.”

Since the announcement, the media has made various assumptions about the actual payback list of banks. However, the Treasury’s press release did not list any of the 10 banks. Once the U.S. Treasury releases the names of the banks that can repay the government’s bailout funds, the specifics will be posted under “TARP Funds.”

TARP Funds as of May 27, 2009

The 19 bank holding companies (BHCs) that underwent the stress test have until June 8, 2009 to develop a plan to raise funding from private sources and until November 9, 2009 to implement the plan.

On October 14, 2009, the Capital Purchase Program (CPP), within TARP, was offered to the financial community to provide new capital to banks. Banks participating in CPP receive funds from the Treasury in exchange for purchase of bank shares with warrants. These shares are considered “Tier 1” capital. For the exception of MetLife, all of the other BHCs that underwent the stress test elected to participate in TARP’s Capital Purchase Program.

Due to the restrictions that come with TARP funds, many banks are scrambling to raise capital and pay off their TARP debt to get rid of the government warrants and buy back their shares. During the week of June 8th, the Federal Reserve will announce which of these BHCs will be allowed to pay back government bailout funds.

FAILED Stress Test: Amount of TARP funds borrowed:

PASSED Stress Test: Amount of TARP funds borrowed:

Stay tuned for upcoming results posted under “TARP Funds.”

TARP Funds – Purpose

Back in September 2008, the global credit markets nearly froze. Several major financial institutions – Lehman Brothers, Fannie Mae, Freddie Mac and American International Group – went under. To stabilize their capital situation, the very established partnerships of Goldman Sachs and Morgan Stanley changed their charter to become commercial banks. Against this backdrop, the number of failed FDIC-insured banks keeps growing.

On October 3, 2008, the U.S. Treasury created the new Office of Financial Stability to establish and manage a Treasury fund called the Troubled Asset Relief Program (TARP). Through TARP, the Treasury can now buy up to $700 billion of mortgage backed securities (MBS) from “troubled” banking institutions. The goal of this bailout is to increase liquidity in the secondary mortgage markets through purchase of illiquid MBS – thereby reducing the potential losses at the institutions who currently own them.

On October 14, the Capital Purchase Program (CPP), within TARP, was offered to the financial community to provide new capital to banks. In turn, this allows the banks to offer more business loans thereby stimulating the economy.

The deadline for responding to this offer was November 14. Banks participating in CPP receive funds from the Treasury in exchange for purchase of bank shares with warrants. These shares are considered “Tier 1” capital. The Treasury was immediately given $250 billion to buy equity stakes in nine major U.S. banks and many smaller banks. Going forward, the President must certify additional funds as needed.

There are restrictions that come with TARP funds. For example, banks must be willing to: sell an amount of stock equal to 1-3% of their risk-weighted assets; lose some tax benefits; and incur limits on executive compensation. For this reason, many banks are scrambling to raise capital, pay off their TARP debt to get rid of the government warrants and buy back their shares. During the week of June 8th, the Federal Reserve will announce which of the 19 banks that underwent the stress tests will be allowed to repay government bailout funds.

With that in mind, stay tuned for the upcoming results posted under “TARP Funds.”

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