As we’ve explained here before, the government didn’t just give all that TARP money away to those 579 banks for nothing: it got warrants to buy stock in the banks at certain prices over a ten-year time horizon. And as we informed you last month, no sooner did the banks start making noises about repaying the TARP money did they also begin referring to the cash they were forking over to buy back said warrants as a supposed “early repayment penalty” and angling for a discount on buying them back. JP Morgan CEO Jamie Dimon brought up the issue with Barack Obama himself, while a little bank in West Virginia called Centra sent its CEO and vice president on the media circuit blasting the “penalty” as usurous and “un-American.”
But would the Treasury Department really cave to this spin by giving banks that repaid TARP funds early another subsidy? The answer appears to be “yes,” at least on the basis of the deal it cut with Indiana’s Old National Bancorp, which bought back an estimated $5.81 million worth of warrants last week for the bargain price of $1.2 million, terms a Bloomberg analysis estimates could shortchange taxpayers to the tune of $10 billion. A source tells TPM Neil Barofksy, the special inspector general assigned to oversee the TARP, plans to “soon” add a special audit into the warrant repurchases to the six separate audits of various eyebrow-raising aspects of the bailout already underway at his office. Only three banks have exited the TARP have bought back their warrants thus far — with disturbing (though strangely mixed) results.
On one hand of course, as CNBC’s Steve Liesman points out in the following clip on the Old National deal, $10 billion is a fairly tiny figure in the context of the bailout. But why give any break at all to banks in such a hurry to offer multimillion dollar pay packages again? It’s complicated…
According to a story about TARP repayment trends that ran in Wednesday’s New York Times, stronger banks “like Goldman” are actually pushing for Treasury to negotiate higher prices on the warrants, as another way of differentiating strong banks from weaker ones. (And you thought Goldman Sachs was in charge of these things…)
It seems unlikely that Old National’s standards will apply across the board — for one thing, because not every bank wants its warrants back. Of the five banks that paid back their TARP money on March 31, two — Bank of Marin and Signature Bank — chose to leave their warrants in government hands. The other two, Iberiabank Corporation and the aforementioned Centra Financial, paid $1.2 million and $750,000, respectively — even though the gap between the amount of TARP funding they received was much wider than that, with Iberiabank the recipient of $90 million and Centra a mere $15 million. (Centra VP John Fahey was on vacation when we called for comment and an assistant said he is “not a BlackBerry person.”)
And those banks all held their TARP money for roughly the same amount of time, a critical difference. Old National may have gotten an 80% discount on its warrants, but if the $100 million in TARP funding it held for three and a half months had been a government loan, $1.2 million would be equivalent to the interest on a 4.5% loan — over a period of time during which the Fed was lending money to banks through its discount window at a rate of 0.5%. A stronger argument the banks have for getting a break on their warrants is the political pressure under which they accepted TARP funds; as recently-released Treasury documents make clear, for at least the first nine banks to receive TARP funding, participation in the program wasn’t an option.
But buying back its warrants is an option — which is why we find it somewhat baffling that the government would bother negotiating with hundreds of banks instead of applying one standard (say, the market’s?) across-the-board. Not that it would be the first headscratcher to come out of this bailout.