TARP

TARP Watchdog Finds Yet Another Bank Subsidy That "Warrants" Investigation

Moe Tkacik | May 22, 2009, 3:22PM

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.

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Centra Bank

Do Banks Really Get Charged "Fees" For Repaying TARP Funds Early? (Hint: No)

Moe Tkacik | April 23, 2009, 3:51PM

It has been a big month for West Virginia's Centra Bank, whose executives have been interviewed in the New York Times, USA Today, the Wall Street Journal and on Fox News. On March 31, Centra became one of the first five banks to repay a TARP loan -- and it's mad as hell about the terms. The way Centra sees it, the bank was stuck with what it terms an "early repayment penalty" of $750,000 for paying back its $15 million injection just ten weeks after it had received it.

"What they did is wrong and fundamentally un-American," Centra CEO Douglas Leech told the Times, comparing the payout to being charged a 60% interest rate. Today John Fahey, a vice president at the bank, likened the transaction to being forced to pay a 999% premium Fortune.

Behind those bits of somewhat wild analogizing is a major campaign by big banks to get out of paying the government in full if they choose to return their TARP money early. Jamie Dimon and Lloyd Blankfein respective CEOs of JP Morgan and Goldman Sachs, took up the issue with Obama himself at their April 10 meeting, and the American Bankers Association is lobbying Congress to relax the "penalties."

Here's their argument: TARP funds came with options to buy stock in the bailed out banks. The idea was that if the banks profited from the Treasury's injection of capital, taxpayers could share in the profits. The strike prices on the options were calculated on the basis of the average of the bank stocks during the 20 trading days prior to the TARP injections, and the warrants on all but fifteen of the 321 publicly-held banks are currently "out of the money" -- or considerably higher than it would cost to buy the shares today. But the warrants don't expire until 2018, so presuming bank stocks rise over the next decade, they are quite valuable. One analysis estimates that the government's warrants to buy Goldman Sachs and JP Morgan stock alone are worth $2.7 billion. If Goldman returned its TARP money this month, that would effectively mean they had paid a 19% annualized interest rate on the TARP funds, or nearly 10% of the entire injection -- a stiffer "penalty" than even Centra's 5%.

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