Summary: Treasury should give up on negotiated sales and simply auction the bank warrants it received through its TARP investments. Auctioning the warrants will enhance the transparency of the process, ensure that taxpayers get a fair return on their investment, free banks from the nuisance of government involvement, and allow banks, if they choose, to preserve needed capital.
Healthy banks are anxious to escape from the government’s Troubled Asset Relief Program. TARP capital seemed cheap at first since the government offered more generous financial terms than were available from private investors. But now the hidden costs of government investments – compensation limits, tighter regulatory scrutiny, and a public backlash against financial bailouts – have become apparent. As a result, many banks want to pay off Uncle Sam and free themselves from the TARP.
Repayment sounds simple. Subject to regulatory approval, banks can simply write a check to Treasury that covers the amount of money they received (by selling preferred stock) plus any outstanding dividends. But there’s a complication. When Treasury purchased the preferred shares, it also received warrants to purchase common stock in the future. To fully escape the burden and stigma of TARP, the banks thus need a way to get Treasury to relinquish those warrants.