Treasury’s Auction of its TARP Capital Purchase Program Investments
During the 2008 and 2009 financial crisis, the United States Treasury (the “Treasury”) established several programs in an attempt to stabilize the economy. One of these programs was the Troubled Assets Relief Program (“TARP”) Capital Purchase Program (“CPP”). The purpose of the CPP was to provide immediate and temporary funding to viable financial institutions. Over 700 financial institutions throughout the United States took advantage of this program and borrowed funds from the Treasury. In exchange, the Treasury took an ownership position in the financial institutions through the issuance of preferred stock (or for S-corps, a subordinated debt security).
The Treasury now holds illiquid investments in several financial institutions and is faced with the dilemma of being a shareholder or debt holder for indefinite periods of time.
Nearly five years later, the Treasury now holds illiquid investments in several financial institutions and is faced with the dilemma of being a shareholder or debt holder for indefinite periods of time. Although TARP recipients can repay any assistance provided by the Treasury at any time, subject to prior regulatory approval, the Treasury generally cannot demand repayment. For these reasons, in 2012, the Treasury initiated a strategy to wind down its outstanding TARP bank investments in the CPP. The Treasury outlined its three options: (i) wait for the TARP recipients to voluntarily repay, (ii) sell its investments, or (iii) restructure its investments to facilitate repayment or sale. The first option is challenging as TARP CPP recipients are not required to raise capital and repay the Treasury, and waiting for voluntary repayment generally does not align with the Treasury’s goal of this program acting as an emergency (and temporary) program.
The Treasury has heavily relied on the third option to wind down its program and commenced Dutch auctions of its investments in preferred stock and subordinated debt. The Dutch auction process accepts bids for the amount of preferred shares/debt that investors are willing to purchase and the price they are willing to pay. The auctioned shares/debt are assigned to the bidders from the highest bids down, until all of the allotted shares/debt are assigned. The Treasury’s first auction relating to CPP investments occurred in March 2012, and the Treasury has continually been auctioning its investments since that time. Often, the Treasury sells its investments in CPP at a discount to the original par value. The financial institutions with outstanding TARP CPP funds and the price received at auction are posted on the Treasury’s website (www.treasury.gov).
The Treasury notifies financial institutions that their preferred shares or subordinated debt are being considered for auction. Once a financial institution is selected for auction, such institution is required to enter into a Placement Agency Agreement with the placement agents who are retained by the Treasury to place (i.e. sell) the Treasury’s investment to new investors. A few days before the auction, the Treasury issues a press release announcing the names of the auction participants and related details. After that press release, the auction occurs the following week and lasts approximately four business days. Redacted versions of the Placement Agency Agreements also are posted on the Treasury’s website (www.treasury.gov).
Each month, the Treasury continues selling its CPP investments and intends to continue until nearly all of its CPP investments are sold. The Treasury has already received approximately $3 billion in proceeds from CPP auctions and has indicated that it may retain certain CPP investments, which investments the Treasury expects will be repaid at par. As the Treasury continues to sell its CPP investments, a program that received a lot of attention and criticism will cease its existence and merely be a historical program enacted to provide relief during the 2008 – 2009 crisis.