Treasury May Keep U.S. Bank Stakes After Buyback

April 17 (Bloomberg) -- The Treasury may retain an ownership interest in many U.S. banks even after the lenders buy back preferred stock the government currently holds as part of its rescue effort.

The government will continue to hold warrants, attached to every capital injection it has made, even after any share buybacks, Treasury officials said on condition of anonymity. Banks seeking to escape the government’s grip want to retire the warrants -- which give the right to buy stock in the future at a preset price -- at the same time they acquire the government- owned preferred shares. The government counters that companies must follow the two-step process described in contracts.

The officials said the U.S. would give up the warrants only after subsequent talks with appraisers and the banks to agree on a price. As long as the warrants remain, lenders would continue to face some federal constraints, including limits on hiring non-American citizens, the officials said. Lenders would be freed of restrictions on executive pay and dividends, they said.

“When this program was created, everything was done so fast, I don’t think people were contemplating they would be exiting this quickly,” said Diane Casey-Landry, chief operating officer of the American Bankers Association.

Banks Seek Exit

Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the Treasury’s rescue program. The warrants issue may be the latest complication in a $700 billion effort to unfreeze credit that has sparked an outcry among both lawmakers and some bankers.

The Treasury won’t hold onto the warrants longer than needed to complete the process outlined in contracts with the banks, said Andrew Williams, a spokesman for the department.

“Treasury is abiding by the process defined in our investment agreements and will continue to do so,” Williams said. “Any inference that we are slowing the process down is incorrect. Treasury is required by law to liquidate the warrants after repayment, and we obviously intend to honor this requirement.”

Most of the funds from the Troubled Asset Relief Program distributed so far have been used for buying stakes in financial companies. Warrants apply to all elements of TARP, and officials are still wrestling with how to include them in their plan to finance purchases of distressed assets.
Treasury representatives are working with the Federal Deposit Insurance Corp. and potential participants in the toxic- debt programs on how to apply the warrants requirement.

Read Entire Article

By Rebecca Christie