7 Pages Posted: 11 May 2010
Date Written: May 11, 2010
The increased frequency of auctions versus negotiations has ensured that taxpayers are justly rewarded for their risky investments in the banking sector. Contrary to the banking lobby’s early propaganda, the Troubled Asset Relief Program (TARP) warrants have proven to be very valuable raising $6.1 billion so far. I expect the U.S. Treasury to raise a further $4.1 billion from 236 banks with warrants outstanding based on the prices at the end of the first quarter. The administration plans to give away $3.0 billion subsidy to about 580 existing TARP recipients. The U.S. Treasury wants them to participate in a so-called Small Business Lending Fund, which would cancel the taxpayers’ warrants and convert the 5 percent preferred stock into 1 percent preferred stock. The Small Business Lending Fund is TARP 2.0, but TARP 2.0 has none of the upside for taxpayers that TARP 1.0 had. We should be contracting state ownership of the banking sector not expanding it. Finally, the sale of the 27 percent stake of Citigroup common stock has moved too slowly, and the administration should consider a large underwritten sale of that stock to lock in profits and reduce taxpayers’ firm specific risk in the large bank.
Keywords: TARP, Citigroup, City National Bank, CYN, C, Old National Bank, ONB, Capital Purchase Program, Troubled Asset Relief Program, Warrants, Options
JEL Classification: G01, G2, G3
Suggested Citation: Suggested Citation
Wilson, Linus, Written Testimony for the House Financial Services Subcommittee on Oversight and Investigations' Hearing on 'TARP Oversight: An Update on Warrant Repurchases and Benefits to Taxpayers' (May 11, 2010). Available at SSRN: https://ssrn.com/abstract=1603513 or http://dx.doi.org/10.2139/ssrn.1603513