A government program to rid itself of TARP investments in small banks has proved a boon to hedge funds, private-equity and other private investors, according to a new watchdog report.
As the Treasury Department looks to exit from its taxpayer-backed investments in these lenders, private investors like hedge funds and others have stepped in and scooped up about 70% of the shares auctioned by the U.S. government. Other buyers included banks, institutional investors and brokers buying shares on behalf of other entities.
The Treasury-created market has benefited a few savvy investors, while saddling taxpayers with a loss. Three private funds, which the report didn’t name, have won almost half the shares available at auction, often netting either a profit on paper or on the resale, according to the special inspector general for the Troubled Asset Relief Program. The Treasury, which has held 185 auctions to date, said it has raised about $ 3 billion on TARP investments that were originally valued at $ 3.8 billion, for a loss of $ 800 million at the auctions.
The Treasury “set up this market where investors could come in quickly and flip and profit,” said Christy Romero, TARP’s special inspector general, in an interview.
As the new owners of the bank’s shares, the funds can profit by reselling them back to the bank at a premium. At one auction, the report said, a bidder won the shares for $ 3 million less than taxpayers had originally paid. Eight months later, the same bidder sold the shares back to the bank at a $ 1.6 million profit. Banks sometimes repurchase the shares to avoid dividend payments, which are generally at 9% of principal, or because they don’t want to owe money to the outside investors.
Treasury officials say the risk of losing money at the auctions was necessary to ensure taxpayers weren’t holding the potentially risky bank investments for years to come.