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U.S. Treasury Needs Less Bailout Bluster: TARP Monitor

AIG did announce on Oct. two that the company "received a notice that it is under consideration by the Financial Stability Oversight Council (Council) for a proposed determination that AIG is a systemically important financial institution pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act," which SIGTARP called "a positive step towards implementation."

TARP began in October 2008, when former Treasury Secretary Henry Paulson famously gathered top executives from nine of the nation's largest bank holding companies and politely informed them that they would be receiving the first round of bailout funds in return for preferred shares in their companies.

The largest bailout recipient among the banks were Bank of America (BAC - Get Report) and Citigroup.

Bank of America received "only" $15 billion in bailout money in October 2008, but later received another $10 billion in January 2009, after the company completed its acquisition of Merrill Lynch, plus another $20 billion through TARP's "Targeted Investment Program," for a total of $45 billion. Bank of America redeemed all of the TARP preferred shares in December 2009.

Citigroup (C - Get Report) received $25 billion in bailout funds in October 2008, and another $20 billion through the Targeted Investment Program in December 2008. Citi's TARP preferred shares were converted to common shares, which the government completed selling in 2010.

SIGTARP made two other key recommendations to the Treasury. The first was to change the TARP program to "cease reliance on LIBOR," or the London Interbank Offered Rate, which is being investigated by regulators in the UK and the U.S., after Barclays PLC (BCS) agreed to settle charges of fraudulently manipulating its LIBOR rate submissions, with the UK Financial Services Authority, the U.S. Department of Justice and the Commodity Futures Trading Commission.

The TARP Inspector General said that the Treasury should no longer base loan rates for certain TARP programs on LIBOR," because "continued use of LIBOR for TARP while it is broken, unreliable, and remains potentially subject to manipulation, undermines public confidence in financial markets and TARP and could put taxpayers at risk."

SIGTARP's other recommendation was for the Treasury to conduct an "analysis in consultation with banking regulators that TARP bank auctions promote financial stability." The Treasury has been selling-off TARP preferred shares at significant discounts, sometimes to outside investors, but often to the same banks that owe them the money. The Inspector General said it was "concerned that some banks may have the ability to repay in full but may now try to get out of TARP for less," and that an analysis can "determine that allowing the bank to redeem its TARP shares at a discount outweighs the risk that the bank will not repay in full."

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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