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

NEW YORK ( TheStreet) -- It's time for the U.S. Treasury to stop bragging about bailout profits and look forward by protecting taxpayers from the risk of another bailout, according to a report released by a bank bailout watchdog.

In its quarterly report to Congress, the Office of the Special Inspector General for the Troubled Assets Relief Program, or TARP, said that "recently, Treasury appears to have shifted its emphasis from promoting financial stability to assessing returns on investment," like it did on Wednesday, after PrivateBancorp ( PVTB) fully redeemed $243.8 million in TARP preferred shares held by the government.

The Treasury said that "the overall positive return on TARP's bank programs now totals nearly $22 billion," and that out of a total of $245 billion in bailout money provided to banks, "TARP's bank programs and has now recovered nearly $267 billion to date through repayments, dividends, interest, and other income." The Treasury added some icing to the cake: "Going forward, each additional dollar recovered through TARP's bank programs represents an additional dollar of profit from those programs for taxpayers."

That's all well and good, but the TARP Inspector General -- known as "SIGTARP" -- said that "TARP was never about a simple return on investment. Treasury statements on financial stability largely relate to Treasury's view of TARP's contribution to restoring financial stability in the past." Looking ahead, SIGTARP said "it is imperative that Treasury bring back its primary focus to promoting financial stability for the long term."

One of the ways the Treasury can focus on financial stability and reduce the risk of another bailout is to consider American International Group ( AIG) as "systemically important," in order to "the strongest level of Federal regulation" for the insurer, SIGTARP said.

The Treasury provided $69.8 billion to AIG through April 2009, taking a preferred stake in the company, which it has been winding down, most recently selling $18 billion worth of AIG preferred shares in September.

SIGTARP said that "having had no banking regulator for years, AIG became regulated by the Federal Reserve as a savings and loan holding company last month when Treasury's ownership of AIG stock dropped below 50%." But with AIG CEO Robert Benmosche planning to sell AIG Bank, "there would once again be no banking regulator over AIG's financial business, which continues outside the bank," and that "taxpayers need to be protected against the potential impact of any future AIG financial distress on the broader economy based on AIG's size, as one of the largest insurance companies in the world, and interconnectedness."

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) 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) 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.

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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 TheStreet.com 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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