Hedge funds, private equity firms and other private investors scooped up about 70% of the shares auctioned off by the U.S. government as the government divests its TARP investments in small banks. Three private funds won almost half the shares available at the auction.
Treasury winds down TARP
The Troubled Asset Relief Program, or TARP, was created in 2008 in response to the financial crisis. TARP provided operating capital from government funds to support important American industries when the banking system effectively frozen up. The Treasury has been gradually winding down its TARP investments for a couple of years, with the department starting to recover its TARP investments as early as 2009.
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According to a watchdog report, the government’s getting rid of its TARP investments in small banks has proven to be a big boon for hedge funds, private equity and other private investors. While private investors like hedge funds and others have scooped up about 70% of the shares auctioned off by the U.S. government, other buyers like banks, institutional investors and brokers too bought shares on behalf of other entities.
Ryan Tracy, Julie Steinberg and Rob Copeland of The Wall Street Journal point out that the Treasury-created market has benefited a few savvy investors while saddling taxpayers with a loss. According to the special inspector general for TARP, 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.
Hedge funds beneficiaries of the strategy
Citing people familiar with the matter, The Wall Street Journal reports that niche hedge funds which focus on beaten-down assets have quietly been beneficiaries of the strategy. For instance, Stamford, Conn., firm Hidene Capital Management LLC amassed roughly $250 million of the securities, now totaling about one-tenth of its assets under management overall. Interestingly, a Hildene fund that holds the vast majority of the firm’s TARP holdings gained about 18% last year, an investor update shows. Thats five times the pace for hedge funds overall, as tracked by HFR Inc.
Most of the large banks that received funds, like JPMorgan and Citigroup, repaid the money by 2012, though hundreds of smaller banks either couldn’t pay the funds back yet or didn’t want to pay since the TARP money represented a relatively cheap source of capital. However, the Treasury told the remaining banks it intended to auction its holdings. As of December, 34 banks were in the program.
Report could inflame lawmakers
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 watchdog report marks the first time statistics about the winning bidders have been made public. The information revealed by the report could further inflame lawmakers and other TARP critics. They contend that the U.S. wasted taxpayer money and didn’t demand enough from the banks it rescued.
The U.S. acquired a $204.9 billion stake in 707 banks between 2008 and 2009 as it attempted to save teetering banks from the financial crisis. Thanks to repayments and dividends from the largest banks, taxpayers have been repaid in full and even made a profit.