Question for bankers: Do you plan to return your TARP money?

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Permalink Reply by Gary Schurman on April 1, 2009 at 7:19pm

Do you mean as far as equity valuation is concerned? If you are talking about valuation then assuming that the bank is investing the TARP funds at say Libor and paying a dividend of say Libor plus then cash flow to equity holders would be a net negative.

Cash flow to equity before TARP + TARP investment at Libor - Preferred dividend at Libor plus = Cash flow to equity after TARP.

The change in discount rate could go either way. Equity holders may look at the TARP funds as additional regulatory capital (good thing) or may look at it as unneeded additional leverage (bad thing). The actual redemption of the shares would probably be looked at as a positive given the negative spread the TARP funds are probably yielding and the fact that redemption means that the bank has adequate capital.

You would also have to take into account dilution if the TARP money carries warrants that vest. This might be the most significant cost.

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Permalink Reply by Dennis Santiago on April 1, 2009 at 7:52pm

Naw I'm more interested in understanding the sentiment of bankers as it pertains to how it affects their operating businesses. Besides, TARP money isn't supposed to be a passive cash and equivalents investment asset holding out against inflation at LIBOR. But right now it's acting as a multi-dimensional business cost offsetting loan loss provisions. So it's artificially inflating asset quality indicators instead of letting market forces mark these companies properly.

Personally I'm optimistic. Bankers are doing the calculus in their heads as to which path will do them the most good. And many outcomes are manifesting.

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