Brian Zwerner’s Kensington Blake Capital Commentary on the U.S. Treasury TARP Program

November 24, 2014

Kensington Blake Capital’s Managing Principal Brian Zwerner had considerable involvement in the U.S.

Treasury’s Trouble Asset Relief Program (TARP). Through this program, the U.S. Treasury provided key

support for the markets at a very difficult time in our economy. One key aspect of the TARP program

was the Treasury’s investment in banks throughout the country. In total, Treasury invested over $245

Billion in hundreds of banks. These investments were made in the mega banks such as Bank of America

and J.P. Morgan and also in very small banks with only $100 Million in assets.

The investments in banks through the TARP program took the shape of perpetual preferred securities.

These securities typically carried a dividend rate of 5% for the first five-years. As an incentive for the

issuing bank to repay Treasury, the dividend rate typically stepped up to 9% after the first five-years and

remained at this rate until repaid. Dividends could be deferred by the issuer in times of hardship, which

allowed the securities to be treated as capital for the banks. In most instances, the dividends were

cumulative, such that the issuer still owed them later if they deferred payment. However some

securities were issued non-cumulative due to local banking regulations.

The Treasury wanted to build in some upside to their investments if the banks they helped shore up

recovered. For banks with public stock, the Treasury took equity warrant coverage equal to 5% of the

preferred investment. For instance, a bank that took $100 Million in TARP preferred had to give

Treasury $5 Million in equity options. These options were struck at the money at the time the bank took

the TARP investment. For banks that did not have publicly traded stock, the Treasury generally took

extra preferred securities that carried a 9% dividend rate from day one as their “upside” security.

Many banks recovered, in part because of the investment by the U.S. Treasury through the TARP

program. As their balance sheets improved, these banks typically raised new equity or preferred capital

and repaid the government. The program was a big success. However for smaller or more challenged

banks, the Treasury investment was likely to remain outstanding for a number of further years. The

Treasury began selling off their investments to investors starting in spring 2012.

Treasury hired a number of broker-dealers to act as agents on their behalf to conduct auctions of these

securities. The Treasury has now conducted over 25 such auctions, the last one completed just last

week. Interested bidders can participate in a Dutch auction whereby bids are accepted and all bidders

pay the clearing price established. This process has allowed the Treasury to nearly wind down the

program and realize further proceeds for the taxpayers.

Overall the TARP program can certainly be proclaimed as a success for the U.S. government and the

banking system in the country.

Commentary by Brian Zwerner, Managing Principal, Kensington Blake Capital, LLC.

www.kensingtonblakecapital.com

For further information on the U.S. Treasury TARP Program, please see their website here:

http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/bank-investment-

programs/Pages/default.aspx

For further information on the Treasury’s auction process, please see their press release on the recent

auction completed:

http://www.treasury.gov/press-center/press-releases/Pages/jl9707.aspx