TARP Prepayment: It's Not a Marathon, It's A Steroid Frenzied Sprint

Equity Private (here and here) has put together some interesting points of when/why/how/under what conditions the banks may cross the TARP repayment finish line first, and as a result doom the stragglers to another price pop of at least 50% (shh, the market works in mysterious ways these days).

I would like to point out the following blurb from the original TARP term sheet, which I do not recall seeing having been amended, which makes it even more explicit just who can repay the TARP over the next three years. In essence only companies that raise new equity can pay down TARP, dollar for dollar, with new private capital raised. For all of Lewis' and Vikram's talk of paying back TARP, isn't it a little aggressive to believe that BofA and Citi can issue new equity right now? Of course, assuming the massive market squeeze on no vol continues, who knows: they just very well might.

Then again, what is a Term Sheet to the Treasury (and the US government for that matter) than just yet another one-ply piece of paper?

Redemption:

Senior Preferred may not be redeemed for a period of three years from the date of this investment, except with the proceeds from a Qualified Equity Offering (as defined below) which results in aggregate gross proceeds to the QFI of not less than 25% of the issue price of the Senior Preferred. After the third anniversary of the date of this investment, the Senior Preferred may be redeemed, in whole or in part, at any time and from time to time, at the option of the QFI. All redemptions of the Senior Preferred shall be at 100% of its issue price, plus (i) in the case of cumulative Senior Preferred, any accrued and unpaid dividends and (ii) in the case of noncumulative Senior Preferred, accrued and unpaid dividends for the then current dividend period (regardless of whether any dividends are actually declared for such dividend period), and shall be subject to the approval of the QFI’s primary federal bank regulator. “Qualified Equity Offering” shall mean the sale by the QFI after the date of this investment of Tier 1 qualifying perpetual preferred stock or common stock for cash. Following the redemption in whole of the Senior Preferred held by the UST, the QFI shall have the right to repurchase any other equity security of the QFI held by the UST at fair market value.

hat tip Ian Sphere: Related Content

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Bill Gross Saying U.S. Should Buy Cheap Assets, Maybe Even PIMCO Bonds

Bill Gross, manager of PIMCO, the largest bond fund in the U.S., issued his February investment outlook today. His main argument is the following "To PIMCO, the remedy for this deflationary deleveraging and mini-depression is simple and almost axiomatic: stop the decline in asset prices." (ed. "mini" depression? Looks like Bill won't go full Rosenberg on this one). Without saying anything new, Gross is advising the Treasury, Central Bank, i.e. the U.S. taxpayers, to buy cheap assets (presumably ones in which Bill is axed himself). Not surprisingly, PIMCO was one of 4 funds picked in December to purchase mortgage-backed securities, and one of the managers selected to run the CP funding facility, and of course, was a top contender to purchase toxic debt under TARP before Hank Paulson scrapped that idea. In the spirit of increasing transparency, it is interesting just how much of these securities Bill has purchased ahead of time for his own book?

But we digress. Bill concludes "PIMCO’s advice to policymakers is as follows: you can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied, but rejuvenated in price. Capitalism at its philosophical and practical center depends on credit, and while new loans can be and are being advanced via the banking system, it’s a much more difficult task to force shadow banks to lend. That lending depends on securitization which in turn depends on stable and eventually higher asset prices than currently exist."

Ok, we get it and we like it, but as hard as we try, we can't help being cynical in asking just how much of a benefit for his investors (and himself personally) would Bill reap as the U.S. uses taxpayer money to purchases these "cheap" security classes.

The full letter is here. Sphere: Related Content

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