Azernews.Az

By Bloomberg

Private investors including hedge funds are profiting from the U.S. Treasury’s sales of stakes in small banks from the capital-injection program created during the financial crisis, according to a government watchdog report.

As of the end of 2014, 70 percent of the Treasury’s auctioned shares in community banks had been bought by private fund investors, with auctions resulting in discounts as steep as 90 percent and some at losses for the government, the Special Inspector General for the Troubled Asset Relief Program said in a report released Wednesday in Washington. Investors are then reselling the shares to the banks, which want to avoid paying higher dividends or allowing investors to name a non-voting director.

The report is part of the watchdog’s oversight of the government bailout program initiated in 2008 to stem the worst turmoil since the Great Depression. While the rescue packages for banks such as Citigroup Inc. and American International Group Inc. eventually helped stabilize the financial system, many smaller banks struggled to recover.

“Treasury auctions leave community banks on the hook for TARP investments and dividend payments, only now these are owed to private entities,typically unknown to the bank, that are benefiting from these auctions,” the watchdog, headed by Christy Romero, said in the report.

Flipping Shares

Private investors are reaping profits from “flipping” TARP shares, sometimes within weeks or months, the watchdog said. In one example, a bank unsuccessfully tried to negotiate with the Treasury to buy back its TARP shares, and the Treasury auctioned the shares at a loss of almost $3 million, Sigtarp said. Eight months later, the bank borrowed funds to buy the shares back from the purchaser, who made a $1.6 million profit, according to the watchdog.

“Treasury created the Capital Purchase Program to promote financial stability, protect taxpayers and the economy, and support our nation’s community banks,” Tim Bowler, a Treasury deputy assistant secretary, said in a statement. “Treasury has already restructured investments in 35 community banks to help spur new capital formation and lending, and also helped 28 community banks refinance into the lower-cost Community Development Capital Initiative program to support lending in underserved communities.”