What a fascinating idea from Ray Hennessey!
What’s the best way for the government to exit these investments and give back the money (and interest) to the taxpayers?
Here’s a thought: Make it a big closed-end fund and sell the shares to the public. That’s right. Make TARP the biggest-ever initial public offering.
Already, TARP will have the characteristics of a closed-end fund. It will hold preferred shares that pay up to a 10 percent dividend and will carry a net asset value based on the health of the underlying banks.
What Treasury can do is first carve out 10 percent of the fund by selling shares to the public in an IPO. Mutual funds, pension funds and hedge funds can all buy the shares from underwriters, with the government (read: taxpayers) getting all the proceeds from the first sale. In return, the investors get up to a 10 percent yield and can trade the shares freely in the public markets. After all, preferred shares are far more liquid than the troubled debt TARP was supposed to buy, so keep liquid shares in a liquid market. At times, like with all closed-end funds, the TARP shares will trade at a discount to NAV, but, hey, that’s what free markets are about.
Even retail investors could be offered the shares, possibly through an auction-style IPO akin to Google’s IPO or the OpenIPO process Bill Hambrecht created. That gives regular folks even bigger leverage to the upside
Over time — maybe every six months to a year — Treasury can hold follow-on offerings, selling more shares to the public to monetize the TARP.
Along the way, the banks themselves will also buy back their own preferred shares from TARP at a premium, and the proceeds from those sales are then given to investors as a special dividend.
Essentially, a TARP IPO would act like a giant privatization of government assets. It could would have the implicit backing of the U.S. government, have a very healthy yield and return bank stocks to the stock market, not Washington vaults.
Best of all, it would also not last. Because banks don’t want to have to pay the high dividends on the preferreds, there is an incentive to buy back these securities. As time goes on, individual TARP shareholders would see the share value decline, but in return they would be getting cash from all the buybacks, which they could use to reinvest in the broader market.
I love this idea!
It gets the Feds out of the business of “owning” chunks of private banks. It gets taxpayers of the hook for the most part. Hell, make the dividends for the shares be federal tax free.