The Treasury Department said Friday that Sun Bancorp Inc. of Vineland, New Jersey, repaid $89.3 million, money it originally received on Jan. 9. They gave back the TARP money. Does that make it a good investment?
Sun Bancorp has sufficient funds to complete the redemption.
Additionally:
“When the Capital Purchase Program (which is part of the Troubled Assets Relief Program, or TARP) became available to well capitalized and healthy financial institutions like Sun, it was a positive partnership between the government and business to stimulate the economy through additional lending and community support,” said Thomas X. Geisel, president and chief executive officer of Sun Bancorp.
Geisel continued: “The partnership then became politicized, the rules and regulations changed, and the dynamics of the partnership substantially shifted. These changes significantly restricted the way we support our customers and communities, as well as the way we run our business.”
Sun Bancorp was well capitalized by regulatory standards before accepting the CPP investment and will continue to be well capitalized under the same standards after the redemption.
Great.
I’m sure the Bank did not appreciate the Government getting into their business anyway. Neither would too many businesses.
But here is where it gets interesting:
The Company also issued a Warrant to purchase 1,543,376 shares of its common stock to the Treasury Department at an exercise price of $8.68 per share. According to the Company, they expect the Treasury Department to liquidate the Warrant following the full redemption of the Preferred Stock.
Part of the TARP deal was return of the money, plus interest, — plus warrants — to purchase shares in the bank. 1.5 million shares of the bank. This represents nearly 7% of the entire shares issued. They can exercise the warrants at $8.68, the stock closed Friday at $7.00. This creates significant overhang in the stock. I say that because a major stockholder (the US Government) will be looking the sell shares as the price moves up over $8.68.
So what does the chart look like?
Wow. The story sounds great, but the chart looks terrible. This is a stock that is stuck in a long term negative trend. And that trend will not change until the stock can break through that red overhead resistance line. That line is currently sitting at $11, a long way from $7.00. And in between $7 and $11, there is a significant amount of stock that will be for sale starting as soon as the stock moves beyond $8.68. This is a good example how we have to “marry” fundamental work with technical work. The fundamental story sounds compelling. The technical story looks ugly.
Good for Sun Bancorp, but I’d rather find somewhere else to put money to work.
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Bank Nationalization and Mark to the Market
by Thomas Mullooly on March 3, 2009
Mark to Market is a topic I have written about previously.
You can read about them here. I don’t like changing the rules of the game in mid-stream, but something drastic needs to be done. A terrific opinion piece was written in the Wall Street Journal recently by Peter Wallison. If you click on his name, you can see his very impressive resume. Graduate of Harvard Law, adviser to Nelson Rockefeller, adviser to President Reagan, General Counsel to the US Treasury, Wallison has the credentials.
The Obama Administration has still not come up with a plan to remove troubled assets from the balance sheets at banks. Therefore, their solution appears to be “semi-nationalization,” as evidenced recently when the US Government and Citigroup agreed to convert the preferred shares held by the government into common shares. The US Government will soon own approximately 36% of Citigroup, which is about as aclose as you can get to nationalizing a bank without coming right out and saying it.
Wallison asks a very important question as the thesis of his article. Accounting rules are very important, and should not be bent. This situation appears exceptional, but that does not mean there will be other exceptions in the future. It is a dangerous precedent. What most commentators and other media are missing is this important twist. Wallison writes:
What happens, then, when there is virtually no market for these assets — as has been true for at least a year? In that case, accounting rules require the banks use whatever market indicators are available.
What will this imply for other banks that are in trouble, or soon fall into trouble? How endless is the money supply?
I agree with Wallison’s approach…nationalizing the banks is a terrible solution. Revisiting mark to the market needs to become a priority. And Wallison writes:
…Both taxpayers and banks could come out well — and so would our economy — if the government were to buy the assets at their “net realizable value,” which is based on an assessment of their current cash flows, discounted by their expected credit losses over time.
Take a look at the article here (printed in the Wall Street Journal February 25, 2009). Additionally, suspending mark to market can effectively replace another cash infusion from the Government. It is worthy of consideration.
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