Liquidity and Private Placement Discounts in the TARP Preferred Stock Auctions

The liquidity discounts in the first seventy-two Troubled Asset Relief Program (TARP) auctions of preferred stock averaged 9.6%. The liquidity discounts were significantly lower for publically held banks and banks that had never missed a bailout dividend. In addition, auction yields were significantly higher, 152 basis points higher, in private placements open only to accredited investors. This paper develops two different valuation frameworks based on accounting: call report data to estimate the yields and present value of untraded preferred stock. The TARP auction yield to maturity averaged 9.85% in the auctions studied.