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Tickers in this Article: LNC, HIG, ALL, PRU, AMP, C
The U.S. Treasury is set to earn a windfall as another recipient of preferred stock issued under the so-called bailout program returns the capital to the government. The taxpayer will make a good return on some investments here as this program slowly winds down.

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The Capital Purchase Program (CPP) was a part of Troubled Asset Relief Plan (TARP), set up at the depth of the financial crisis, and involved the government investing taxpayer funds into hundreds of banks in exchange for warrants and preferred stock. Some insurance companies were also eligible to receive this capital as well.

TARP Insurers
Lincoln National (NYSE:LNC) was one of those insurers, and received $950 million in capital back in July 2009. The government received 950,000 shares of Series B preferred stock, which paid a 5% annual dividend, and warrants to purchase 13,049,451 shares of Lincoln National common stock at an exercise price of $10.92.

Lincoln National was not the only insurer to be eligible to receive a CPP investment under TARP. Prudential Financial (NYSE:PRU), Allstate (NYSE:ALL) and Ameriprise Financial (NYSE:AMP) were eligible to receive capital but declined to participate. Hartford Financial (NYSE:HIG) received $3.4 billion in capital under the program.

Almost one year later, Lincoln National is now raising capital to redeem this preferred stock investment. The insurer is using cash on hand, and issuing $335 million of common stock, and a $750 million senior note issue to help fund this redemption.

It would seem that the U.S. Treasury, and thus the taxpayer made a quick 5% return on its investment over the last year. However, there is additional upside from the warrants issued to the government, as Lincoln National announced that the company is not buying back the warrants.

The government has been selling these warrants back to the company, or to other parties through auctions. The government has sold warrants in 53 TARP recipients and received $5.63 billion in proceeds through March 19, 2010.

It's not clear what the government could get for these warrants if it sold them, but with Lincoln National trading at close to $28 per share and an exercise price of $10.92 per share on the warrants, the value is considerable.

Many other warrants that the government holds are far out of the money. The largest is in Citigroup (NYSE:C), where the Treasury owns warrants to purchase 210 million shares at $17.85. Citigroup is trading around $4 per share.

TARP Clunkers
Not every investment that the U.S. Treasury made under the CPP was as successful as Lincoln National. The Office of the Inspector General of the TARP program reported that as of March 31, 2010, 104 CPP recipients had missed preferred dividend payments to the government, and $188.9 million of unpaid dividends were outstanding.

The Bottom Line
Taxpayers hit a home run on its investment in Lincoln National as this insurer is set to redeem the preferred stock that was issued a year ago. The government still has future upside from the warrants it will own post redemption. (For more stock analysis, take a look at 5 Low P/E Bargains Worth A Look.)

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