[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
JULY OVERSIGHT REPORT *
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SMALL BANKS IN THE CAPITAL PURCHASE PROGRAM
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
July 14, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL
JULY OVERSIGHT REPORT *
__________
SMALL BANKS IN THE CAPITAL PURCHASE PROGRAM
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
July 14, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
U.S. GOVERNMENT PRINTING OFFICE
57-212 WASHINGTON : 2010
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20402-0001
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Richard H. Neiman
Damon Silvers
J. Mark McWatters
Kenneth Troske
C O N T E N T S
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Page
Executive Summary................................................ 1
Section One:
A. Introduction.............................................. 4
B. The Banking Sector: A Summary of the Current Profile...... 6
C. Details of the TARP for Non-Stress-Tested Banks........... 8
1. When Did Banks Receive the Assistance?................ 12
2. What Type of Assistance Did Smaller Banks Receive?.... 14
3. How Many Smaller Banks Have Paid Back Their CPP
Assistance?............................................ 14
4. How Many Smaller Banks Are in Arrears?................ 16
5. How Many CPP Recipients Have Failed?.................. 17
6. TARP Bank Restructuring Policy........................ 18
D. Exit Strategy............................................. 19
1. Time Horizon and the Redemption Process............... 22
2. Monitoring of Investments/Treasury's Engagement With
Smaller CPP Recipients................................. 28
3. Systemic Considerations for Exit...................... 34
E. The Smaller Banking Sector and Treasury................... 35
1. Has Including Smaller Banks in the CPP Furthered
Treasury's Initial Objectives?......................... 35
2. How Will the CPP Affect the Smaller Bank Sector in the
Future?................................................ 42
F. Conclusion................................................ 50
Annex I: U.S. Banking Sector Data............................ 53
1. Amount of CPP Funds................................... 53
2. Key Characteristics of Banks.......................... 54
3. Examination of Capital Conditions..................... 68
4. Bank Failures......................................... 75
Annex II: CPP Missed Dividend Payments....................... 78
Section Two: Additional Views
A. J. Mark McWatters and Professor Kenneth Troske............ 80
Section Three: TARP Updates Since Last Report.................... 83
Section Four: Oversight Activities............................... 102
Section Five: About the Congressional Oversight Panel............ 103
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JULY OVERSIGHT REPORT
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July 14, 2010.--Ordered to be printed
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EXECUTIVE SUMMARY \*\
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\*\ The Panel adopted this report with a 5-0 vote on July 13, 2010.
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In late 2008, as the financial markets neared collapse,
Congress provided Treasury with the authority to spend up to
$700 billion through the Troubled Asset Relief Program (TARP).
Treasury's first and largest use of its new authority was to
create the Capital Purchase Program (CPP), which would
eventually pump nearly $205 billion into 707 banks across the
country. Through this massive display of financial force,
Treasury hoped to restore confidence in the markets, return
stability to the financial system, and restart the flow of
credit.
The Panel has focused past CPP oversight on the experience
of the nation's largest banks, which received the lion's share
of the program's funding. Of the 19 American banks with more
than $100 billion in assets, 17 participated in the CPP,
receiving 81 percent of the total CPP funds. Money was made
available to these banks in only a matter of weeks, in some
cases even before the banks applied for the funds. Most of
these large CPP banks have already repaid taxpayers, and many
are now reporting record profits. By contrast, of the 7,891
banks with assets of less than $100 billion, only 690 received
funds from the CPP. Those banks experienced a much longer and
more stringent evaluation, and many are now struggling to meet
their obligations to the taxpayers.
The CPP had a different impact on large and small banks in
part because these banks vary in a number of fundamental ways.
Small banks, for example, do not benefit from any ``too big to
fail'' guarantee; their regulators have been quite willing to
close down failing institutions. Small banks are
disproportionately exposed to commercial real estate, where
future losses are likely. Small banks are often privately held
or thinly traded and have limited access to capital markets.
Despite these differences, Treasury provided CPP capital under
only a single set of repayment terms. This ``one-size-fits-
all'' approach appears to have suited large banks much better
than their smaller counterparts.
Most significantly, Treasury's terms included very strong
incentives for banks to repay taxpayers and to exit the CPP
within a five-year period. In the current distressed financial
market, however, smaller banks may find it difficult or
impossible to raise the capital necessary for repayment. Some
banks are already having difficulty making their dividend
payments, and the circumstances facing these banks may grow
more acute over time. Beginning in 2013 the dividend rate
charged to CPP-recipient banks will rise from today's
relatively modest 5 percent to a very expensive 9 percent. If
they are unable to access new capital by the time the dividend
rate increases, more small banks may become trapped, with no
way either to escape the CPP or to pay their required
dividends. A growing number could default on their obligations
to taxpayers, be forced to consolidate, or collapse completely.
Consolidation or failure may be appropriate for some weak and
poorly managed banks, but it would be unfortunate if well-run
institutions were forced onto this path solely due to the CPP.
In principle, Treasury established safeguards to ensure
that CPP-recipient banks would not fall into this trap. Because
the CPP was announced to stabilize the banking system, not to
rescue troubled banks, there were a number of restrictions in
place to ensure that the banks receiving CPP funding would not
have difficulties repaying. CPP funding for small banks was
capped at 5 percent of risk-adjusted capital, and funding was
offered only to banks deemed ``healthy'' by their primary
regulator. In practice, these safeguards appear to have been
insufficient. CPP-recipient small banks appear to be no
healthier than other small banks, and the broader small bank
sector is struggling under the general strain of a poor economy
and the more acute strain of commercial real estate
liabilities. One in seven small banks in the CPP has already
missed a dividend payment, and fewer than 10 percent of CPP-
recipient small banks have repaid taxpayers. At the moment
Treasury has $24.9 billion in CPP funds outstanding at small
banks, and the prospects for full recovery are uncertain.
It is also unclear whether the participation of small banks
in the CPP has advanced Treasury's broader aims for the
program. Treasury's main stated goal was to restore stability
to the financial system, but the participation of small banks
likely did not advance this cause. Even in the aggregate, by
themselves the smaller CPP banks comprise too small a share of
the banking sector to be systemically significant. Treasury's
other initial goal was to increase credit availability, but as
the Panel explored in depth in its May 2010 report, there is
very little evidence to suggest that the CPP led small banks to
increase lending.
More recently, Treasury has articulated a different reason
for opening the CPP to small institutions: fairness. In this
view, Treasury had an obligation to provide smaller banks with
the same access to capital as larger banks so as to avoid
tilting the playing field in favor of larger institutions. Yet
the ideal of fairness will be poorly served if the CPP has the
effect of stabilizing large institutions while smaller
institutions continue to struggle with growing losses and no
capacity to repay their obligations to the taxpayers. Indeed,
one of the most lasting and troubling effects of the CPP may be
to increase concentration in the banking sector. In its
earliest days the CPP provided a capital cushion that helped
large banks weather the financial crisis and, in some cases,
purchase smaller banks. Now small banks continue to struggle
and the TARP provides little relief.
Although the majority of CPP small banks have so far
managed to pay their dividends on time, evidence is mounting
that many banks will fall behind in the future. Treasury should
take immediate steps to ensure that as many banks as possible
repay taxpayers and to prepare to deal accordingly with the
banks that cannot. In particular, Treasury should work to
support CPP banks' efforts to raise new capital, and it should
articulate processes for finding and appointing board members
for banks that fall too far behind on their dividend payments.
In the end, there is little evidence that the CPP has
strengthened the small bank sector. As the small banking sector
continues to struggle, the number of small banks that were once
deemed healthy but that cannot make their dividend payments and
repay their TARP obligations may grow. So long as small banks
remain weak, their lending to customers--especially to small
businesses--will remain constricted and will have a dampening
effect on any economic recovery.
SECTION ONE
A. Introduction
Treasury announced the Troubled Asset Relief Program's
(TARP) Capital Purchase Program--the CPP--in October 2008 as
one of the programs authorized by the Emergency Economic
Stabilization Act (EESA).\1\ Under the CPP, Treasury provided
capital to financial institutions in order to promote systemic
stability and promote the flow of credit. In exchange, Treasury
received senior preferred stock or subordinated debentures and,
in most cases, warrants. The CPP was the largest of three
capital injection programs under the TARP, providing 707 banks
with capital injections totaling nearly $205 billion.\2\
Funding under the program ended in December 2009.
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\1\ Emergency Economic Stabilization Act of 2008 (EESA), 110th
Congress (12 U.S.C. Sec. 5201, et seq.).
\2\ U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending June 30, 2010 (July 1, 2010)
(online at www.financialstability.gov/docs/
transactionreports/7-1-10%20Transactions%20Report%20as%20of%206-30-
10.pdf) (hereinafter ``Treasury Transactions Report for the Period
Ending June 30, 2010'').
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The first CPP recipients were among the largest banks in
the country. Subsequently, early in 2009, and as described in
greater detail in the Panel's June 2009 report, the nation's 19
largest bank holding companies (BHCs) were ``stress-tested'' by
the Federal Reserve Board of Governors (Federal Reserve) to
determine whether their capital reserves were adequate. These
BHCs, which had assets above $100 billion, were estimated at
the time to hold approximately two-thirds of domestic BHC
assets and over one-half of domestic loans, and Treasury and
the Federal Reserve deemed their health to be critical to the
stability of the banking system as a whole. After the stress
tests concluded, the Federal Reserve and Treasury required some
of the stress-tested banks to raise more capital.
Although more than 700 banks received CPP funds, the small
number of very large banks above the stress-test limit received
the lion's share of that money. In total, the stress-tested
banks received 81 percent of the CPP funds, while the other 690
CPP recipient banks received 19 percent of the total CPP funds
disbursed, approximately $40 billion, of which $24.9 billion is
outstanding. These banks are regionally diverse banks that
range in size from very small--less than $1 billion in assets--
to very large, but just below $100 billion in assets. Since
taking CPP funds, these banks have generally continued
operations in a banking sector that remains weak. Some have
merged, some have failed, some have expanded, and some, but by
no means all, have repaid their TARP funds, while others--
nearly one in seven--have missed dividend payments on their CPP
preferred shares to Treasury. Treasury's portfolio of preferred
shares and warrants therefore represents investments in a
struggling sector and in a variety of disparate banks whose
most obvious common trait is that they took CPP funds.
In this report, the Panel evaluates CPP's investments in
small banks and attempts to judge the program's success by
Treasury's own stated goals. In the early days of the CPP, when
Treasury described its goals for the program, Treasury said
that its primary goal was to stabilize the financial system,
while its secondary goal was to increase credit.\3\ Treasury
further explained that it included banks of all sizes in order
to increase credit availability to the communities served by
those disparate banks. But the links between these broad goals
and including smaller banks in the program may be tenuous.
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\3\ U.S. Department of the Treasury, Interim Assistant Secretary
for Financial Stability Neel Kashkari Remarks on Financial Markets and
TARP Update (Dec. 5, 2008) (online at www.ustreas.gov/press/releases/
hp1314.htm) (hereinafter ``Kashkari Remarks on Financial Markets and
TARP Update'').
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The first goal--systemic stability--would not seem to have
required the participation of smaller banks, although smaller
CPP recipients were able to shore up their capital positions.
The CPP, like the other TARP programs, was created in response
to shocks to the financial system and the credit freeze caused
by faltering, large, interconnected financial institutions. But
by December 2008, when Treasury said that increasing capital in
banks had already stabilized the system, for the most part only
the larger banks had entered the program.\4\ It would be a year
before the smaller banks completed their entry. When they did,
they represented less than a tenth of the number of banks in
the United States and held less than 16 percent of the assets
in the banking industry,\5\ and they received only a small
fraction of the CPP funds. Furthermore, it is clear that the
missteps of a single smaller bank could not have frozen the
credit markets and drained investor confidence, and there are
few indications that even in the aggregate, by themselves the
smaller CPP recipients have that sort of systemic significance.
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\4\ By December 1, 2008, of the 52 banks that had received CPP
funds, 22 of them had less than $10 billion in assets. By that time,
however, 73.9 percent of the CCP funds had already been disbursed. SNL
Financial; Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2.
\5\ SNL Financial.
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The second goal--increasing credit availability--has had
indifferent success, as the Panel explored in depth in its May
2010 report on the small business credit crunch.\6\ While some
CPP recipients increased lending, some did not, and it is very
difficult to attribute shifts in lending levels to the receipt
of CPP funds.\7\
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\6\ See generally Congressional Oversight Panel, May Oversight
Report: The Small Business Credit Crunch and the Impact of the TARP
(May 13, 2010) (online at cop.senate.gov/documents/cop-051310-
report.pdf) (hereinafter ``May Oversight Report'').
\7\ See Section E.1, infra.
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Treasury has also stated that opening the CPP to banks of
all sizes fulfilled a goal of fairness: to ensure that smaller
banks had the same access to capital as larger banks so as to
avoid tilting the playing field in favor of larger
institutions. This was consistent with Treasury's mandate in
EESA: Treasury's statutory considerations include equal access
to EESA programs for financial institutions.\8\ In this view,
Treasury had an obligation to provide smaller banks with the
same access to capital as larger banks. Small banks, however,
are fundamentally different from large banks, and so their
access to CPP capital has produced very different results.
Smaller banks do not benefit from an implicit ``too big to
fail'' guarantee; they are disproportionately exposed to
commercial real estate, where future losses loom; they are
often private or thinly traded; and these factors restrict
their access to capital. If the banking sector remains weak and
capital constricted, some of the smaller CPP recipients may not
be able to either raise capital to repay Treasury or make their
dividend payments.
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\8\ EESA, Sec. 103(5) (12 U.S.C. Sec. 5213(5)) (``. . . all
financial institutions are eligible to participate in the program,
without discrimination based on size, geography, form of organization,
or the size, type, and number of assets eligible for purchase under
this Act'').
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Thus, it is possible that the effect of permitting smaller
banks to participate in the CPP will be to increase
consolidation among some of those banks. Without a clear means
of raising equity capital that can substitute for the CPP
Preferred on their balance sheets, not only will these banks
remain subject to the stigma associated with participation
(described in the Panel's May 2010 report), but they may also
have to shrink or sell themselves in order to pay back
Treasury. Thus, although Treasury did not consider
concentration to be a factor in its goals for the CPP, the
program could have the effect of increasing concentration in or
weakening the smaller bank sector, with potentially harmful
effects for communities, competition, and, to the extent that
any merger or failure of CPP-recipient banks contributes to a
larger trend of bank industry concentration, perhaps systemic
stability.
Whether these problems were foreseeable in October 2008,
they are readily identifiable now. Where, then, does this leave
Treasury, the smaller CPP recipients, and the taxpayers' money?
This report approaches this question by examining the current
state of the smaller CPP recipients, comparing them to the
banking sector as a whole in an effort to determine
correlations, if any, among CPP recipients, and examining
Treasury's approach to monitoring, managing, and divesting its
holdings. Four primary questions remain: (1) how much taxpayer
money is at risk in these smaller banks; (2) how stressed--or
healthy--are these banks, and how able to contribute to
economic recovery; (3) how is Treasury managing its interest in
these banks; and (4) what are the possible consequences for the
small bank sector--and the small bank participants--of the CPP?
This topic falls under the Panel's mandate to examine the
Secretary of the Treasury's use of authority under EESA and the
impact of purchases made under the Act on the financial markets
and financial institutions.\9\
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\9\ EESA, Sec. 125(1)(A)(i)-(iii) (12 U.S.C. Sec. 5233(b)(1)(A)(i-
iii)).
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B. The Banking Sector: A Summary of the Current Profile
The banking sector in the United States is characterized by
three main groups of banks: a very small number of massive
institutions, a significant number of regional banks, and
thousands of small banks. As part of its examination of non-
stress-tested banks, the Panel analyzed banking sector data
across bank asset sizes and compared TARP and non-TARP
banks.\10\ Although certain differences emerged in the results,
there was no evidence supporting a hypothesis about why banks
did or did not receive TARP funds, and no unexpected
differences among banks in each asset category.\11\ For
example, no banks, TARP or non-TARP, seem to have escaped the
housing bust. TARP and non-TARP banks may differ regarding
which loan types currently comprise the bulk of their problem
loans, but both have a similar proportion of problem loans to
deal with compared to their total loan portfolios. TARP banks,
however, seem to be disproportionately ``Commercial Real Estate
(CRE) Concentrated,'' \12\ requiring them to receive additional
supervisory attention. On the other hand, from a capital
perspective, all banks are doing relatively well. More than 97
percent of all banks are ``well capitalized'' in each bank
asset category, with a negligible percentage
undercapitalized.\13\ The median Tier 1 Capital ratios are
slightly higher at non-TARP banks, but without further
information, this could as easily represent supervisory capital
requirements in preparation for losses as it could good health.
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\10\ For the purposes of its analysis, the Panel used four
categories based on bank asset sizes: Large Banks (those with over $100
billion in assets), Medium Banks (those with between $10 billion and
$100 billion in assets), Smaller Banks (those with between $1 billion
and $10 billion in assets), and Smallest Banks (those with less than $1
billion in assets). See Annex I, infra, for data.
\11\ The Panel's findings, summarized here, are set forth in detail
in Annex I, infra.
\12\ An institution is ``CRE Concentrated'' when its total reported
loans for construction, land development, and other land represent 100
percent or more of the institution's total capital; or when its total
CRE loans represent 300 percent or more of its total capital, and the
outstanding balance of the institution's CRE loan portfolio has
increased by 50 percent or more during the past 36 months.
\13\ Less than 1 percent of Smaller and Smallest Banks are
undercapitalized using the Tier 1 Risk Ratio (5 and 44 banks,
respectively). None of the Largest banks are undercapitalized. Over 97
percent of banks in each asset category are ``well capitalized:'' 82
out of 83 of the Medium Banks, 549 out of 558 of the Smaller Banks, and
7,134 out of 7,248 of the Smallest banks are well capitalized, with 100
percent--all 20--of Large Banks ``well capitalized.'' According to the
Tier 1 Leverage Ratio, less than 2 percent of banks in each asset
category are undercapitalized: 1 out of 83 Medium Banks, 9 out of 558
Smaller banks, and 93 out of 7,248 Smallest banks. No Large Banks are
undercapitalized according to this ratio. More than 97 percent of all
banks in each asset category are ``well capitalized'' using the
leverage ratio: 82 out of 83 of the Medium Banks; 541 out of 558 of the
Smaller Banks, and 7,098 out of 7,248 of the Smallest Banks. See Annex
1 for further information, infra. It is important to note that Tier 1
capital, while it is a measure of a bank's health, is a snapshot that
may not capture all of the stresses facing a bank. For example, a bank
could be ``healthy'' according to its Tier 1 capital ratio but its
profitability sluggish. Similarly, a supervisor could view a bank with
high Tier 1 capital as nonetheless having a risky profile and could
demand that the bank retain high capital in order to withstand future
anticipated losses.
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The lack of distinctions between the groups poses
difficulties not only for Treasury's approach to its investment
going forward, but also for other policy makers. If it were
possible to determine a shared quality or qualities among TARP
banks that distinguish them from non-TARP banks, it might
affect regulators' supervisory approaches or policy
determinations, as well as Treasury's approach to divesting the
CPP investments. But the potential explanations for differences
or similarities among the groups are numerous and not clearly
indicated by the data.
The program was designed for healthy banks, and from this
starting point it might have been presumed that their
performance--in lending, return on assets, or other factors--
should have been superior to that of the banks that did not
receive CPP funds. But this is not apparent from the data, and
on some metrics TARP banks have fared worse than non-TARP
banks. Assessing this assumption is also complicated by the
relatively small number of banks that received CPP funds and
the way the application process developed over time.\14\ Banks
that entered and exited early--the short-term participants--may
have avoided the stigma that came to plague the program, while
the long-term participants have been exposed not only to the
stigma but also to a struggling sector and a higher likelihood
that their capital would become impaired as losses mounted. It
may be, however, that the recipient banks were (at best)
marginally healthy, particularly given the unstable and
declining state of the sector at that time. It is also possible
that the healthiest of the banks that applied might have
received CPP funds, but among the smaller banks, only the
marginal banks might have decided to apply, needing the funds
despite the stigma that developed around the program.\15\
Although the banking supervisors have articulated some of the
processes whereby they determined eligibility for the program,
the deliberate opacity of the application process, discussed in
Section C, below, may also conceal commonalities. Other
factors, not accounted for in an analysis of capital position
or loan exposures, might explain the minor differences between
the groups.
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\14\ May Oversight Report, supra note 6.
\15\ See Section E, infra.
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In the absence of clear distinguishing characteristics for
the group of CPP banks, Treasury has two choices when
evaluating its investment and the effect of that investment on
the banking sector. It must either rigorously attempt to
determine what, if anything, sets CPP banks apart or, failing
that, operate under the assumption that nothing material sets
CPP banks apart. If the latter is the case, then CPP banks will
likely be subject to largely the same stresses as the sector as
a whole. And the sector as a whole, which was declining in
2008, is still under substantial stress, with increased bank
failures and consolidations, making Treasury a significant--
$24.9 billion--investor in a struggling market. Since 2007 the
number of bank failures has increased 4,567 percent, from 3 to
140, with failures concentrated in the Southeast, Midwest, and
Southwest, the three areas with the greatest concentration of
banks. The number of banks on the FDIC's Problem List has
increased 824 percent over this same time period, from 76 to
702.
While acquisitions of troubled institutions allow for
capital to continue to spread throughout the banking sector,
the increased concentration also means that the troubled and
non-performing assets become more concentrated in a shrinking
sector, with potential implications for systemic stability.\16\
The total amount of bank assets, a number that has actually
increased by nearly $2 billion in the past three years, is now
concentrated in an increasingly smaller number of banks.
Mergers and acquisitions have occurred largely in the smaller
bank categories. While it is the smaller institutions that have
primarily driven these changes, failing, acquiring, and merging
among themselves, as the banking sector becomes more
concentrated in fewer banks, these institutions share larger
pieces of the asset pie. Although the CPP was not designed to
address bank consolidations, for those banks that participated
and remain in the program, the CPP has the potential to
pressure them into further consolidations in order to exit the
program, while the large banks which exited quickly were
unaffected.
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\16\ See Section E.2, infra, for a discussion of the effects of
concentration on banking system stability.
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C. Details of the TARP for Non-Stress-Tested Banks
Treasury announced the CPP on October 14, 2008. From the
beginning, Treasury described the program as being intended to
help healthy financial institutions.\17\ While the relatively
small number of failures of CPP recipients may support this
contention, the increasing number of CPP recipients that have
missed dividend payments on their CPP preferred stock
nonetheless calls into question the continuing health of many
participants.\18\ Although, as described above, CPP recipients
appear to track broadly the larger banking sector in many ways,
among CPP recipients, there are stark differences in size and
date of entry into the program. Larger banks entered and exited
first, while smaller banks both took longer to enter and are
taking longer to leave. This subjects them to continued market
and program pressure, contributing to a fundamentally different
experience for smaller participant banks, compared to larger,
CPP-recipient banks.\19\
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\17\ See Neel Kashkari, interim assistant secretary for financial
stability, U.S. Department of the Treasury, Speech before the Institute
of International Bankers, Washington, DC (Oct. 13, 2008) (online at
www.ustreas.gov/press/releases/hp1199.htm) (``As with the other
programs, the equity purchase program will be voluntary and designed
with attractive terms to encourage participation from healthy
institutions.''). See also Senate Committee on Banking, Housing, and
Urban Affairs, Testimony of Neel Kashkari, interim assistant secretary
for financial stability, U.S. Department of the Treasury, Turmoil in
the Credit Markets: Examining Recent Regulatory Responses, at 35 (Oct.
23, 2008) (online at www.gpo.gov/fdsys/pkg/CHRG-110shrg1014/pdf/CHRG-
110shrg1014.pdf) (hereinafter ``Kashkari Testimony before Senate
Banking'') (``. . . this is a program that is meant for healthy
institutions.''). It is important to note that the first nine CPP
recipients were not subject to an application process--then-U.S.
Treasury Secretary Paulson told them that they would be taking the
money. Congressional Oversight Panel, December Oversight Report: Taking
Stock: What Has the Troubled Asset Relief Program Achieved?, at 16-17
(Dec. 9, 2009) (online at cop.senate.gov/documents/cop-120909-
report.pdf) (hereinafter ``December Oversight Report''). The remaining
banks, to varying degrees, were subjected to a more rigorous
application process.
\18\ As discussed in Section C.4, infra, regulators can prevent a
bank from making dividend payments if the bank's capital levels are too
low to permit such payments. Accordingly, a missed dividend payment may
signal capital adequacy problems.
\19\ See Section E, infra, discussing the stigma on banks that
participate and the looming pressures on banks arising from the
inability to redeem.
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EESA was signed into law on October 3, 2008. Two weeks
later, Treasury announced that it would use its authority under
EESA to inject capital into the banking system. On October 28,
2008, Treasury made its first capital injections by purchasing
senior preferred stock (CPP Preferred). By December 31, 2009,
the eventual deadline for Treasury's capital purchases, $204.9
billion had gone to 707 financial institutions, including $41.4
billion to 690 small and medium-sized institutions.\20\
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\20\ U.S. Department of the Treasury, Treasury Announces TARP
Capital Purchase Program Description (Oct. 14, 2008) (online at
www.financialstability.gov/latest/hp1207.html); U.S. Department of the
Treasury, FAQ on Application Deadline for the Capital Assistance
Program (online at www.financialstability.gov/docs/CPP/
FAQ_CAPdeadline.pdf) (accessed July 9, 2010). At present, the smaller
institutions owe $24.9 billion to Treasury.
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Treasury made each capital purchase through a Securities
Purchase Agreement (SPA). The terms of SPAs vary somewhat by
institution type--public, private, S-corporation, mutual
holding company or mutual bank--but are substantially
similar.\21\ CPP Preferred, which has no maturity date, pays
quarterly dividends at a rate of 5 percent per year for the
first five years that a financial institution remains in the
program, and 9 percent thereafter.\22\ For most CPP-recipient
banks, Treasury also received warrants to purchase common
shares, allowing taxpayers to realize an upside on potential
equity appreciation.\23\
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\21\ See Congressional Oversight Panel, July Oversight Report: TARP
Repayments, Including the Repurchase of Stock Warrants, at 7 (July 10,
2009) (online at cop.senate.gov/documents/cop-071009-report.pdf)
(hereinafter ``July Oversight Report''). Because S corporations are
legally allowed to issue only one class of equity, and it must be held
by a natural person, Treasury structured subordinated debenture
transactions, which pay interest quarterly at 7.7 percent per year for
the first five years that the financial institution is in the program
and 13.8 percent per year thereafter, rather than purchasing preferred
stock. The interest rate is higher than the dividend rate to reflect
that interest payments can be deducted for tax purposes while dividend
payments cannot. Because of this distinction, the net amount of taxes
effectively paid to Treasury would be less if it received a debt
instrument versus an equivalently yielding share of preferred stock.
The rate difference equalizes the effect on all taxpayers. Mutual banks
also issue subordinated debentures.
\22\ Dividends are cumulative for bank holding companies and their
subsidiaries, and non-cumulative for banks. See Id. at 8. In late 2008,
5 percent was cheap: 9 percent will be expensive. Industry sources
conversations with Panel staff (June 21, 2010). The dividend increase
is intended to create an incentive for banks to repay. In order to
qualify as Tier 1 capital, the investments cannot be ``callable'' and
must be repayable only at the option of the bank. The 9 percent
dividend shifts the investment from relatively cheap to fairly
expensive, and thus provides an incentive for banks to repay. While the
program was designed to create Tier 1 capital with built-in incentives
to repay, it mimics the ``teaser'' rates that enticed many residential
mortgage customers before the crisis, with some similar effects. A
commitment that was cheap at the outset may prove burdensome when the
rate increases.
\23\ See Section B.2, infra. See also U.S. Department of the
Treasury, Factsheet on Capital Purchase Program (Mar. 17, 2009) (online
at www.financialstability.gov/roadtostability/CPPfactsheet.htm)
(hereinafter ``Factsheet on Capital Purchase Program''); July Oversight
Report, supra note 21, at 7 (``[W]arrants may be traded on public or
private markets, and they can be highly valued by investors who believe
the share price of the issuing company is likely to rise above the
strike price''). In the case of institutions that are not publicly
traded, Treasury received warrants to purchase preferred stock or debt
and these warrants were exercised immediately upon closing the initial
investment so they are no longer outstanding.
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The first nine CPP applicants agreed to participate prior
to the institution of an application process.\24\ Even after
the process was formalized, Treasury's initial guidance as to
the application process was produced hastily. In addition,
according to the Federal Reserve's Office of Inspector General,
the Federal Reserve's initial application process for bank
holding companies that it regulated alerted it to issues that
resulted in additional guidance from Treasury and procedures
from the Federal Reserve. Accordingly, even aside from the
largest CPP recipients, which applied before Treasury issued
guidance, later applicants would have faced a more formal
application process than earlier applicants.\25\ Treasury
acknowledges that the process of deciding whether to accept
banks into the CPP became more detailed over time.\26\
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\24\ The first nine recipients were Bank of America, Bank of New
York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley,
State Street, and Wells Fargo. Merrill Lynch also received funds, but
it subsequently was acquired by Bank of America.
\25\ See Board of Governors of the Federal Reserve System, Office
of the Inspector General, Audit of the Board's Processing of
Applications for the Capital Purchase Program under the Troubled Asset
Relief Program (Sept. 30, 2009) (online at www.federalreserve.gov/oig/
files/CPPFinal_Report_9.30.09_for-web.pdf) (hereinafter ``CPP
Applications Audit''). For a detailed discussion of the CPP application
process, see Office of the Special Inspector General for the Troubled
Asset Relief Program, Opportunities to Strengthen Controls to Avoid
Undue External Influence over Capital Purchase Program Decision-Making
(Aug. 6, 2009) (SIGTARP-09-002) (online at www.sigtarp.gov/reports/
audit/2009/Opportunities_to_Strengthen_Controls.pdf).
\26\ Treasury conversation with Panel staff (June 14, 2010).
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When banks applied to the program also depended on their
corporate form. Although the SPAs are substantially similar,
application documents became successively available, with
staggered deadlines. The original CPP application deadline for
publicly held institutions was November 14, 2008.\27\ The
deadline for applications from eligible privately held
financial institutions was December 8, 2008; \28\ for S
corporations it was February 13, 2009; \29\ and for mutual
organizations it was May 14, 2009.\30\ On May 13, 2009,
however, Treasury Secretary Timothy Geithner announced that
Treasury was reopening the CPP application period for small
banks, which were defined as banks with up to $500 million in
assets.\31\ The small bank program remained open until December
31, 2009, with banks required to file applications by November
21, 2009.\32\
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\27\ U.S. Department of the Treasury, Process-Related FAQs for
Capital Purchase Program (online at www.treas.gov/press/releases/
reports/faqcpp.pdf) (accessed July 9, 2010).
\28\ U.S. Department of the Treasury, Private Bank Program Q & A
(online at www.treas.gov/press/releases/reports/faq 111708 private.pdf)
(accessed July 9, 2010).
\29\ U.S. Department of the Treasury, Treasury Releases Capital
Purchase Program Term (Jan. 14, 2009) (online at
financialstability.gov/latest/hp1354.html).
\30\ U.S. Department of the Treasury, Treasury Releases Capital
Purchase Program Term Sheet for Mutual Banks (Apr. 14, 2009) (online at
financialstability.gov/latest/tg88.html).
\31\ Timothy F. Geithner, secretary, U.S. Department of the
Treasury, Remarks at the Independent Community Bankers of America
Annual Washington Policy Summit (May 13, 2009) (online at
www.treasury.gov/press/releases/tg127.htm).
\32\ U.S. Department of the Treasury, FAQ on Capital Purchase
Program Deadline (online at www.financialstability.gov/docs/
FAQ%20on%20Capital%20Purchase%20Program%20Deadline. pdf) (accessed July
9, 2010).
---------------------------------------------------------------------------
To apply, financial institutions first consulted with and
then submitted applications directly to their primary federal
regulators. Regulators reviewed the applications and then made
recommendations to Treasury. The regulators were to base their
recommendations on their conclusions about the overall
viability, or health, of the applicants, prior to the injection
of any CPP funds.\33\ These recommendations were based both on
the banks' capital levels at the time and their levels going
forward under stressed scenarios.\34\ Treasury then considered
the application, gave significant weight to regulators'
recommendations, and decided whether to make an investment. If
the regulators were going to recommend denying the application,
they would first inform the bank so as to provide it with the
opportunity to withdraw: as a consequence, there were no public
rejections from the program, although not all banks that
applied withdrew voluntarily. Approved applications were
publicly announced two days later, while withdrawn or denied
applications were not disclosed.\35\ This opaque process was
designed to prevent adverse market consequences for banks that
were not failing but also were not eligible for the CPP. For
example, institutions with a CAMELS rating of two, which
generally signifies a healthy institution, might nonetheless
have been subject to further review because of the age of the
examination finding and other such factors. Presumptive denials
attached to CAMELS ratings of four or five.\36\ The marginal
twos, therefore, were not necessarily severely struggling, but
nonetheless may not have met the requirements established for
the program.
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\33\ Treasury issued guidance to the regulators on October 20,
2008. It instructed the regulators to classify applications in one of
three categories: presumptive approval, presumptive CPP Council review,
or presumptive denial. The regulators were to make this determination
based on the institution's financial performance ratios, the time that
had elapsed since its last examinations, and its CAMELS rating. CPP
Applications Audit, supra note 25.
The FDIC uses the CAMELS composite rating system to assess the
health of FDIC-insured financial institutions. Uniform Financial
Institutions Rating System, 62 Fed. Reg. 752, 753 (FDIC Jan. 6, 1997)
(notice). The CAMELS composite rating is derived from six key
components: (1) Capital adequacy; (2) Asset quality; (3) Management
capability; (4) Earnings quantity and quality; (5) Liquidity; and (6)
Sensitivity to market risk. A rating of 4 indicates that there is a
distinct possibility of failure if the problems are not addressed and
resolved. Under these circumstances, the FDIC may provide financial
assistance to the bank to prevent its failure. A rating of 5 indicates
that the institution has chronic problems and has a high probability of
failure without immediate financial assistance and drastic reforms. See
Federal Deposit Insurance Corporation, Resolutions Handbook: Chapter
2--The Resolutions Process, at 5 (Apr. 2003) (online at www.fdic.gov/
bank/historical/reshandbook/ch2procs.pdf) (hereinafter ``FDIC
Resolutions Handbook'').
\34\ While the recommendations were based partly on forward-looking
criteria, some banks that received CPP funds have experienced decreases
in capital position as they have remained in the program. OCC
conversations with Panel staff (July 6, 2010).
\35\ Factsheet on Capital Purchase Program, supra note 23; U.S.
Department of the Treasury, Capital Purchase Program (Nov. 3, 2009)
(online at www.financialstability.gov/roadtostability/
capitalpurchaseprogram.html). Some of the numbers of applications are,
however, available. See Ryan Taliaferro, How Do Banks Use Bailout
Money? Optimal Capital Structure, New Equity, and the TARP, Harvard
Business School Working Paper, at 8 (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1481256) (hereinafter ``Taliaferro Working
Paper''); Office of the Inspector General of the Federal Deposit
Insurance Corporation, Controls Over the FDIC's Processing of Capital
Purchase Program Applications from FDIC-Supervised Institutions, at 3
(online at www.fdicoig.gov/reports09/Eval-09-004-508.shtml). The
average wait time for applications from banks whose primary regulator
was the FDIC was approximately one month at the FDIC level and seven to
eleven days at Treasury. Id.
\36\ CPP Applications Audit, supra note 25. Of course, none of
these considerations attached to the first nine banks that entered the
program, since they did not undergo a formal application process before
receiving funds. Their health at the time cannot be presumed from
participation in the program. Id.
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1. When Did Banks Receive the Assistance?
One significant distinction between the stress tested
institutions and non-stress tested institutions is when they
received their CPP funds. The stress tested institutions
received their CPP funds in late 2008, while the smaller
institutions received them starting in December 2008 and
extending through 2009. A practical consequence of this
distinction is that, by 2009, Treasury and the supervisors had
had more time to establish a more rigorous screening process.
As Figure 1 shows, the vast majority of CPP recipients
received their funds between December 2008 and February 2009.
Of those recipients, 23 banks had between $10 billion and $100
billion in assets, 146 had between $1 billion and $10 billion
in assets, and 244 had less than $1 billion in assets. The
number of banks receiving CPP funds then generally declined
throughout 2009, with a small spike in December of 2009, as the
program drew to a close.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Between the reopening of the CPP for small banks in May
2009 and the program's subsequent closure at the end of 2009,
157 banks received funding.\38\ These 157 small banks made up
22 percent of the 707 banks that received funding throughout
the life of the CPP. They received $5.8 billion, or 2.8 percent
of the total funds invested under the CPP.\39\
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\38\ The Federal Reserve System's Office of Inspector General found
that as of September 2009, few institutions had applied under the
program for small banks, and it stated that it saw few indications that
many more would apply, given the conditions imposed retroactively by
Congress and the stigma associated with the funds. CPP Applications
Audit, supra note 25. For a complete discussion of the stigma
associated with taking CPP funds, particularly for smaller banks, see
May Oversight Report, supra note 6. According to James Lundy, president
and chief executive officer of the Alliance Bank of Arizona, the stigma
developed over time. At the commencement of the program, taking CPP
funds was viewed as an ``endorsement'' of the bank, but soon became a
liability. See Congressional Oversight Panel, Testimony of James Lundy,
president and chief executive officer, Alliance Bank of Arizona,
Transcript: Phoenix Field Hearing on Small Business Lending, at 96
(Apr. 27, 2010) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-042710-phoenix.cfm) (hereinafter ``Phoenix
Field Hearing on Small Business Lending'').
\39\ Panel staff analysis of Treasury's June 11 Transactions
Report. Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2; SNL Financial.
---------------------------------------------------------------------------
2. What Type of Assistance Did Smaller Banks Receive?
Treasury's investment in the large majority of CPP
recipient-banks takes the form of preferred stock. Some banks,
however, are barred from issuing preferred stock because they
are S corporations or mutual banks. As discussed earlier, these
banks instead issued debt to Treasury in the form of
subordinated debentures.\40\ Treasury also took warrants in the
vast majority of banks that received CPP funds; these warrants
give taxpayers the opportunity to benefit from appreciation in
the value of the common equity in their investments in the
banking sector.\41\ For privately held banks that participate
in the CPP, any warrants taken by Treasury would be relatively
illiquid and therefore hard to sell. Consequently, when
Treasury took warrants in private banks, the warrants were
exercised, and preferred stock was purchased immediately.\42\
The preferred shares that Treasury received upon exercise pay 9
percent interest.\43\ The majority of Treasury's holdings were
preferred stock with warrants and preferred stock with
exercised warrants, available to public and private banks,
respectively.
---------------------------------------------------------------------------
\40\ Treasury conversation with Panel staff (June 14, 2010); U.S.
Department of the Treasury, Term Sheet: TARP Capital Purchase Program
(Subchapter S Corporations), at 1 (Jan. 14, 2009) (online at
www.financialstability.gov/docs/CPP/scorp-term-sheet.pdf).
\41\ A small number of banks certified as Community Development
Financial Institutions (CDFIs), which lend in underserved communities,
did not provide warrants to Treasury. House Financial Services,
Subcommittee on Oversight and Investigations, Written Testimony of
David N. Miller, chief investment officer, Office of Financial
Stability, U.S. Department of the Treasury, TARP Oversight: An Update
on Warrant Repurchases and Benefits to Taxpayers, at 2 (May 11, 2010)
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/
miller_final_
testimony_5-11-10.pdf).
\42\ Exercising a warrant means that the holder of the warrant
exercises the right to purchase the stock subject to the warrant.
\43\ U.S. Department of the Treasury, Term Sheet: TARP Capital
Purchase Program (Non-Public QFIs, excluding S Corps and Mutual
Organizations), at 6 (Nov. 17, 2008) (online at
www.financialstability.gov/docs/CPP/Term%20Sheet%20-
%20Private%20C%20Corporations.pdf) (hereinafter ``CPP Term Sheet'').
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3. How Many Smaller Banks Have Paid Back Their CPP Assistance?
Financial institutions seeking to redeem their CPP
securities must get approval from their primary federal
regulator to do so.\44\ According to bank supervisors, under
the criteria used for CPP preferred redemptions, CPP preferred
stock is not ``special'' by virtue of Treasury's
involvement.\45\ A CPP redemption is equivalent to any
retirement of capital; the regulators must decide whether the
institution will remain adequately capitalized after the
capital retirement. After receiving the redemption request,
Treasury consults with the primary regulator about the request.
If the regulator approves the repayment, Treasury allows CPP
preferred stock to be redeemed.\46\ The redemption price of the
CPP Preferred is set by the SPA, which provides that the shares
are to be redeemed at the principal amount of the debt.\47\ A
CPP recipient must redeem a minimum of 25 percent of its shares
during any redemption transaction.
---------------------------------------------------------------------------
\44\ 12 U.S.C. Sec. 5221(g).
\45\ OCC conversations with Panel staff (June 10, 2010); FDIC
conversations with Panel staff (June 14, 2010); Federal Reserve
conversations with Panel staff (June 29, 2010); OTS conversations with
Panel staff (July 7, 2010).
\46\ See July Oversight Report, supra note 21, at 1.
\47\ See July Oversight Report, supra note 21, at 10-11.
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Thirteen of the 17 largest recipients of CPP funding, all
participants in the Federal Reserve's stress tests, have
redeemed their preferred shares.\48\ The remaining 690 small
and medium-sized recipient banks received a total of $41.4
billion. Of those small and medium-sized institutions, 64 have
redeemed CPP securities for $13.7 billion.\49\ Forty-nine of
those 64 financial institutions have fully repaid their CPP
funds.\50\ Additionally, Treasury has received $2.2 billion in
interest and dividend payments from non-stress tested
institutions,\51\ plus $395.7 million in net income from
warrant repurchases and third-party auction sales of
warrants.\52\ Aside from the larger banks repaying their shares
earlier, there is no immediately identifiable pattern to the
repayments.
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\48\ In the spring of 2009, the Federal Reserve and Treasury
conducted a Supervisory Capital Assessment Program (SCAP) for the
largest U.S. bank holding companies to assess the adequacy of their
capital and potential need for an additional capital buffer at each
company under two macroeconomic future scenarios. All domestic bank
holding companies with more than $100 billion in assets as of year-end
2008 were required to participate in the assessment, with 19
institutions qualifying. Three other banks, HSBC USA, RBS Citizens, and
TD Bank, met the asset criteria but are not wholly-owned by U.S. bank
holding companies. Board of Governors of the Federal Reserve System,
The Supervisory Capital Assessment Program: Design and Implementation
(Apr. 24, 2009) (online at www.federalreserve.gov/bankinforeg/
bcreg20090424a1.pdf). Furthermore, of the 19 institutions that
underwent the SCAP assessment, or stress testing, only 17 received TARP
CPP funds. MetLife was deemed to have sufficient capital, and GMAC
received funds through the Automotive Industry Financing Program. Board
of Governors of the Federal Reserve System, The Supervisory Capital
Assessment Program: Overview of Results, at 30 (May 7, 2009) (online at
www.federalreserve.gov/bankinforeg/bcreg20090507a1.pdf). The four
stress-tested institutions that still hold their CPP funds are Fifth
Third, KeyCorp, Regions, and SunTrust. Treasury's Transaction Reports
state that $64 billion is outstanding under the program. This number
includes $25 billion in Citigroup common stock, $14.3 billion in CPP
Preferred held by Fifth Third, KeyCorp, Regions, and SunTrust, and
$24.9 billion held by the non-stress-tested CPP participants.
\49\ Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2.
\50\ These institutions have redeemed their preferred shares and
Treasury no longer holds their warrants. Treasury Transactions Report
for the Period Ending June 30, 2010, supra note 2.
\51\ U.S. Department of the Treasury, Cumulative Dividends and
Interest Report as of May 31, 2010 (June 11, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/
May%202010%20Dividends%20and%20Interest%20Report.pdf) (hereinafter
``Treasury Cumulative Dividends and Interest Report'').
\52\ Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2.
---------------------------------------------------------------------------
FIGURE 2: CPP FUNDS OUTSTANDING AND PERCENTAGE OF FUNDS RECEIVED
OUTSTANDING, BY BANK SIZE \53\
---------------------------------------------------------------------------
\53\ U.S. Department of the Treasury, Troubled Asset Relief Program
Transaction Reports (Nov. 17, 2008-June 25, 2010) (online at
www.financialstability.gov/latest/reportsanddocs.html); SNL Financial.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
4. How Many Smaller Banks Are in Arrears?
TARP-recipient financial institutions pay one of two kinds
of quarterly dividends to Treasury--cumulative dividends, which
are paid by bank holding companies and their subsidiaries, or
non-cumulative dividends, which are paid by stand-alone banks.
A bank's regulator can forbid it from paying dividends if the
regulator believes that payment of the dividend would threaten
the bank's safety and soundness. In addition, some banks
require shareholder approval to pay capital distributions. When
banks miss their dividend payments, the two different kinds of
dividends have different consequences. If cumulative dividends
remain unpaid, Treasury will be paid any accrued and unpaid
dividends on redemption of the shares. However, non-cumulative
dividend payments that are missed do not have to be paid on
redemption, unless such dividends have been accrued.\54\
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\54\ Non-cumulative dividends are quarterly payments that require
payment of the current quarter's accrued dividends upon redemption, but
do not require payment of unpaid dividends from previous quarters. The
non-cumulative dividends accrue when they are declared by the bank.
Even though a bank that fails to declare a dividend will not have to
pay it later, banks paying non-cumulative dividends have an incentive
to pay quarterly dividends to demonstrate that they are healthy and
viable. OTS conversation with Panel staff (July 7, 2010). Failure to
pay a CPP dividend is public information.
Holders of non-CPP preferred shares in banks have an additional
incentive to encourage the institution to pay non-cumulative dividends.
So long as any dividends remain outstanding and unpaid on CPP preferred
stock, the bank may not pay out dividends or redeem any common or other
junior or parity stock. See U.S. Department of the Treasury, Form of
[Certificate of Designations] of Fixed Rate Non-Cumulative Perpetual
Preferred Stock, at A-4 (online at www.financialstability.gov/docs/CPP/
Standard-Preferred-COD_Non-Cumulative-Private.pdf) (hereinafter ``Form
of [Certificate of Designations] of Fixed Rate Non-Cumulative Perpetual
Preferred Stock'') (accessed July 6, 2010).
---------------------------------------------------------------------------
Approximately one-seventh, or 15 percent, of CPP-recipient
banks have outstanding dividend payments. Throughout the life
of the program, 105 CPP recipients have missed dividend
payments to Treasury totaling approximately $159.8 million.
Eighty CPP recipients failed to pay cumulative dividends of
roughly $153.3 million, and 25 failed to make non-cumulative
dividend payments of about $6.5 million. Nineteen banks have
missed four dividend payments totaling $72.9 million, eight
have missed five payments totaling $25.0 million, and one has
missed six payments totaling $117,663.\55\ When a bank misses
six dividend payments, Treasury has the right to appoint two
board members.\56\
---------------------------------------------------------------------------
\55\ Data provided by the U.S. Department of the Treasury.
\56\ See U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--May 2010, at 9 (June 10, 2010) (online
at www.financialstability.gov/docs/105CongressionalReports/
May%202010%20105%28a%29%20Report_final.pdf) (hereinafter ``TARP Monthly
105(a) Report--May 2010''); Form of [Certificate of Designations] of
Fixed Rate Non-Cumulative Perpetual Preferred Stock, supra note 54, at
A-8.
---------------------------------------------------------------------------
Of the 105 institutions that have missed dividend payments,
28 have missed one quarterly payment. Ten institutions have
made no dividend payments, having missed between one and six
payments. Six of these ten missed non-cumulative dividends,
meaning that the dividends will not be paid on redemption.\57\
Some banks have missed dividend payments in the past, but have
since made late payments or repaid all delinquent dividends.
One bank redeemed its CPP Preferred after missing three
dividend payments. Banks that have missed at least one dividend
payment received a total of $4.6 billion in CPP funds.\58\ The
outcome for banks that have missed dividend payments is mixed.
While some have either failed or continued to miss payments,
others have redeemed their CPP stock or become current on
dividends.
---------------------------------------------------------------------------
\57\ SNL Financial.
\58\ Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2.
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5. How Many CPP Recipients Have Failed?
As of June 14, 2010, four CPP recipients have failed. Three
were banks; one was CIT Group, a non-bank financial institution
(with a bank subsidiary). CIT filed for bankruptcy on November
1, 2009.\59\ The FDIC took United Commercial Bank into
receivership on November 6, 2009.\60\ On November 13, 2009, the
FDIC took Pacific Coast National Bancorp into receivership;
\61\ it filed for bankruptcy on December 17, 2009.\62\ The FDIC
took Midwest Bank and Trust Co. into receivership on May 14,
2010.\63\ Beyond dividend payments, the amount that can be
recovered from failed institutions, if any, will depend on the
outcome of the bankruptcy proceedings.\64\ Treasury's
investments in CIT and Pacific Coast National Bancorp are
valued at zero.\65\
---------------------------------------------------------------------------
\59\ CIT Group, Inc., Form 8-K for the Period Ended November 1,
2009, at 1 (Nov. 4, 2009) (online at www.sec.gov/Archives/edgar/data/
1171825/000095012309057703/y80157e8vk.htm). CIT Group exited bankruptcy
in December 2009. CIT Group, Inc., CIT Shares Commence Trading on New
York Stock Exchange (Dec. 10, 2009) (online at businesswire.com/portal/
site/cit/
index.jsp?ndmViewId=news_view&newsId=20091210005961&newsLang=en).
\60\ Federal Deposit Insurance Corporation, East West Bank,
Pasadena, California Assumes All the Deposits of United Commercial, San
Francisco, California (Nov. 6, 2009) (online at www.fdic.gov/news/news/
press/2009/pr09201.html). United Commercial Bank had received $298.7
million in CPP funds on November 14, 2008. According to the FDIC,
United Commercial Bank failed because of concentrations in commercial
real estate and associated sectors, possibly compounded by alleged
fraud by senior management. Federal Deposit Insurance Corporation,
United Commercial Bank Fact Sheet: Discussion of Additional Issues
(Nov. 11, 2009) (online at www.fdic.gov/news/news/press/2009/
pr09201c.html) (hereinafter ``United Commercial Bank Fact Sheet'').
\61\ Federal Deposit Insurance Corporation, Sunwest Bank, Tustin,
California, Assumes All of the Deposits of Pacific Coast National Bank,
San Clemente, California (Nov. 13, 2009) (online at www.fdic.gov/news/
news/press/2009/pr09207.html). Pacific Coast National Bancorp had
received $4.1 million in TARP funds on January 16, 2009.
\62\ Pacific Coast National Bancorp, Form 8-K for the Period Ended
December 17, 2009 (Dec. 22, 2009) (online at www.sec.gov/Archives/
edgar/data/1302502/000092708909000240/pcnb-8k122209.htm).
\63\ Federal Deposit Insurance Corporation, Firstmerit Bank,
National Association, Akron, Ohio, Assumes All of the Deposits of
Midwest Bank and Trust Company, Elmwood Park, Illinois (Mar. 14, 2010)
(online at www.fdic.gov/news/news/press/2010/pr10116.html).
\64\ CIT Group's and Pacific Coast National Bancorp's bankruptcy
proceedings have concluded with no recoveries made by the taxpayers.
Treasury Transactions Report for the Period Ending June 30, 2010, supra
note 2, at notes 16, 19.
\65\ Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2, at 4, 6. Any chance that the taxpayers will recoup
any value from the investments depends on the results of the bankruptcy
proceedings. There is an extraordinarily remote possibility that some
amount will be recovered, but it is so unlikely as to be functionally
zero.
---------------------------------------------------------------------------
Excluding CIT, these three failures represent 0.4 percent
of the total number of CPP recipients; by comparison, bank
failures among non-TARP recipients represented 3 percent of all
non-TARP banks.\66\ It is possible that this difference can be
attributed to the program's focus on healthy institutions.\67\
Though a program for healthy banks should yield a lower rate of
failures, it cannot necessarily be expected to yield no
failures, particularly given shifting conditions in the sector.
It also is possible that some institutions that were strong
when they entered the CPP have since succumbed to negative
market pressures in the prolonged recession.
---------------------------------------------------------------------------
\66\ As of September 30, 2008, there were 7,677 banks that did not
later receive TARP assistance. Federal Deposit Insurance Corporation,
FDIC Approves 2009 Operating Budget, Releases Third Quarter 2008
Results for the Deposit Insurance Fund (Dec. 16, 2008) (online at
www.fdic.gov/news/news/press/2008/pr08137.html). Of those banks, 239
had failed by July 9, 2010. Federal Deposit Insurance Corporation,
Failed Bank List (online at www.fdic.gov/bank/
individual/failed/banklist.html) (accessed July 12, 2010).
\67\ See also Jeffrey Ng, Florin P. Vasvari, and Regina Wittenberg
Moerman, Were Healthy Banks Chosen in the TARP Capital Purchase
Program?, Chicago Booth Research Paper No. 10-10 (Mar. 6, 2010) (online
at papers.ssrn.com/sol3/papers.cfm?abstract_id=1566284) (hereinafter
``Ng, Vasvari and Moerman Research Paper'').
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6. TARP Bank Restructuring Policy
A CPP-recipient bank in danger of insolvency because of
undercapitalization may submit to Treasury a proposed
restructuring plan aimed at regaining stability. Treasury
believes that if it makes concessions under the terms of its
CPP investment, it may help the bank to raise private capital
and improve its chances of survival, thus avoiding receivership
and a total loss on the CPP Preferred.
During 2009, two restructuring transactions were completed.
In August, Popular, Inc. completed an exchange of $935 million
of preferred stock held by Treasury for an identical amount of
newly issued trust preferred securities.\68\ Similarly, on
December 11, 2009, Superior Bancorp completed an exchange of
$69 million of preferred stock held by Treasury for an
identical amount of newly issued trust preferred
securities.\69\ Three more restructurings have occurred in
2010. In February, Midwest Banc Holdings exchanged $84.8
million of CPP Preferred, along with accrued dividends, for
$89.4 million of mandatory convertible preferred stock.
(Midwest Bank and Trust, which as discussed earlier was seized
by the FDIC in May 2010, was a subsidiary of Midwest Banc
Holdings.) \70\ In April, Independent Bank Corp. exchanged $72
million in preferred stock issued under the CPP, plus accrued
dividends, for $74.4 million of mandatory convertible preferred
stock.\71\ In June, First Merchants Corporation exchanged $46.4
million of its $116 million in CPP preferred stock for $46.4
million of non tax-deductible trust preferred securities.\72\
At least two other CPP recipients, Sterling Financial Corp. and
First BanCorp, have entered into an agreement to make a similar
exchange of preferred stock for mandatory convertible preferred
stock.\73\ Treasury has stated that exchange transactions will
be approved only on a case-by-case basis once all the relevant
information is evaluated.\74\
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\68\ Popular, Inc. paid Treasury a $13 million exchange fee. See
Office of the Special Inspector General for the Troubled Asset Relief
Program, Quarterly Report to Congress, at 61 (Oct. 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/October2009_Quarterly_
Report_to_Congress.pdf). See also Popular, Inc., Form 10-Q for the
Quarterly Period Ended September 30, 2009, at 60 (Nov. 9, 2009) (online
at www.sec.gov/Archives/edgar/data/763901/000095012309060126/
g20716e10vq.htm).
\69\ On December 14, 2009, Superior Bancorp filed with the SEC a
Form 8-K that announced the completion of the exchange transaction with
Treasury. Superior Bancorp, Superior Bancorp Builds Equity Capital,
Completes Exchange of TARP Securities with U.S. Treasury (Dec. 14,
2009) (online at www.sec.gov/Archives/edgar/data/1065298/
000114420409064449/ v168906_ex99.htm).
\70\ See Section B.5, supra.
\71\ U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--April 2010, at 10 (May 10, 2010) (online
at www.financialstability.gov/docs/105CongressionalReports/
April%202010%20105(a)%20report_final.pdf).
\72\ U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--June 2010, at 11 (July 12, 2010) (online
at www.financialstability.gov/docs/105CongressionalReports/
June%202010%20105(a)%20Report_Final.pdf).
\73\ Sterling Financial Corp., Form 10-Q for the Quarterly Period
Ended March 31, 2010, at 9 (May 3, 2010) (online at www.sec.gov/
Archives/edgar/data/891106/000119312510102955/ d10q.htm); First
BanCorp, Form 8-K: Current Report (July 7, 2010) (online at
www.sec.gov/
Archives/edgar/data/1057706/000129993310002613/ htm_38264.htm).
\74\ Treasury conversations with Panel staff (Dec. 15, 2009).
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In conclusion, of the 707 banks that received CPP funds,
approximately one-seventh, or 15 percent, have experienced
capital conditions that have prevented them from paying a
dividend. Four institutions have failed, 105 institutions have
unpaid dividends, and five banks have restructured their CPP
preferred stock, including one that subsequently failed. These
figures could portend future difficulties for Treasury's exit
strategy.
D. Exit Strategy
Treasury has two options as it seeks to divest from smaller
banks: either Treasury continues to hold its CPP investments
until they are redeemed in full, or Treasury sells its
investments to investors.\75\ If Treasury determines that its
best or most practical course is to hold until maturity or
redemption, small banks, subject to their regulators' approval,
must use cash on hand, raise public or private equity capital,
or generate sufficient future earnings to repay.\76\ For many
smaller banks still in the CPP, current market conditions limit
each of these options. This means smaller banks are more likely
to stay in the program for an extended period.\77\ In
particular, because the equity capital markets are relatively
expensive for smaller banks to access, Treasury's exit strategy
for smaller banks will differ qualitatively from its approach
to medium and larger banks.\78\ To date, 13 of the 17 stress-
tested BHCs that received CPP funds have fully repaid their
assistance.\79\ Each accessed the equity capital market prior
to redeeming Treasury's investment. Some analysts expect the
remaining stress-tested BHCs to follow a similar course and
repay by 2011.\80\ By contrast, of the 15 smallest banks that
have fully redeemed Treasury's assistance so far, only two
raised equity capital prior to exiting the program. With large
institutions continuing to exit the CPP, Treasury's focus
increasingly shifts to the several hundred smaller institutions
that received CPP funds and have more limited options to repay
them--626 of the 690 small and medium-sized banks that
participated in the CPP have yet to redeem their CPP
investments.\81\ Additionally, because many of the smaller
banks are lightly traded or private, Treasury's divestment
options, relative to the larger banks, are more limited.
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\75\ Subject to compliance with applicable securities laws,
Treasury has the ability to ``sell, assign, or otherwise dispose of''
the CPP Preferred it holds. See U.S. Department of the Treasury,
Securities Purchase Agreement: Standard Terms, at Sec. 4.4 (online at
www.financialstability.gov/docs/CPP/spa.pdf) (hereinafter ``Securities
Purchase Agreement: Standard Terms'') (accessed July 9, 2010). This
means that the CPP Preferred can be sold in private transactions to
interested investors, or it can be offered to the public in a resale
registered with the SEC. The CPP recipient institutions that report to
the SEC are required, under the terms of the SPA, to file a shelf
registration statement, which would permit sales to the public. A shelf
registration statement allows the financial institution to offer and
sell its securities for a period of up to two years. With the
registration ``on the shelf,'' the financial institution, by updating
regularly filed annual and quarterly reports to the SEC can sell its
shares in the market as conditions become favorable with a minimum of
administrative preparation and expense. Private institutions, however,
do not have the flexibility of using the shelf registration statement,
and would have to engage in an initial public offering if they wished
to sell equity to the public. For both public and private institutions,
however, Treasury can make sales in private transactions exempt from or
not subject to SEC registration.
\76\ The CPP Preferred is Tier 1 capital, and it can only be
replaced with equivalent capital, namely equity. For this reason,
access to the debt markets is less relevant to the question of CPP
exit. Retained earnings, however, are a component of Tier 1 capital,
and so a bank that cannot raise capital in the market might nonetheless
earn its way out of the CPP. For a discussion of capital requirements
for banks, see Congressional Oversight Panel, June Oversight Report:
Stress Testing and Shoring Up Bank Capital, at 9-10 (June 9, 2009)
(online at cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter
``June Oversight Report'') (``tier 1 (core) capital is the sum of the
following capital elements: (1) common stockholders' equity; (2)
perpetual preferred stock; (3) senior perpetual preferred stock issued
by Treasury under the TARP; (4) certain minority interests in other
banks; (5) qualifying trust preferred securities; and (6) a limited
amount of other securities. Tier 2 (supplementary) capital is made up
of the following capital elements: (1) the amount of certain reserves
established against losses; (2) perpetual cumulative or non-cumulative
preferred stock; (3) certain types of convertible securities; (4)
certain types of long-, medium-, and short-term debt securities; and
(5) a percentage of unrealized gains from certain investment
assets.'').
\77\ Treasury expected smaller banks to remain in the CPP for a
longer period than larger banks. The original terms of the CPP required
a bank to raise equity as a condition to exit in less than three
years--a prospect substantially more prohibitive to smaller banks.
Provisions in ARRA changed this requirement. See also Financial Crisis
Inquiry Commission, Testimony of Henry M. Paulson, Jr., former
secretary, U.S. Department of the Treasury, The Shadow Banking System,
at 70 (Mar. 6, 2010) (online at www.fcic.gov/hearings/pdfs/2010-0506-
Transcript.pdf) (hereinafter ``The Shadow Banking System'') (Then-
Secretary Paulson testifying that the CPP was designed to have ``two or
three thousand banks'' hold the CPP for ``three to five years'').
\78\ ICBA conversations with Panel staff (June 23, 2010). See also
Hal B. Heaton, Valuing Small Businesses: The Cost of Capital, The
Appraisal Journal, at 13-16 (Jan. 1998) (online at lumlibrary.org/
webpac/pdf/TAJ/ValuingSmallBusinesses.pdf) (hereinafter ``Valuing Small
Businesses'') (concluding that the ability of small businesses to raise
capital is hampered by increased systemic risks, non-systemic risks,
and liquidity effects that increase the required rate of return for
capital investment). Congressional Oversight Panel, March Oversight
Report: The Unique Treatment of GMAC Under TARP, at 50-51 (Mar. 11,
2010) (online at cop.senate.gov/documents/cop-031110-report.pdf)
(discussing Treasury's statements that some of the largest financial
institutions had the ability to raise money from capital markets and
existing shareholders).
\79\ Of the 17 stress-tested BHCs that received CPP capital, Bank
of America, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley,
PNC Financial, U.S. Bancorp, The Bank of New York Mellon, CapitalOne,
State Street, BB&T, and American Express redeemed their CPP Preferred
and warrants. Treasury is in the process of liquidating its common
stock holdings in Citigroup; therefore, although Treasury still
maintains an ownership position in Citigroup, for the purposes of this
analysis it is deemed repaid. SunTrust Banks, Regions Financial Corp.,
Fifth Third Bancorp, and KeyCorp continue to have CPP Preferred and
warrants outstanding. GMAC received TARP funds from Treasury's AIFP,
not its CPP, and MetLife, although stress tested, never received TARP
assistance. Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2. See also Congressional Oversight Panel, Written
Testimony of Herbert M. Allison, Jr., assistant secretary for financial
stability, U.S. Department of the Treasury, COP Hearing on Assistance
Provided to Citigroup Under TARP (Mar. 4, 2010) (online at
cop.senate.gov/documents/ testimony-030410-allison.pdf).
\80\ See SNL data (Mean Estimates and Actuals Summary for Diluted
Earnings per share ($)). See also Dan Freed, Five Regional Banks With
Dilution Potential, TheStreet.com (May 21, 2010) (online at
www.thestreet.com/offers/omnisky/html/ markets/marketfeatures/
10763003.html).
\81\ Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2.
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After a financial institution redeems its CPP Preferred, it
may also repurchase its warrants, which are ``detachable'' from
the CPP Preferred, meaning that they can trade separately.\82\
Treasury is required to purchase the warrants at ``fair market
value,'' although the warrants do not trade on any market and
so have no observable market prices.\83\ The fair market value
is therefore determined using a negotiation and appraisal
process between Treasury and the financial institution.\84\ If
a financial institution does not wish to repurchase its
warrants,\85\ or the parties cannot agree on a fair price, and
neither party wishes to invoke the appraisal procedure,
Treasury will, as a matter of policy, auction the warrants to
the public.\86\ Treasury intends to dispose of its warrants as
soon as practicable.\87\ Therefore, a financial institution may
repurchase its warrants as soon as it redeems its preferred
shares.\88\ The warrants, which have a 10-year life, may be
exercised at any time.\89\ The exercise price of the warrants
for public financial institutions is based upon the 20-day
trailing average stock price of the underlying common
shares.\90\ For private financial institutions, the exercise
price is $0.01 per share.\91\
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\82\ If Treasury sold its CPP Preferred to a third party, a
financial institution would be allowed to repurchase its warrants once
the sale is completed. Treasury conversations with Panel staff (Dec.
15, 2009).
\83\ For a more complete discussion of warrants and the repurchase
process, see the Panel's July 2009 report. July Oversight Report, supra
note 21. See also Office of the Special Inspector General for the
Troubled Asset Relief Program, Assessing Treasury's Process to Sell
Warrants Received from TARP Recipients, at 10 (May 10, 2010) (SIGTARP-
10-006) (online at www.sigtarp.gov/reports/audit/2010/Assessing%20
Treasury's%20Process%20to%20Sell%
20Warrants%20Received%20From%20TARP%20 Recipients_May_11_2010.pdf)
(stating Treasury has generally succeeded in negotiating prices from
recipients for the warrants at or above its estimated composite value);
Securities Purchase Agreement: Standard Terms, supra note 75.
\84\ The repurchase process for a financial institution is a multi-
step procedure starting with the institution's proposal to Treasury of
its determination of the fair market value of the warrants. Treasury
has a choice of whether to accept this proposed fair value. If Treasury
and the financial institution are unable to agree on the fair value
determination, either party may invoke the appraisal procedure. In the
appraisal procedure process, both Treasury and the financial
institution select independent appraisers. If the appraisers fail to
agree, a third appraiser is hired, and subject to certain limitations,
a composite valuation of the three appraisals is used to establish fair
market value. This composite valuation is determined to be the fair
market value and is binding on both Treasury and the financial
institution. If the appraisal procedure is not invoked, and neither
party can agree on the fair market value determination, Treasury then
sells the warrants through the auction process. See Robert A. Jarrow,
TARP Warrants Valuation Methods (Sept. 22, 2009) (online at
www.financialstability.gov/docs/
Jarrow%20TARP%20Warrants%20Valuation%20 Method.pdf).
In addition, the process is different for private banks. Treasury
immediately exercises the warrants of private financial institutions.
See CPP Term Sheet, supra note 43, at 6.
\85\ After the CPP Preferred is redeemed, the financial institution
has 15 days to decide whether it wishes to repurchase its warrants. See
U.S. Department of the Treasury, Treasury Announces Warrant Repurchase
and Disposition Process for the Capital Purchase Program (June 26,
2009) (online at www.financialstability.gov/latest/tg_06262009.html).
\86\ Treasury has conducted a number of these auctions. See ``TARP
Updates Since Last Report'' in Congressional Oversight Panel, June
Oversight Report: The AIG Rescue, Its Impact on Markets, and the
Government's Exit Strategy, at 298, 312-314 (online at cop.senate.gov/
documents/cop-061010-report.pdf).
\87\ See Congressional Oversight Panel, Written Testimony of
Secretary Timothy F. Geithner, COP Hearing with Treasury Secretary
Timothy Geithner, at 5 (June 22, 2010) (online at cop.senate.gov/
documents/testimony-062210-geithner.pdf) (hereinafter ``COP Hearing
with Treasury Secretary Timothy Geithner--Written Testimony''); U.S.
Department of the Treasury, Treasury Department Releases Text of Letter
from Secretary Geithner to Hill Leadership on Administration's Exit
Strategy for TARP (Dec. 9, 2009) (online at www.ustreas.gov/press/
releases/tg433.htm).
\88\ See July Oversight Report, supra note 21.
\89\ U.S. Department of the Treasury, TARP Capital Purchase Program
Senior Preferred Stock and Warrants Summary of Senior Preferred Terms,
at 4 (Oct. 14, 2008) (online at www.financialstability.gov/docs/CPP/
termsheet.pdf) (hereinafter ``TARP Capital Purchase Program Senior
Preferred Stock and Warrants Summary of Senior Preferred Terms'').
Prior to December 31, 2009, the warrants could only be exercised in
part. Id. at 4-5. See also July Oversight Report, supra note 21, at 12.
\90\ The number of warrants issued is equal to 15 percent (5
percent for a private financial institution) of the face value of the
preferred investment divided by the exercise price. See TARP Capital
Purchase Program Senior Preferred Stock and Warrants Summary of Senior
Preferred Terms, supra note 89, at 4. The warrant exercise price is
calculated taking the average of the closing prices for the 20 trading
days up to and including the day prior to the date on which the TARP
Investment Committee recommends that the Assistant Secretary for
Financial Stability approve the investment. For example, if the 20 day
average stock price is $10, the holder of the warrant pays $10 for each
share of stock when it exercises the warrant. If the share price
exceeds $10 when the warrants are exercised, the holder of the warrants
has paid less than market value for these shares, and can then sell
them at market value and turn a profit. See U.S. Department of the
Treasury, FAQs on Capital Purchase Program Repayment and Capital
Assistance Program, at 2 (May 2009) (online at
www.financialstability.gov/docs/FAQ_CPP- CAP.pdf) (hereinafter ``FAQs
on Capital Purchase Program Repayment and Capital Assistance
Program''); July Oversight Report, supra note 21, at 12-13.
\91\ CPP Term Sheet, supra note 43, at 6. As discussed above, EESA
requires that Treasury receive warrants in exchange for all TARP
investments. 12 U.S.C. Sec. 5223(d). However, a ``de minimis''
provision allows Treasury to create exemptions from this requirement
for small institutions. See 12 U.S.C. Sec. 5223(d)(3)(A) (``The
Secretary shall establish de minimis exceptions to the requirements of
this subsection, based on the size of the cumulative transactions of
troubled assets purchased from any one financial institution for the
duration of the program, at not more than $100,000,000''). Treasury has
not yet published any regulation establishing a formal de minimis
exception. To date, only CPP participants that were certified CDFIs
have been evaluated under this exception, and in particular, only those
CDFIs receiving less than $50 million. Treasury conversation with Panel
staff (Mar. 26, 2010). Banks that have received less than $100 million
in TARP funds that are not CDFIs have had to issue warrants.
The 22 CDFIs that are part of the CPP may have an exit option not
available to other CPP participants. Treasury's Community Development
Capital Initiative (CDCI) is scheduled to invest capital at a dividend
rate of 2 percent--compared to the 5 percent rate under the CPP--in
eligible CDFIs to support credit access in underserved areas. Although
Treasury has yet to make any investments under this program, the 22
CDFIs that received CPP funds will be able to exchange their CPP funds
for securities issued under the CDCI, effectively swapping their 5
percent dividend rate for a 2 percent dividend rate, provided they meet
certain ``good standing'' provisions. For those CDFIs that remain
current on their dividend payments under the CPP and in compliance with
the other covenants and conditions of the TARP--all criteria for the
exchange--it seems likely they will exchange their CPP funds for the
more favorable securities. Although this represents an exit from the
CPP not currently available to other participants, the ``good
standing'' provisions should restrict troubled CDFIs from switching
from the CPP to the CDCI. As of June 11, 2010, 3 CDFIs had missed
dividend payments owed to Treasury; each would be ineligible to
exchange their securities. U.S. Department of the Treasury, Dividend
and Interest Reports (online at financialstability.gov/latest/
reportsanddocs.html). See also U.S. Department of the Treasury, FAQ on
the TARP Community Development Capital Initiative (online at
www.financialstability.gov/docs/CDCI/CDCI%20FAQs%20Updated.pdf)
(accessed July 12, 2010); TARP Monthly 105(a) Report--May 2010, supra
note 56; Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2. In March, a fourth CDFI's regulator determined it
to be ``in troubled condition'' and imposed several limitations,
including a restriction on paying dividends without written approval
from the regulator's regional director. As of June 11, 2010, this CDFI
was current on its dividend payments to Treasury. See Broadway
Financial Corporation, Form 10-K for the Fiscal Year Ended December 31,
2009, at 24 (June 17, 2010) (online at www.sec.gov/Archives/edgar/data/
1001171/000119312510141662/d10k.htm).
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1. Time Horizon and the Redemption Process
Although Treasury's authority to make additional
commitments to employ TARP funds will expire on October 3,
2010, it will still hold a substantial pool of assets on that
date.\92\ The disposition of these assets may take many years.
Under the original terms of the CPP, banks could not redeem
their CPP Preferred for three years unless the institution
completed a qualified equity offering of at least 25 percent of
Treasury's CPP investment amount. Provisions in the American
Recovery and Reinvestment Act (ARRA) changed the timing of
repayment so that a bank, subject to the approval of its
regulator, can redeem Treasury's investment without replacing
capital or waiting a specified period.\93\ Despite this change,
Treasury is expected to continue to hold a significant stake in
small banks for an extended period--thereby making the federal
government a player in the small bank market into the
indefinite future. As Treasury begins to lay the groundwork for
an exit, however, the problem is that for certain CPP
recipients, the path remains extremely unclear.
---------------------------------------------------------------------------
\92\ Congressional Oversight Panel, January Oversight Report:
Exiting TARP and Unwinding its Impact on the Financial Markets, at 4
(Jan. 13, 2010) (online at cop.senate.gov/documents/cop-011410-
report.pdf) (hereinafter ``January Oversight Report''). Treasury's
authorization to expend TARP funds may expire earlier if the Dodd-Frank
Wall Street Reform and Consumer Protection Act is passed. In an
amendment to the Dodd-Frank Conference Report (H.R. 4173),
Congressional negotiators agreed to an amendment that would reduce the
total TARP funding to $475 billion and prohibit Treasury from using any
TARP funds for any new program or initiative created after June 25,
2010. Until October 3, 2010, however, Treasury would still retain the
ability to make additional commitments and changes to initiatives and
programs, provided they were in operation prior to June 25, 2010.
Treasury would also be prohibited from recycling TARP repayments into
new obligations. See Dodd-Frank Wall Street Reform and Consumer
Protection Act, Conference Report to accompany H.R. 4173, at 770 (June
29, 2010) (H. REP No. 111-517) (online at financialservices.
house.gov/Key_Issues/ Financial_Regulatory_Reform/
conference_report_FINAL.pdf) (hereinafter ``Dodd-Frank Wall Street
Reform and Consumer Protection Act''). The House of Representatives
passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in
a 237-192 vote on June 30, 2010, but as of July 13, 2010, the Senate
has not yet taken action.
\93\ FAQs on Capital Purchase Program Repayment and Capital
Assistance Program, supra note 90, at 2.
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CPP recipients can be divided into two primary categories:
those that can access capital, public or private, and those
that face significant constraints in doing so.\94\ About half
of the smaller banks remaining in the program are privately
held, meaning that they do not have access to the public
capital markets. Of the publicly traded smaller banks, many are
lightly traded and may not have ready access to public
investors. These breakdowns correlate with size. Medium-sized
banks were significantly more likely to tap the equity capital
market prior to redeeming their assistance, while smaller banks
have been unlikely to do so, and the smallest banks have been
extremely unlikely to do so--instead repaying with cash on
hand.
---------------------------------------------------------------------------
\94\ Only 4.3 percent of the smaller banks still in the CPP with
less than $1 billion in assets held equity offerings between October
2008 and June 2010. Excluding private placements, just 2 percent of
these institutions held offerings during this period. Data accessed
through SNL Financial data service. Approximately 30 percent of banks
still in the CPP with assets between $1 billion and $10 billion held
equity offerings during this period; excluding private placements, 20
percent of banks this size held offerings. Id.
---------------------------------------------------------------------------
FIGURE 3: BANKS THAT RAISED EQUITY CAPITAL BEFORE REDEEMING THEIR CPP
FUNDS \95\
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\95\ Data from SNL Financial. Among the 15 banks with over $100
billion in total assets to raise equity through capital markets prior
to CPP redemption, only Hartford Financial Services Group (Hartford
Financial) and Lincoln National Corporation (Lincoln National) were not
subject to the stress tests. See The Hartford Financial Services Group,
Inc., Form 10-Q for the Quarterly Period Ended March 31, 2010, at 7
(Apr. 29, 2010) (online at www.sec.gov/Archives/edgar/data/874766/
000095012310040660/c99142e10vq.htm); Lincoln National Corporation, Form
10-Q for the Quarterly Period Ended March 31, 2010, at 1 (May 7, 2010)
(online at www.sec.gov/Archives/edgar/data/59558/000005955810000159/
d10q.htm). Hartford Financial and Lincoln National entered the CPP in
June and July 2009, respectively, after the Federal Reserve conducted
and released the results of its May 2009 stress tests. Treasury
Transactions Report for the Period Ending June 30, 2010, supra note 2.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Of the banks that redeemed Treasury's CPP investments as of
June 17, 2010, only two banks with assets below $1 billion
accessed the equity capital market--meaning that thus far, only
13 percent of banks of that size that have exited have been
able to do so by raising equity capital. For banks with assets
between $1 billion and $10 billion, 17 banks, or 49 percent,
raised equity prior to redemption; and for banks with assets
from $10 billion to $100 billion, 9 banks, or 75 percent,
tapped the equity market prior to redemption.\96\ Of banks with
assets above $100 billion, 100 percent raised equity before
redemption. All other redemptions came out of cash on hand. A
bank's ability to use cash on hand to redeem depends on the
capital position of the bank. A bank with substantial cash on
hand that will nonetheless inappropriately reduce its capital
position through a CPP redemption will be prevented by
supervisors from redeeming until it replaces CPP shares with
equivalent Tier 1 capital. Those institutions that quickly
redeemed their CPP shares and avoided exposure to balance sheet
risks that would have impaired their capital position were able
to do so out of cash on hand. In essence, their capital
position did not change from the time of the application to the
time of the redemption. But if a bank holds CPP funds for
longer, the bank's capital condition could become impaired
while it continues to hold CPP funds. In that case, even if CPP
funds were not necessary for the bank's capital cushion at the
time of its CPP application, supervisors could later require
the bank to increase its capital cushion, increasing its need
for CPP capital and delaying its exit from the program.\97\
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\96\ Debt financing is also significantly more available to larger
banks, especially those with equity traded on a stock exchange, than to
smaller banks. Debt proceeds, however, do not count as Tier 1 capital
and cannot replace Tier 1 equity capital for supervisory purposes.
Large banks may have raised debt prior to exiting the CPP and applied
the debt proceeds toward their CPP redemption, provided the large bank,
despite the redemption, continued to maintain an adequate capital
cushion as determined by its regulator. For example, Bank of America
used a combination of $19.3 billion raised from a common stock offering
and $25.7 billion from excess liquidity to redeem its CPP Preferred.
Debt proceeds may have comprised a portion of the ``excess liquidity,''
although precise usage of debt proceeds is difficult to track. See Bank
of America Corporation, Form 10-K for the Fiscal Year Ended December
31, 2009, at 18 (Feb 26, 2010) (online at www.sec.gov/Archives/edgar/
data/70858/000119312510041666/d10k.htm). But because any redemption or
retirement of Tier 1 capital that results in an inappropriately reduced
capital position must be accompanied by a replacement of equivalent
capital from a regulatory perspective, however, excess liquidity will
not suffice for redemption under those circumstances. These
requirements apply to both large and small institutions. OCC
conversations with Panel staff (July 6, 2010).
\97\ OCC conversations with Panel staff (July 6, 2010).
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Smaller banks that have strong capital positions face a
variety of factors that affect the timing of their exits.
Factors that press for quick repayment include the costs of the
program. TARP banks are required to make quarterly dividend
payments at an annualized rate of 5 percent, and these payments
increase to 9 percent if a bank does not repay its CPP funds
within five years.\98\ The cost of TARP funds is not solely
quantitative, however; it is also reputational. With some
banks' competitors seizing on the TARP label in negative
advertising, TARP assistance may have commercial consequences.
Accordingly, the TARP stigma--discussed in detail in the
Panel's May 2010 report--may place pressure on institutions to
exit the program as soon as possible.\99\
---------------------------------------------------------------------------
\98\ See note 22, supra.
\99\ May Oversight Report, supra note 6, at 68-72. For more detail
on the effect of the TARP stigma, see Section E, infra.
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On the other hand, even those smaller institutions with
strong capital positions, the ability to access the capital
markets, and no difficulties paying their dividends, may face a
variety of pressures that counsel against prompt
repayment.\100\ At present, that a participant bank has yet to
redeem its CPP investment does not necessarily signal to the
market or its competitors that it cannot.\101\ Relative to
other capital, CPP funds, particularly before the increase in
the dividend rate, and setting aside concerns about stigma and
industry perception, may constitute cheap capital for a
particular bank.\102\ Banks of all sizes may continue to hold
CPP capital for a number of reasons, including to build loan
loss reserves, to make new loans, or to deploy that capital at
a later date. Previous Panel reports have documented several
existing pressures that could lead to capital preservation:
severe commercial real estate exposure,\103\ foreclosures in
the residential housing market,\104\ capital scarcity, the
prospect of tighter requirements, and interest rate risk.\105\
In light of this pervasive uncertainty, it may be prudent
policy for small banks, even those that can repay, to use
Treasury's investment to enhance their capital cushions.
Consistent with these pressures, Treasury expects many smaller
banks to hold their CPP investments for the full five years,
until the dividend requirements increase.\106\
---------------------------------------------------------------------------
\100\ This exposes Treasury to additional risk if a bank's
financial condition deteriorates in the meantime. For a discussion of
how Treasury balances its policy objectives, see Section D.3, infra.
For banks that are in the program and are making dividend payments,
Treasury earns 5 percent annually on its investment for five years, and
9 percent after.
\101\ This signal may shift after five years when the dividend rate
rises from 5 to 9 percent, at which point the market may assume that a
bank that has not redeemed is unable to do so.
\102\ Although industry analysts may view the capital as costly,
the cost to the individual bank depends on the alternatives available
for that bank. A bank that would experience high costs in accessing the
capital markets or private investors might choose to retain its CPP
rather than experiencing dilution or incurring offering fees. See note
22, supra. As of the first quarter of 2010, the median cost of
borrowing for a bank falls between 2 percent and 3 percent for banks of
all sizes, although it is higher for smaller banks. Median cost of
borrowing includes all debt and preferred shares, but does not include
deposits. SNL Financial data. Because these are medians, however, a
particular bank may have a significantly harder time borrowing at those
rates. These numbers differ from dividend rates for perpetual preferred
shares. From 2004 to 2006 the median dividend rate for a perpetual
preferred share investment was 6.6 percent. SNL Financial data.
\103\ Congressional Oversight Panel, February Oversight Report:
Commercial Real Estate Losses and the Risk to Financial Stability, at 2
(Feb. 10, 2010) (online at cop.senate.gov/documents/cop-021110-
report.pdf) (hereinafter ``February Oversight Report'') (``The
Congressional Oversight Panel is deeply concerned that commercial loan
losses could jeopardize the stability of many banks, particularly the
nation's mid-size and smaller banks, and that as the damage spreads
beyond individual banks that it will contribute to prolonged weakness
throughout the economy.''). See also Sheila C. Bair, chairman, Federal
Deposit Insurance Corporation, Remarks at the Independent Community
Bankers of America's 2010 National Convention (Mar. 19, 2010) (online
at www.fdic.gov/news/news/speeches/chairman/spmar1910.html)
(hereinafter ``Commercial Real Estate: A Drag for Some Banks but Maybe
Not for U.S. Economy'') (``And you are seeing your nonperforming loans
continue to rise.''). Unlike larger banks, which are more likely to
hold an array of secondary market securities on their balance sheets,
smaller banks are significantly less exposed to the complex financial
instruments that fed the financial crisis. See Rajeev Bhaskar, Yadav
Gopalan, and Kevin L. Kliesen, Commercial Real Estate: A Drag for Some
Banks but Maybe Not for U.S. Economy, The Regional Economist, at 1
(Jan. 2010) (online at research.stlouisfed.org/publications/regional/
10/01/commercial-real-estate.pdf); February Oversight Report, supra, at
130.
\104\ See generally Congressional Oversight Panel, April Oversight
Report: Evaluating Progress of TARP Foreclosure Mitigation Programs
(Apr. 14, 2010) (online at cop.senate.gov/documents/cop-041410-
report.pdf) (hereinafter ``April Oversight Report'').
\105\ May Oversight Report, supra note 6, at 53.
\106\ Treasury conversations with Panel staff (June 14, 2010).
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For smaller public banks, access to the equity capital
markets is limited because of the fixed costs tied to the
issuance, and the inability of smaller banks, which are not
actively traded, to sell a sufficient volume of stock to
support these fixed costs.\107\ This places some smaller banks
that have not repaid in a difficult situation, leaving them
more dependent on the capital provided by Treasury, as their
only other options to raise comparable equity capital are
private investors. For other smaller banks, this concern may be
tempered because of the relatively small amount of assistance
they received and their ability to generate sufficient retained
earnings to redeem Treasury's investment prior to the dividend
step-up. For many affected banks, however, the sector's
returning to health will be an essential part of this equation.
---------------------------------------------------------------------------
\107\ ICBA conversations with Panel staff (June 23, 2010); private
investors' conversations with Panel staff (July 2, 2010). See also
Denis Boudreaux, Tom Watson, and James Hopper, A Behavioral Approach To
Derive The Cost Of Equity Capital For Small Closely Held Firms, Journal
of Business & Economics Research, at 71 (Oct. 2006) (online at
www.cluteinstitute-onlinejournals.com/PDFs/2006402.pdf) (``Recent
studies have provided evidence that the degree of risk and the
corresponding cost of capital increase with the decreasing size of the
company.''); Valuing Small Businesses, supra note 78, at 16 (``Numerous
studies give overwhelming evidence of discounts of 20%-40% for stocks
that are not actively traded compared with equities that are actively
traded.'').
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Raising private capital for smaller banks is challenging in
general, but it is particularly challenging in the current
economic climate for several reasons. First, smaller banks
often rely on local networks of investors, including existing
shareholders and board members, to raise cash. Given the
underlying weaknesses in the banking sector, these investors
may be reluctant to part with additional capital; it may also
be difficult to attract new investors. Reliance on local
investors also subjects banks to geographic vulnerability, as
small banks may face acute challenges in raising capital from
investors in areas that were hard hit by the collapse of the
real estate bubble.
Second, a number of factors minimize the likelihood that
private equity funds will be a dependable source of capital for
small banks.\108\ Private equity funds typically focus their
investments in banks exceeding $1 billion in assets, and
industry sources state that private equity investors are
currently more interested in purchasing institutions in
distressed sales at a greater discount than in investing in
going concerns. The term ``private equity'' includes firms that
specialize exclusively in financial institutions, as well as
those that do not specialize in the field but are interested
nonetheless in making investments in this area. While there are
many private equity firms interested in investing in financial
institutions, the level of interest in the small bank sector
specifically is unclear. There are large players in the private
equity business generally, but there is no clear group of
dominant players that focus specifically on the small bank
market. In fact, some private equity firms participate only in
FDIC-assisted transactions because such transactions offer more
downside protection than open-bank transactions.\109\ Nor are
private equity funds likely to become a larger share of the
market because there are significant barriers to entry. Most
notably, if a fund's investment makes it the owner of more than
24.9 percent of the bank, that bank must apply and be approved
by the Federal Reserve Board as a bank holding company.\110\
Even a smaller interest, such as a 10 percent stake in a bank,
could subject the fund to a certain amount of disclosure
requirements and other vetting processes.\111\ In most cases,
the cost of qualifying to make a significant investment in a
small bank is not worth the potential return, especially since
such investment would carry certain risks if the bank's
portfolio contained weaknesses not easily discovered through
due diligence.
---------------------------------------------------------------------------
\108\ Private equity firm conversations with Panel staff (June 21,
2010). Private equity funds typically consist of pooled funds
contributed by institutional or other sophisticated investors into a
business venture that makes a variety of investments.
\109\ Private investor conversations with Panel staff (June 21,
2010).
\110\ 12 U.S.C. Sec. 1841(a); 12 C.F.R. Sec. 225.11.
\111\ Even under circumstances in which a private equity fund holds
less than 25 percent of voting securities, it may nevertheless be
subject to regulation by the Federal Reserve as a bank holding company.
See 12 U.S.C. Sec. 1841(a); 12 CFR 225.31(d). In addition, a private
equity fund wishing to bid on a failed FDIC-insured institution must
first obtain a charter from its primary regulator to be eligible to bid
on the failing institution. After obtaining a charter, the fund must
then be approved by the appropriate regulator. FDIC Resolutions
Handbook, supra note 33, at 9. The private equity fund may be required
to ``complete and submit transaction specific qualification requests
and other bidder qualification materials as well as confidentiality
agreements, financial and other information'' to the FDIC. The FDIC can
require the fund to supply its private financial information and
subject it to a credit investigation. Federal Deposit Insurance
Corporation, Memorandum to Prospective Bidders, at 1-3 (online at
www.fdic.gov/buying/financial/memo_bidder.pdf).
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Third, many of these banks hold substantial portfolios of
CRE loans, which are poised to experience a new wave of losses
in the coming years. This risk of future losses further strains
small banks' resources and undermines confidence in them,\112\
while putting additional pressure on the due-diligence process
for any potential buyer. As the bank gets smaller, however, it
becomes less valuable for a private equity investor to expend
resources on an elaborate examination of the bank's books,
because the return from the bank may never be enough to justify
those costs. In sum, the combination of these factors may cause
small banks to be perceived as an even riskier investment.
---------------------------------------------------------------------------
\112\ See February Oversight Report, supra note 103, at 2; May
Oversight Report, supra note 6, at 29 (``In addition, banks
experiencing capital weakness--due to anticipated losses in the CRE
market or balance sheets still plagued by troubled assets--may hold
cash as a means of buttressing their capital position.'').
---------------------------------------------------------------------------
Given these multiple stresses on smaller banks' ability to
raise capital, public or private, many of them may struggle to
repay. In discussions with Panel staff prior to the release of
its January 2010 report, Treasury stated that it would focus on
an institution-by-institution approach, a tactic that is well
suited to the exit of large institutions. However, Treasury
also indicated that it would be open to other possibilities,
such as ``bundling'' multiple investments for sale, that might
be particularly conducive to unwinding the large number of
small investments in small institutions. Bundling, or creating
a pool of disparate bank investments, would create a mutual
fund-like investment composed of shares of multiple smaller
banks. It would have the advantage of creating diversity in the
investment; where an investor might be reluctant to be exposed
to one smaller bank, or several smaller banks in the same
region, the possibility of diversifying across multiple banks
in multiple regions might be more attractive, provided that
Treasury avoided correlated risks in the pools. Such pools
would have to be sold consistent with existing securities laws,
but there is ample precedent for such pooled investments
generally. Treasury is continuing to evaluate its disposition
alternatives, including bundling, but as of the release of this
report has yet to finalize an approach.\113\
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\113\ One possibility--one that would bolster banks further--would
be for Treasury to convert its investment to common, which is less
costly for the bank and is higher quality tier-1 capital. This would
place Treasury further down the priority list and deprive it of its
dividend payments, which would deprive taxpayers of revenue from their
investments. For the smallest banks, those that do not have reasonable
access to the capital markets, a conversion to common might both
maintain an illiquid investment while depriving the taxpayers of the
dividend stream owed.
---------------------------------------------------------------------------
Although banks continue to redeem their CPP shares, the
redemption approval criteria, like other supervisory standards,
remain opaque. Regulators have indicated that repayment of CPP
capital receives no special supervisory treatment: it is
treated the same as any other decision to redeem capital.
Redemption of CPP shares is simply included as part of the
routine considerations of capital adequacy, earnings, asset
quality, and liquidity.\114\ Industry groups maintain, however,
that some banks have been confused about repayment criteria, as
Treasury and regulators have neglected to articulate clear
standards.\115\ Industry sources state that transparency is a
question of balance: while too much transparency may allow
banks to ``play'' to the criteria, too little may leave banks
uncertain about how to plan for the future. Bank supervisors
note, however, that they have clear processes for repayment.
The Federal Reserve, for example, has issued a supervisory
letter that publicly sets forth considerations for redemption
of capital, including redemptions of public funds.\116\ It is
nonetheless possible that small banks may depend on clarity
about repayment criteria even more than large banks because
they have limited staff and resources for formulating a
comprehensive exit strategy and because they have fewer options
for exit.\117\
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\114\ Federal Reserve conversations with Panel staff (June 29,
2010). See also FAQs on Capital Purchase Program Repayment and Capital
Assistance Program, supra note 90, at 2 (``Supervisors will carefully
weigh an institution's desire to redeem outstanding CPP preferred stock
against the contribution of Treasury capital to the institution's
overall soundness, capital adequacy, and ability to lend, including
confirming that the institution has a comprehensive internal capital
assessment process.'').
\115\ Industry sources conversations with Panel staff (June 10,
2010).
\116\ Board of Governors of the Federal Reserve System, SR 09-4
Applying Supervisory Guidance and Regulations on the Payment of
Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding
Companies (Mar. 27, 2009) (online at www.federalreserve.gov/boarddocs/
srletters/2009/SR0904.pdf).
\117\ Industry sources conversations with Panel staff (June 10,
2010).
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2. Monitoring of Investments/Treasury's Engagement With Smaller CPP
Recipients
Treasury has hired outside asset managers to monitor the
credit risk posed by its CPP-recipient institutions.\118\ The
asset managers monitor CPP-recipient banks on an ongoing basis,
and Treasury officials regularly meet with the asset managers
to discuss their reports. Using publicly available information,
or information obtained pursuant to the SPAs in the case of
private banks, the asset managers assign each participant bank
a credit score and provide regular write-ups to Treasury. The
asset managers look to a variety of capital ratio markers to
evaluate the investment. For certain institutions, Treasury and
its external asset managers engage in heightened monitoring and
due diligence, and the asset manager may receive non-public
information from the CPP-recipient bank, although Treasury
typically tries to distance itself from such non-public
information. Treasury states that it leans heavily on the
expertise and knowledge of its asset managers.\119\
---------------------------------------------------------------------------
\118\ Treasury has contracted with nine asset managers:
AllianceBernstein LP, FSI Group, LLC, and Piedmont Investment Advisors,
LLC were selected in April 2009. In December 2009, Treasury added
Avondale Investments, LLC, Bell Rock Capital, LLC, Howe Barnes Hoefer &
Arnett, Inc., KBW Asset Management, Inc., Lombardia Capital Partners,
LLC, and Paradigm Asset Management, LLC. U.S. Department of the
Treasury, Treasury Hires Asset Managers under the Emergency Economic
Stabilization Act (Apr. 22, 2009) (online at
www.financialstability.gov/
latest/tg100.html); U.S. Department of the Treasury, Treasury
Department Hires Asset Managers to Serve as Financial Agents for Wind-
Down Phase of EESA (Dec. 23, 2009) (online at
www.financialstability.gov/latest/pr_12232009.html).
\119\ Treasury conversations with Panel staff (June 14, 2010).
---------------------------------------------------------------------------
Asset managers are paid fees based on a sliding scale
relative to the number of institutions they manage: for the
first 50 institutions, the asset manager receives an annualized
fee of $50,000 per financial institution; for the next 50, the
asset manager receives an annualized fee of $40,000 per
financial institution, and for each subsequent institution, the
asset manager receives an annualized fee of $30,000 per
financial institution. Asset managers also receive incentive
fees based on overall returns to Treasury.\120\ Treasury also
relies on federal banking regulators in monitoring recipients,
but it does not have access to non-public information collected
by the regulators. According to the Government Accountability
Office (GAO), Treasury's distance from this non-public
information is deliberate: Treasury maintains a separation
between its responsibilities as an investor and its duties as
government entity. A GAO audit of the TARP found that Treasury
uses the data gathered through the monitoring process, in
consultation with its external managers and legal advisors, to
determine a proper course of action for a stressed institution.
Treasury may make recommendations to the bank's management or
work with the management and other security holders to improve
the financial condition of the bank, including through
recapitalizations or other restructurings. GAO notes that these
actions are ``similar to those taken by large private investors
in dealing with troubled investments'' and that ``Treasury does
not seek to influence the management of TARP recipients'' for
its own investment purposes.\121\ Because these asset managers
are acting on behalf of Treasury in its capacity as an
investor, they do not have any powers that Treasury itself does
not have. For example, the asset managers have no input as to
whether the FDIC takes a bank into receivership.
---------------------------------------------------------------------------
\120\ Incentive compensation fees are determined collectively for
the Asset Managers. Asset managers are responsible for payments to any
subcontractors they hire. See, e.g., U.S. Department of the Treasury
and Piedmont Investment Advisors, LLC, Financial Agency Agreement for
Asset Management Services for Equity Securities, Debt Obligations, and
Warrants, at 9, 25 (Apr. 21, 2009) (online at
www.financialstability.gov/docs/ContractsAgreements/
Piedmont%20FAA%20Equity%20Asset%20Manager%20FINAL.pdf). All of the
financial agency agreements are available online. See U.S. Department
of the Treasury, Office of Financial Stability Contract Detail (online
at www.financialstability.gov/impact/contractDetail2.html) (accessed
July 7, 2010).
\121\ U.S. Government Accountability Office, Financial Audit:
Office of Financial Stability (Troubled Asset Relief Program) Fiscal
Year 2009 Financial Statements, at 56 (Dec. 2009) (GAO-10-301) (online
at www.gao.gov/new.items/d10301.pdf) (hereinafter ``Financial Audit:
Office of Financial Stability Fiscal Year 2009 Financial Statements'').
---------------------------------------------------------------------------
Consistent with this approach, Treasury has repeatedly
referred to itself as a ``reluctant shareholder,'' emphasizing
that it does not plan to interfere in the day-to-day management
of the institutions that have received TARP funds.\122\ The
precise boundaries of this approach are unclear, particularly
in light of the fact that Treasury has taken a more active
stance with certain of its institutions, like General
Motors,\123\ although it does seem Treasury is currently
adhering to a ``hands-off'' approach for smaller banks.
Although industry sources maintain that smaller banks have had
mixed experiences in the CPP, and smaller institutions
expressed frustration with initial delays in rolling out the
program and with the stigma that has become attached to it,
those sources have not reported concerns about any management
role Treasury has played thus far.\124\ Likewise, supervisors
have informed the Panel that they have received no complaints
about Treasury's management approach from the institutions they
supervise.\125\
---------------------------------------------------------------------------
\122\ See House Oversight and Government Reform, Subcommittee on
Domestic Policy, Written Testimony of Herbert M. Allison, Jr.,
assistant secretary for financial stability, U.S. Department of the
Treasury, The Government As Dominant Shareholder: How Should the
Taxpayers' Ownership Rights Be Exercised?, at 5 (Dec. 17, 2009) (online
at oversight.house.gov/images/stories/
Allison_Testimony_for_Dec-17-09_FINAL_2.pdf) (hereinafter ``Allison
Testimony before House Oversight and Government Reform Subcommittee on
Domestic Policy'') (``[T]he U.S. government is a shareholder
reluctantly and out of necessity'' and Treasury ``intend[s] to dispose
of [its] interests as soon as practicable, with the dual goals of
achieving financial stability and protecting the interests of the
taxpayers'').
\123\ See, e.g., Congressional Oversight Panel, September Oversight
Report: The Use of TARP Funds in the Support and Reorganization of the
Domestic Automotive Industry, at 20-21 (Sept. 9, 2009) (online at
cop.senate.gov/documents/cop-090909-report.pdf) (describing Treasury's
role in initiating board and management changes at General Motors).
\124\ Industry sources conversations with Panel staff (June 10,
2010).
\125\ The supervisors also do not report significant contacts with
Treasury about its investments. OCC conversations with Panel staff
(June 10, 2010); FDIC conversations with Panel staff (June 14, 2010);
Federal Reserve conversations with Panel staff (June 29, 2010); OTS
conversations with Panel staff (July 7, 2010).
The OTS has stated that Treasury has called to inform them that an
OTS-supervised bank has missed a dividend payment. Federal Reserve
conversations with Panel staff (June 29, 2010).
---------------------------------------------------------------------------
For CPP participants that miss six consecutive dividend
payments, Treasury has the ability to appoint an independent
member to its Board of Directors.\126\ A bank's regulator can
suspend payment of dividends. As discussed below, CPP capital
receives no special treatment by virtue of being a Treasury
investment, and therefore supervisors do not accord CPP
Preferred ``special'' treatment when evaluating an
institution's ability to pay a dividend. Rather, dividend
payments are evaluated under standard supervisory criteria, and
an institution that would impair its capital position by paying
a dividend may not do so, although regulators do not disclose
the approach they use in applying their standard criteria.\127\
As of the release of this report, one bank has missed six
payments. This bank missed its sixth dividend payment in May
2010. Treasury has not yet appointed any board members to its
board.
---------------------------------------------------------------------------
\126\ Although Treasury has established how it will manage its
appointment of board members to TARP recipients in which it holds
common shares, its plan for the degree of intervention that it thinks
appropriate to board members for preferred share holdings is not yet
formulated. It is therefore not clear how its approach will mesh with
its ``reluctant shareholder'' policy. See Allison Testimony before
House Oversight and Government Reform Subcommittee on Domestic Policy,
supra note 122, at 5-6.
\127\ See Section C, supra.
---------------------------------------------------------------------------
Treasury is developing policies and procedures for
appointing board members for banks that have missed six
dividend payments. Some of the issues it is considering include
the willingness of skilled and innovative potential board
members to serve on the boards of geographically diverse small
struggling banks, members' ability to sit on more than one
board,\128\ whether board members must live in the same
geographic area as the bank, and the need to purchase
directors' and officers' liability coverage for board
members.\129\ Treasury has informed the Panel that it is also
taking into account state corporate law as well as bank
supervisory requirements as it develops its plan to appoint
board members. Treasury is reviewing the potential use and cost
of search firms to find qualified board members.\130\
---------------------------------------------------------------------------
\128\ A board member who sits on the boards of two directly
competing institutions could implicate the directors' duty of loyalty,
depending on state law, or could also possibly implicate antitrust
laws. See American Law Institute, Principles of Corporate Governance:
Analysis and Recommendations, at Sec. 5.06 (``Competition with the
Corporation'') (2005) (stating that antitrust laws might be implicated
when a director sits on the board of competing corporations).
\129\ One study found that small banks have mixed results
identifying board members. According to a December 2008 survey by the
Federal Reserve Bank of Kansas City, 70 percent of community bankers
``do not anticipate difficulty filling director positions over the next
five years.'' They also reported, however, that ``an increasing
percentage of bankers are finding director recruitment more
problematic; the percentage of bankers expecting greater problems
meeting their director needs increased by more than 60 percent from the
2001 survey.'' In this survey, 66.7 percent of respondents cited
director liability as a factor making it difficult to recruit
directors. Other factors hampering respondents from finding directors
included time and work involved, and difficulty in finding qualified
applicants. Federal Reserve Bank of Kansas City, The 2008 Survey of
Community Banks in the Tenth Federal Reserve Circuit, Financial
Industry Perspectives, at 14 (Dec. 2008) (online at
www.kansascityfed.org/banking/bankingpublications/prs08-2.pdf).
Directors are compensated, but the amounts may not be substantial:
under $10,000 for a bank of under $500 million is common. Industry
sources conversations with Panel Staff (July 8, 2010).
Others state, however, that as long as Treasury provides fairly
broad indemnification to appointees, it should not have a problem
finding qualified directors. In addition, serving as Treasury's
appointee on the board of a bank might be prestigious. Industry sources
conversations with Panel staff (July 8, 2010). There are various
potential sources of directors, such as associations of bank directors.
Because Treasury is still formulating its process, it is not clear as
to whether it will ultimately have difficulty filling board seats.
\130\ Treasury conversations with Panel staff (June 14, 2010).
---------------------------------------------------------------------------
If, during the course of monitoring, the asset manager
finds that a bank is undercapitalized, the asset manager or
Treasury may contact the bank and suggest that it raise private
capital; typically, though, according to Treasury, the bank's
regulator will have already made this recommendation. If the
bank decides to seek additional capital, it submits a formal
request to Treasury.\131\ As part of the bank's submission, it
requests that Treasury perform a formal review and evaluation
of its recapitalization plan. An asset manager hired by
Treasury then conducts due diligence on the bank and analyzes
the recapitalization plan. In the course of its diligence, the
asset manager may interview bank managers, gather non-public
information, including the bank's loan book and the bank
management's analysis of loan losses, and conduct its own loan
loss estimates and capital structure analysis.\132\ Treasury
reviews the work of the asset manager and decides whether to
approve the plan. Among the principles Treasury considers in
determining whether to approve the proposal are: pro forma
capital position of the institution; pro forma position of
Treasury investment in the capital structure; overall economic
impact of the transaction to the government; guidance of the
institution's primary regulator; and consistent pricing with
comparable marketplace transactions.\133\ Treasury has also
stated that it considers whether the concessions it would make
under the deal are fair, and that it will negotiate the deal's
terms, as necessary, to ensure that it is commercially
reasonable, fair, and in the best interests of taxpayers.\134\
In evaluating whether to accept concessions proposed by the
bank, Treasury states that it seeks information from the bank
to determine the size of the concessions being proposed for
other debt and equity holders. Treasury states that it makes
sure that its concessions are on an equal footing with those
made by other debt and equity holders, and that it will not
grant a larger concession than subordinate debt holders
do.\135\
---------------------------------------------------------------------------
\131\ Treasury conversations with Panel staff (June 14, 2010).
\132\ Treasury conversation with Panel staff (June 14, 2010). See
also Office of the Special Inspector General for the Troubled Asset
Relief Program, Quarterly Report to Congress, at 84 (Apr. 20, 2010)
(online at www.sigtarp.gov/reports/congress/2010/
April2010_Quarterly_Report_to_Congress.pdf) (hereinafter ``SIGTARP
April 2010 Quarterly Report'').
\133\ Financial Audit: Office of Financial Stability Fiscal Year
2009 Financial Statements, supra note 121, at 56. See also January
Oversight Report, supra note 92, at 42-43.
\134\ Treasury conversation with Panel staff (Mar. 19, 2010).
\135\ Treasury conversation with Panel staff (Mar. 19, 2010).
---------------------------------------------------------------------------
Treasury will also consider restructuring its investment
such that it might take a loss when the alternative would be
letting the bank fail, resulting in an even greater loss to the
taxpayer.\136\ Treasury has guidelines that provide that a bank
that wants to restructure can only do so in the context of
private capital raising that will provide a more stable footing
for the bank going forward: if the bank can be saved, Treasury
is willing to make concessions in furtherance of that goal.
Treasury states generally that it will not approve transactions
that will adversely affect its holdings.\137\ Treasury also
says that in these circumstances, while it will not make
additional capital infusions, it has little to lose by agreeing
to concessions with regard to banks that are quickly
approaching FDIC resolution, at which point Treasury would lose
its entire investment in any event. Treasury also states that
it has no role in determining whether a CPP-recipient bank
fails: that responsibility falls to the bank's regulators.\138\
Both the FDIC and the Office of Comptroller of the Currency
(OCC) informed the Panel that Treasury has not inserted itself
into their decision-making, and is not involved in the decision
to close a bank.\139\ The supervisors have also stated that a
bank's receipt of CPP funds is not a factor in the decision to
close a bank--they do not consider CPP funds to be ``special''
or different in any way from other forms of equivalent bank
capital.\140\ Treasury has performed restructurings of its
holdings in four institutions; one of these institutions,
Midwest Bank Holding, was later taken into receivership by the
FDIC.\141\
---------------------------------------------------------------------------
\136\ Treasury conversation with Panel staff (June 14, 2010). See
also SIGTARP April 2010 Quarterly Report, supra note 132, at 84.
\137\ Treasury conversation with Panel staff (June 14, 2010).
\138\ Treasury conversations with Panel staff (Mar. 19, 2010 and
June 14, 2010).
\139\ OCC conversations with Panel staff (June 10, 2010); FDIC
conversations with Panel staff (June 14, 2010).
\140\ OCC conversations with Panel staff (June 10, 2010); FDIC
conversations with Panel staff (June 14, 2010); Federal Reserve
conversations with Panel staff (June 29, 2010); OTS conversations with
Panel staff (July 7, 2010).
\141\ See TARP Monthly 105(a) Report--May 2010, supra note 56, at 9
(``Treasury had exchanged its CPP preferred stock ($84.8 million in
initial investment plus $4.3 million in unpaid and accrued dividends)
into $89.1 million of mandatorily convertible preferred stock'');
Federal Deposit Insurance Corporation, Failed Bank Information for
Midwest Bank and Trust Company, Elmwood Park, IL (May 19, 2010) (online
at www.fdic.gov/bank/individual/failed/midwestil.html).
---------------------------------------------------------------------------
Treasury's remedy for missed dividend payments and
restructuring activities is similar to that of a private
investor, but its position as both a government entity and an
investor complicates its exercise of the private investor role.
First, Treasury may not appoint its own employees to a board
position, thereby limiting itself to third-party individuals
and non-employees. A private investor, on the other hand, would
be able to appoint one of its own officers or employees, which
would provide the private investor with a ready pool of
representatives to further its interests.
Second, as an investor in over 700 institutions, most of
them smaller and some of them struggling, Treasury could
potentially need to fill a number of seats from a small
available pool. As noted above, Treasury is currently
evaluating how it will find a large number of qualified people
willing to sit on the boards of troubled institutions.\142\ At
present, Treasury's shareholder rights have only been triggered
with respect to the one institution that has missed six
dividend payments. As CPP investments continue, however, and
are further exposed to the banking sector, Treasury's need to
find qualified board members who are willing to serve will
become more acute.
---------------------------------------------------------------------------
\142\ Treasury conversations with Panel staff (June 14, 2010).
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Third, if a CPP-recipient institution has been mismanaged--
United Commercial Bank of San Francisco, for example, went into
FDIC receivership amid allegations that its downfall was
hastened by fraud at the senior management level \143\--where a
private investor might take more aggressive action, Treasury's
hands-off stance leaves it dependent on the relevant bank's
supervisors to maintain a clean house. While a well-run bank
may ultimately find private or public capital after significant
effort, any weaker or mismanaged recipients may have been
buoyed along by taxpayer funds, merely delaying the inevitable
FDIC resolution or sale. Thus, Treasury's failure to act
promptly, in light of the fact that a private investor would
not hesitate to exercise its rights or discipline management,
creates competitive disparities between CPP-recipient banks and
banks that did not take CPP funds.
---------------------------------------------------------------------------
\143\ See United Commercial Bank Fact Sheet, supra note 60. The
Panel has no non-public information relating to mismanagement at CPP-
recipient banks.
---------------------------------------------------------------------------
Further, if Treasury delays action, it is potentially in
the position of subsidizing mismanaged institutions, which
carries moral hazard concerns. Because the decision to close a
bank is made by supervisors pursuant to preset supervisory
criteria, Treasury does not have the capacity to determine
whether an institution will close.\144\ Treasury's remedies
under the CPP could have been considerably stronger: for
example, in the 1930s, the Reconstruction Finance Corporation's
voting rights doubled if the entities in which it was invested
missed two dividends.\145\ By contrast, CPP SPAs are far
weaker, requiring at least a year and a half of missed
dividends before Treasury can have a say in management. The
result is that Treasury may have overly restricted its ability
to address problem institutions.
---------------------------------------------------------------------------
\144\ Like any private sector investor, Treasury and its asset
managers could determine which banks are likely to close, based on
publicly available data.
\145\ Benton E. Gup, Bank Failures in the Major Trading Countries
of the World, at 80 (1998). See also Congressional Oversight Panel,
April Oversight Report: Assessing Treasury's Strategy: Six Months of
TARP, at 40 (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-
040709-
report.pdf).
---------------------------------------------------------------------------
Finally, also unlike a private investor, which can choose
to write off an investment that is too costly to maintain,
Treasury has policy and statutory concerns that impact its
ability to write off its investments. Treasury has stated that
it will consent to a restructuring that might impair the
investment's value if the alternative is losing the investment
entirely. Treasury could determine that the policy and
maintenance costs of remaining invested in the last CPP banks
\146\ warrants consideration of writing off its investments in
still-functioning institutions, in part because the remaining
investments represent a small portion of the TARP. However,
despite the small size of the remaining investments, this
action could have moral hazard consequences, and might also
contradict EESA's mandate to ``maximize overall returns to the
taxpayers.'' \147\
---------------------------------------------------------------------------
\146\ For a discussion of the future difficulties that may arise
for CPP banks that are unable to exit the program, see Section D.3,
infra.
\147\ 12 U.S.C. 5201(2)(C).
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3. Systemic Considerations for Exit
Treasury has devised a ``three pillar'' exit strategy that
it applies to all TARP recipients. It plans to unwind its
investments in a manner that: (1) maintains systemic stability;
(2) maximizes return on investment; and (3) preserves the
stability of individual institutions.\148\ In conversations
with Panel staff, Treasury did not specify how it plans to
balance these priorities against each other or resolve
conflicts between them when they occur, although Treasury
stated the first two concepts are of higher priority.\149\ The
interplay between the three pillars is vitally important
because there may be tension among them. For example, for those
larger banks that remain in the program, Treasury's attempts to
expedite its exit at the point of maximum value to the taxpayer
could threaten its other policy goals, particularly in
increasing the access to credit, given the continued size and
scope of Treasury's investments.\150\ This concern may be
somewhat assuaged in the context of small banks. Whereas sales
of preferred shares in the world's largest financial
institutions could have systemic consequences, intermittent
sales of shares of individual small banks are less likely to
have a systemic effect. Accordingly, the different nature of
sales of large and small institutions, respectively, may permit
Treasury to employ an exit strategy that hews more closely to
objective measurements: the size of profit realized by the
taxpayer and the strength of the financial institution seeking
exit--provided, of course, that the investments are liquid
enough to sell.
---------------------------------------------------------------------------
\148\ January Oversight Report, supra note 92, at 29-30 (citing
Treasury conversations with Panel staff (Dec. 3, 2009)). In the Panel's
June hearing, Secretary Geithner further elaborated on this strategy,
stating that moving forward Treasury will also ``dispose of investments
as soon as practicable . . . encourage private capital formation to
replace government investments . . . not intervene in the day-to-day
management of private companies in which we have invested, and, as we
implement this strategy, we will seek out the best advice available.''
COP Hearing with Treasury Secretary Timothy Geithner--Written
Testimony, supra note 87, at 5.
\149\ January Oversight Report, supra note 92, at 5 (``The Panel is
also concerned that, although Treasury has been consistent in
articulating its principles, the principles as announced are so broad
that they provide Treasury with a means of justifying almost any
decision'').
\150\ Treasury has responded to this concern by stating that it
interprets its obligation to sell at an ``optimal'' time to mean that
it cannot enter a sale that would undermine systemic stability. Of
course, a bank that fails--after attempts at raising private capital
and restructuring--provides for Treasury's exit, albeit with the loss
of the taxpayers' investment. Whether that failure-as-exit is
systemically significant depends on the size of the bank. January
Oversight Report, supra note 92, at 47 (``One form of exit from the
TARP that has not drawn much attention from commentators involves those
TARP-recipient financial institutions that fail, an event that can be
expected to wipe out the taxpayers' investment. Ironically, when no
further government intervention occurs, this kind of early and
involuntary exit from TARP may have the effect of reducing moral hazard
and restoring market discipline.'').
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Treasury maintains that it is still considering a variety
of approaches for smaller bank repayments,\151\ but the current
repayment outlook for many smaller banks is challenging. If
they continue to face a sluggish recovery, balance sheet
pressure, and severe capital-raising challenges, some of these
smaller banks have few obvious options and are likely to remain
in the TARP for an extended period.\152\ As Treasury's exit
strategy continues to evolve, Treasury states it will give
particular consideration to the smaller private institutions
that now comprise the bulk of CPP participants. Because these
banks' assets are generally illiquid and offer ``no logical
buyer,'' Treasury is planning for the ``friction costs''
associated with their disposition.\153\ In conclusion, although
Treasury has or is in the process of formulating procedures for
managing and disposing of its interest in smaller banks, unless
the economy and the banking sector recover, in many cases it is
not clear that Treasury has many, if any, options other than
``wait and see''--an unacceptable degree of uncertainty for the
taxpayers' investment.
---------------------------------------------------------------------------
\151\ Treasury conversations with Panel staff (June 14, 2010).
\152\ Treasury's proposed SBLF program may present another CPP exit
option for some smaller banks: some banks may be able to convert their
CPP funds to the more favorable terms of the SBLF. However, according
to legislation currently under consideration, at the end of a four and
one half year period, the dividend or interest rate increases to 9
percent. As an incentive to lend, banks with less than $10 billion in
assets that participate in the SBLF pay a dividend or interest rate
based on the amount of small business lending reported in their call
reports during the quarter immediately preceding Treasury's capital
investment--which then forms a baseline figure. The dividend or
interest rate for participating institutions is initially set at 5
percent. During the first two years after an institution receives its
capital investment, the rate is adjusted to reflect changes in the
amount of small business lending relative to its baseline. For every
2.5 percent that an institution increases its small business lending
above its baseline, the rate drops by 1 percent. The dividend or
interest rate may fall as low as 1 percent. The rate reduction will be
limited to the dollar amount of the increase in lending. If an
institution's small business lending remains equivalent to its baseline
or decreases at the end of a two-year period, the dividend or interest
rate increases to 7 percent. The precise details of the conversion
process are unclear, as the legislation provides few specifics and
instead requires the Secretary to issue regulations that will govern
the process. Small Business Jobs Act of 2010, H.R. 5297 (online at
www.congress.gov/cgi-lis/query/z?c111:H.R.5297:). Although the CPP-SBLF
conversion could delay the step-up in dividends for institutions that
participate, and lower its dividend payment in the interim, the SBLF
dividend also increases to 9 percent after 4.5 years, posing some
similar difficulties to those presented by the CPP's design. CPP
participants that have missed more than one dividend payment are not
permitted to convert their CPP capital to the terms of the SBLF.
\153\ Treasury conversations with Panel staff (June 14, 2010).
These ``friction costs'' may also include disposition of illiquid
warrants for public institutions. There are several ways in which the
disposition of warrants for smaller banks could be challenging. First,
it is unlikely that the financial condition of many smaller
institutions will permit these banks to repurchase their warrants from
Treasury (i.e., they lack the capital base to do so). Second, because
the stock of smaller institutions is not as widely traded as that of
larger institutions, it is more challenging to formulate the ``fair
market value'' for the warrants of smaller institutions. July Oversight
Report, supra note 21, at 28. Third, in the event that Treasury decides
to auction its warrants in these banks, the value of the small banks'
warrants may fall short of minimum auction size requirements. In this
case, Treasury can continue to hold the warrant and exercise it at its
discretion; this situation has yet to arise. See note 83, supra.
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E. The Smaller Banking Sector and Treasury
1. Has Including Smaller Banks in the CPP Furthered Treasury's Initial
Objectives?
Any assessment of the merits of including small banks in
the CPP must begin with an understanding of Treasury's
objectives for the program. Treasury has stated that the CPP
was necessary to stabilize the financial system and that,
further, including small banks was necessary for three
principal reasons: (1) to stabilize the system and strengthen
financial institutions so that (2) businesses and individuals
would have access to credit; and (3) to ensure that small banks
were treated fairly relative to larger institutions.
a. Reason One: The CPP Was Necessary to Stabilize the
Financial System
In the fall of 2008, by many measures, the financial system
was on the brink of collapse. At that time and in the days
since, Treasury has argued that the TARP was necessary to avoid
systemic disruptions and to stabilize the financial
system.\154\ Less than six weeks after EESA was passed, then-
Secretary Henry M. Paulson, Jr. stated that the TARP was a
``necessary'' step to ``prevent a broad systemic event.'' \155\
Likewise, in testimony before Congress, then-Interim Assistant
Secretary Neel Kashkari stated that stabilizing financial
markets and reducing systemic risk were ``critical objectives''
of the TARP.\156\
---------------------------------------------------------------------------
\154\ Neel Kashkari, interim assistant secretary for financial
stability, U.S. Department of the Treasury, Remarks before the
Institute of International Bankers (Oct. 13, 2008) (online at
www.financialstability.gov/latest/hp1199.html) (hereinafter ``Kashkari
Remarks before the Institute of International Bankers'') (``The law
gives the Treasury Secretary broad and flexible authority . . . to
purchase any other financial instrument that the Secretary, in
consultation with the Federal Reserve Chairman, deems necessary to
stabilize our financial markets--including equity securities.'').
\155\ U.S. Department of the Treasury, Remarks by Secretary Henry
M. Paulson, Jr. on Financial Rescue Package and Economic Update (Nov.
12, 2008) (online at www.financialstability.gov/latest/hp1265.html).
\156\ House Committee on Financial Services, Written Testimony of
Neel Kashkari, interim assistant secretary for financial stability,
U.S. Department of the Treasury, Oversight Concerns Regarding Treasury
Department Conduct of the Troubled Assets Relief Program, at 1 (Dec.
10, 2008) (online at financialservices.house.gov/hearing110/
kashkari121008.pdf) (hereinafter ``Kashkari Written Testimony'').
---------------------------------------------------------------------------
Systemic stability, however, does not seem to have driven
Treasury's decision to include small banks in the program. As
discussed in Section E.2, small banks may play a vital role in
the economy--by using unique lending technologies to provide
credit to small businesses and by expanding the types of
banking services available to consumers--but the failure of a
small bank is not systemically significant.\157\ Failures of
one, or even many, of the small banks that participated in the
CPP are unlikely to cause the sorts of shocks that froze the
credit markets in September 2008.\158\ Furthermore, as Treasury
described the program as one for healthy banks, Treasury could
not have intended it to prevent a large number of small bank
failures. The allocation of CPP funds was consistent with this
premise: 17 stress-tested banks received 81 percent of the
total CPP funds disbursed, while the other 690 CPP recipient
banks received 19 percent.\159\ The average allocation per
institution was $9.76 billion for stress-tested banks and $60
million for the others. As discussed above, only 9 percent and
37 percent of Smallest and Smaller banks, respectively,
received TARP funds, whereas of Medium and Large banks, 53
percent and 85 percent, respectively, received CPP funds.\160\
---------------------------------------------------------------------------
\157\ FDIC conversations with Panel staff (June 14, 2010); Treasury
conversations with Panel staff (June 14, 2010).
\158\ It is possible that, particularly given the pressures on the
FDIC fund (discussed in Section E.1.b.i, infra), there is some number
of small bank failures that could have created similar wide-spread
freezing of the credit markets. It is, however, difficult to evaluate
this possibility in the abstract.
\159\ See Annex I.2.a, infra. In addition, programs like the TALF
address aspects of the banking industry--such as securitization--that
are less relevant to small institutions. Of course, many aspects of the
government's interventions benefit smaller banks even when they do not
target them directly. Without active securitization markets, for
instance, smaller banks would be less able to recycle capital and
continue lending. Nonetheless, several of the largest government
programs primarily targeted the largest institutions.
\160\ See Annex I.2.a, infra.
---------------------------------------------------------------------------
Moreover, long before many small banks entered the CPP,
Treasury already had asserted that the program had contributed
to stabilizing the financial system. On December 10, 2008, just
over two months after EESA was passed, then-Interim Assistant
Secretary Kashkari announced that the program had succeeded
because the financial system had not collapsed and instead had
become ``fundamentally more stable.'' \161\ Yet on that date,
for the most part only the larger institutions had entered the
program--it would be a year before the smaller banks that were
to participate would complete their entry.\162\ There may
therefore have been longer-term systemic reasons for including
small banks in the CPP, but the timeline above suggests that
Treasury believed that advancing CPP money to the largest banks
was sufficient to immediately stabilize the system in the fall
of 2008.
---------------------------------------------------------------------------
\161\ Kashkari Written Testimony, supra note 156, at 5.
\162\ By December 1, 2008, of the 52 banks that had received CPP
funds, 22 of them had less than $10 billion in assets. By that time,
however, 73.9 percent of the CCP funds had already been disbursed. SNL
Financial. See also Treasury Transactions Report for the Period Ending
June 30, 2010, supra note 2.
---------------------------------------------------------------------------
b. Reason Two: Including Smaller Banks in the CPP Was
Necessary to (1) Strengthen Banks so that They
Could (2) Continue to Make Credit Available
Treasury has also stated that the TARP was necessary to
strengthen financial institutions so that they could keep
credit flowing during a period of economic duress. Although
Treasury designed the CPP to ``attract broad participation by
healthy institutions,'' \163\ the program was announced during
a period of fundamental weakness in the banking sector. The
FDIC's Deposit Insurance Fund was under significant stress, the
credit markets had frozen, and the entire sector was
experiencing a wave of bank failures with rapid declines in
asset valuations, attendant uncertainty, and retrenchment.
Further, in 2008 and early 2009, many smaller banks faced
severe capital shortages. A stress test of smaller banks
conducted by SNL Financial in May 2009 found that of 418
smaller banks, 367 (87.8 percent) needed to raise a total of
$75 billion in additional capital.\164\ Although SNL Financial
has since revised that figure to $43 billion or $35 billion,
depending on which methodology is used, the $75 billion
estimate was cited in several major media sources at the
time.\165\ Given the size of the capital hole and the myriad
pressures faced by smaller institutions during this period,
while stabilizing the small bank sector may not have been a
critical objective of the CPP, it is possible--though
impossible to determine--that providing smaller banks with
funds increased confidence in the sector as a whole, and that
if the CPP had not been extended to smaller banks, credit
markets might have been even more restricted or there would
have been additional bank failures.\166\
---------------------------------------------------------------------------
\163\ U.S. Department of the Treasury, Statement by Secretary Henry
M. Paulson, Jr. on Capital Purchase Program (Oct. 20, 2008) (online at
www.treasury.gov/press/releases/hp1223.htm) (hereinafter ``Statement by
Secretary Henry M. Paulson, Jr. on Capital Purchase Program'');
Kashkari Written Testimony, supra note 156, at 5; CPP Applications
Audit, supra note 25, at 7 (``Under the CPP, Treasury provides funds to
viable financial institutions through the purchase of preferred stock
shares or senior securities, at market value, on standardized
terms.''). Despite Treasury's statements about concentrating the CPP on
healthy institutions, it is possible that some institutions that were
healthy upon entry into the program are not healthy now. When Treasury
reviewed applications, it based its decisions on an assessment of an
institution's health. The accuracy of these assessments depended in
part on assumptions about future market conditions that may have
differed from the state of the market in reality.
\164\ SNL Financial.
\165\ See, e.g. Tenzin Pema, Analysis-Small Bank Share Offers May
Find Fewer Takers, Reuters (May 27, 2009) (online at www.reuters.com/
article/idUKN2744940120090527); Cyrus Sanati, Stress Testing the Rest
of the Banks, New York Times (May 13, 2009) (online at
dealbook.blogs.nytimes.com/2009/05/13/ stress-testing-the-rest-of-the-
banks/).
\166\ For additional discussion of these issues, see the Panel's
May 2010 report. May Oversight Report, supra note 6. For example,
Treasury asserted at the outset that all banks would benefit from the
confidence inspired by government actions taken to quell the crisis,
whether they participated in the CPP or not. Kashkari Remarks on
Financial Markets and TARP Update, supra note 3.
---------------------------------------------------------------------------
Treasury intended the CPP to provide capital in order to
maintain the flow of credit to the economy. When EESA was
passed, then-Secretary Paulson announced that the law
``contains a broad set of tools that can be deployed to
strengthen financial institutions, large and small, that serve
businesses and families.'' \167\ Similarly, in a speech on
October 13, 2008, then-Interim Assistant Secretary Kashkari
stated that EESA would ``empower[ ] Treasury to design and
deploy numerous tools to attack . . . the capital hole created
by illiquid troubled assets,'' which would in turn ``enable our
banks to begin lending again.'' \168\ As the Panel has stressed
repeatedly, these twin objectives were inextricably linked; the
CPP could never be deemed a success if it used taxpayer funds
to shore up bank balance sheets but had no effect on credit
availability. A taxpayer-funded capital infusion that stops at
a bank without flowing to the larger economy in the form of
credit largely serves that bank, not the small businesses and
families that depend upon it.\169\
---------------------------------------------------------------------------
\167\ U.S. Department of the Treasury, Paulson Statement on
Emergency Economic Stabilization Act (Oct. 3, 2008) (online at
www.ustreas.gov/press/releases/hp1175.htm).
\168\ Kashkari Remarks before the Institute of International
Bankers, supra note 154 (``The law empowers Treasury to design and
deploy numerous tools to attack the root cause of the current turmoil:
the capital hole created by illiquid troubled assets. Addressing this
problem should enable our banks to begin lending again.''). See also
Kashkari Written Testimony, supra note 156, at 5 (``We firmly believe
that healthy banks of all sizes should use this program to continue
making credit available in their communities.'').
\169\ December Oversight Report, supra note 17, at 38 (``Treasury
has stated that it limited capital injections from the CPP to healthy
banks in order to ensure that the funds were used for lending, and not
merely to bolster recipient banks' balance sheets.''); Congressional
Oversight Panel, May Oversight Report: Reviving Lending to Small
Businesses and Families and the Impact of the TALF, at 6 (May 7, 2009)
(online at cop.senate.gov/documents/cop-050709-report.pdf) (``The TARP,
and the Administration's broader Financial Stability Plan, will be
successful only if they can revive lending on economically appropriate
terms to meet the credit needs of the American people.'').
---------------------------------------------------------------------------
i. Strengthening Banks
Evaluated against these two metrics of bank strength and
bank lending, it is difficult to evaluate clearly Treasury's
``success'' in realizing these goals for small banks. Data
indicate that while capital may have assisted small banks to
some extent, the sector has not yet recovered from the
financial crisis. Industry sources assert that small banks used
CPP funds for several purposes, including shoring up their
capital bases and replacing loans that were rolling off.\170\
One study found that CPP recipients were healthier than non-CPP
recipients and had a ``higher profitability, a lower ratio of
non-performing loans to total loans and a lower book-to-market
ratio in the quarter prior to the program's initiation.'' \171\
---------------------------------------------------------------------------
\170\ Industry sources conversations with Panel staff (June 10,
2010).
\171\ Ng, Vasvari and Moerman Research Paper, supra note 67. The
authors also found that CPP recipients were perceived negatively by the
equity market, an indication that factors unrelated to program design
may have hindered recipients' performance. By contrast, this Panel
report examines certain, but by no means all, correlations among CPP
recipient banks and finds that differences were generally
insignificant. These findings and differences may reflect the
challenges of isolating the effect of the CPP from other variables.
---------------------------------------------------------------------------
Even so, banks continue to face a wide variety of
pressures, including looming losses on CRE loans, the risk of
future interest rate increases, and the prospect of tighter
capital requirements.\172\ CRE losses may hit CPP-recipient
banks particularly hard: as of the first quarter of 2010,
approximately 40 percent of banks that received CPP funds have
CRE concentrations compared with approximately 19 percent of
non-CPP banks.\173\ According to a Standard & Poor's study, 10
percent of banks in 2009 were assigned a ``D'' rating, which
reflects payment defaults or deferred payments.\174\ More than
700 banks remain on the FDIC's Problem List, and while not all
of them will fail, past experience suggests that roughly 20
percent will.\175\ In addition, more than 30 percent of FDIC-
insured institutions were unprofitable in 2009.\176\ Some of
these banks returned to profitability in the first quarter of
2010--only 19 percent were unprofitable--but it is unclear
whether this change will hold.
---------------------------------------------------------------------------
\172\ May Oversight Report, supra note 6, at 53. See also Ronald
Charbon and Rodrigo Quintanilla, Small U.S. Community Banks Face
Another Tough Year, Standard & Poor's, at 2 (June 14, 2010)
(hereinafter ``Small U.S. Community Banks Face Another Tough Year'').
\173\ Data provided by Foresight Analytics. Guidance established by
federal regulators in 2006 set two commercial real estate measures to
denote an institution's CRE concentration. An institution was deemed to
have a CRE concentration, and therefore warrant extra regulatory
scrutiny, if the ratio of its Construction and Land Development loans
over its total risk-based capital exceeded 100 percent or if the ratio
of the institutions' total CRE loans over total risk-based capital
exceeded 300 percent. Although the Guidance does not place any explicit
limits on the ratio of commercial real estate loans to total assets, it
states that ``if loans for construction, land development, and other
land and loans secured by multifamily and nonfarm, nonresidential
property (excluding loans secured by owner-occupied properties) were
300 percent or more of total capital, the institution would also be
considered to have a [commercial real estate] concentration and should
employ heightened risk management practices.'' Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices, 71
Fed. Reg. 74580, 74581 (Dec. 12, 2006). The supervisors also classify a
bank as having a ``CRE Concentration'' if construction and land loans
are more than 100 percent of total capital. U.S. Department of the
Treasury, Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices, at 7 (Dec. 12, 2006) (online
at www.occ.treas.gov/ftp/release/2006-2a.pdf). For further discussion
of these guidelines, please see February Oversight Report, supra note
103, at 108-109, 113.
\174\ Small U.S. Community Banks Face Another Tough Year, supra
note 172, at 7.
\175\ FDIC conversations with Panel staff (June 14, 2010) (stating
that according to historical data, 19 percent of banks on the Problem
List fail).
\176\ Federal Deposit Insurance Corporation, Quarterly Banking
Profile: First Quarter 2010, at 5 (May 2010) (online at www2.fdic.gov/
qbp/2010mar/qbp.pdf) (hereinafter ``FDIC Quarterly Banking Profile:
First Quarter 2010'').
---------------------------------------------------------------------------
While these studies help to provide some insight into the
CPP, it is difficult to draw definitive conclusions from the
data, principally due to the challenge of isolating the effect
of the CPP from other economic trends and pressures.\177\
Although many small banks were not plagued by problems from the
complicated financial instruments that caused profound damage
to large institutions, they have nonetheless suffered from
stresses in the broader economy, including high unemployment
rates, substantial CRE pressures, and sluggish growth.
Regulatory factors have also affected the small bank sector: as
the Panel noted in its May 2010 report, the prospect of tighter
capital requirements has contributed to uncertainty in the
sector.\178\ In addition, the CPP was not the only government
program designed to assist small banks, so positive results may
reflect the effects of other programs.\179\ It is also
difficult to assess the impact of the CPP because it appears
that short-term participants were able to capture more of the
program's benefits than long-term participants, while avoiding
many of its costs. Short-term participants received a
confidence boost from the bolstered capital cushion, but
avoided being substantially impaired by the stigma and
restrictions that have imposed costs on long-term participants.
---------------------------------------------------------------------------
\177\ See May Oversight Report, supra note 6, at 26 (stating that
it is ``nearly impossible to make a useful evaluation of the
effectiveness of capital infusion programs for the purposes of
increasing lending''). Other methodological difficulties may further
complicate the analysis. For instance, it is possible that CPP
participants share certain common characteristics that distinguish them
from non-CPP banks and skew the results. So few smaller banks
participated in the CPP relative to the number of banks in the sector
that selection bias could have a significant effect. Treasury has
identified one key factor affecting the sample. Because the largest 21
banks participated in the CPP and because their total assets dwarf the
total assets of smaller banks, aggregate CPP results functionally
reflect the experience of large banks and provide little indication of
small bank performance. Treasury conversations with Panel staff (June
11, 2010).
\178\ May Oversight Report, supra note 6, at 53.
\179\ For example, multiple industry sources cited the FDIC's
Transaction Account Guarantee (TAG) program as a resource that has
provided significant support to smaller banks. Industry sources
conversations with Panel staff (June 23, 2010). According to the FDIC,
the program provides customers of ``participating insured depository
institutions'' with ``full coverage on qualifying transaction
accounts.'' Federal Deposit Insurance Corporation, FDIC Board Adopts
Final Rule Extending Tag Program and Maintains Current Deposit
Insurance Assessment Rates (June 22, 2010) (online at www.fdic.gov/
news/news/press/2010/pr10139.html). The TAG program also has much
broader participation than the CPP, possibly based in part on an opt-
out design. While roughly 700 institutions participate in the CPP, over
6,300 have participated in the TAG, and there are no reports that
participants have been stigmatized. Federal Deposit Insurance
Corporation, Final Rule Regarding Amendment of the Temporary Liquidity
Guarantee Program to Extend the Transaction Account Guarantee Program,
at 5 (June 22, 2010) (online at www.fdic.gov/news/board/rule2.pdf).
---------------------------------------------------------------------------
ii. Lending
The CPP's effect on lending is inconclusive. Different
measures produce different results. Many institutions that
received CPP funds did not increase their lending, and some
experienced a decrease in loan value relative to non-CPP
institutions.\180\ According to data provided to the Panel by
Treasury, aside from banks of less than $1 billion in total
assets, non-CPP institutions increased their loan value
relative to CPP institutions between the third quarter of 2008
and the first quarter of 2010.\181\ According to these
measures, participation seems to be correlated with declining
loan value for all but the smallest banks. The Panel reached a
similar conclusion in its May 2010 report, finding that
``most'' CPP recipients decreased their lending, but it also
cited data from SNL Financial indicating that banks between $10
billion and $100 billion grew their lending portfolios.\182\
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\180\ Data provided by Treasury (June 11, 2010). It is worth
noting, however, that neither Treasury nor federal financial regulators
have pushed big banks to deploy their TARP funds in lending to
consumers, small businesses, and smaller banks to ``unfreeze'' the
financial markets the way they have pushed small banks. This may be in
part because the larger institutions have largely exited, and therefore
are not subject to the public pressure arising from the lingering
credit crunch.
\181\ Data provided by Treasury (June 11, 2010). It is difficult to
evaluate this data because it does not account for the influence of
demand on loan value and because it does not account for the effect of
selection bias.
\182\ May Oversight Report, supra note 6, at 3, 62 (``Treasury has
launched several TARP initiatives aimed at restoring health to the
financial system, but it is not clear that these programs have had a
noticeable effect on small business credit availability.''). The SNL
data was for the period between 2008 and 2009. On the other hand,
SIGTARP found that CPP funds helped some banks to continue lending
despite the downturn. More generally, SIGTARP found that TARP funds
were used for lending, capital reserves and investments. Office of the
Special Inspector General for the Troubled Asset Relief Program, Survey
Demonstrates that Banks Can Provide Meaningful Information on their Use
of TARP Funds, at 5, 7 (Jul. 20, 2009) (SIGTARP-09-001) (online at
www.sigtarp.gov/reports/audit/2009/SIGTARP_
Survey_Demonstrates_That_Banks_Can_Provide_Meaningful_Information_On_
Their_Use_Of_TARP_Funds.pdf). SIGTARP distributed its survey letters in
February 2009, surveying only 364 of the 707 CPP participants.
---------------------------------------------------------------------------
One research paper found that CPP recipients used the bulk
of the capital infusions to increase their Tier 1 capital
ratios, rather than to increase their lending.\183\ The paper
also concluded, however, that the CPP had a measurable effect
on lending, as CPP recipients used about 13 cents out of every
CPP dollar to increase their lending.
---------------------------------------------------------------------------
\183\ Taliaferro Working Paper, supra note 35, at 2. In the Panel's
May Report, the Panel also noted that the Federal Reserve's practice of
paying interest on excess reserves may have also created an incentive
for banks to hold cash. See May Oversight Report, supra note 6, at 29.
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However, the paper's findings must be analyzed in light of
two of its core assumptions: first, that selection bias does
not distort comparisons between TARP recipients and non-TARP
assisted banks,\184\ and second, that the measurement period
from September 2008 until June 2009 accurately captures loan
growth as a result of the CPP. In June 2009, many banks--
predominantly the smaller ones--had not even entered the
program,\185\ and some of the banks that had already received
capital investments may not yet have realized the effects of
the program. Accordingly, there are no strong data to conclude
that a substantial portion of the taxpayer dollars provided to
small banks made it into small business lending or other forms
of credit.\186\
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\184\ As noted above, because many institutions withdrew their
applications after consultation with bank regulators but were never
formally rejected, it is hard to know what, if any, characteristics
distinguish participants from non-participants.
\185\ See Treasury Transactions Report for the Period Ending June
30, 2010, supra note 2. As noted above, the first nine banks that
participated did so without a formal application. Subsequent banks were
required to apply and undergo an evaluation.
\186\ See also May Oversight Report, supra note 6, at 58-66.
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c. Reason Three: Including Smaller Banks in the CPP Was
Necessary to Ensure That All Banks Were Treated
Fairly
Treasury also maintains that including small banks in the
CPP served fairness.\187\ That said, while small banks were
eligible to receive TARP funds, there were still differences in
access and experience in comparison to the larger institutions.
For example, the largest banks received funds almost
immediately, but many small banks experienced delays in
entering the program.\188\ When they were eventually granted
access, they found themselves in a program that by then much of
the public viewed negatively. As the Panel's May 2010 report
documented, a TARP ``stigma'' attached to TARP recipients, and
for many of them, their businesses suffered as a result.
Moreover, industry sources maintain that restrictions that were
applied after banks accepted TARP funds have made banks
hesitant to participate in the TARP, as they have no guarantee
that the restrictions in place at the time they accept
government funds will remain constant.\189\ Thus, CPP capital
that might have seemed cheap in late 2008 or early 2009, when
the financial system was reeling, may have become more
expensive today.\190\ As a result, some institutions that
initially applied to the CPP subsequently withdrew their
applications, and an unknown number of institutions decided not
to apply. Others had already accepted TARP funds, but for
reasons discussed in more detail in Section D, have been unable
to raise capital to exit the program. Consequently, as large
banks tap capital markets and existing shareholders to raise
the funds necessary to exit the program, some smaller banks
remain trapped in a program that may harm their
businesses.\191\ Ultimately, despite Treasury's attempt to
design the program so that it would provide broad support to
healthy banks of all sizes, the experience of the smaller banks
has been fundamentally different from the experience of the
largest banks.
---------------------------------------------------------------------------
\187\ See Congressional Oversight Panel, Testimony of Timothy F.
Geithner, secretary, U.S. Department of the Treasury, Transcript: COP
Hearing with Treasury Secretary Timothy Geithner (June 22, 2010)
(publication forthcoming) (online at cop.senate.gov/hearings/library/
hearing-062210-geithner.cfm). Prior to this testimony, Treasury's
statements about the CPP implied that it took the principle of fairness
into account when it designed the program. See Statement by Secretary
Henry M. Paulson, Jr. on Capital Purchase Program, supra note 163
(``This program is designed to attract broad participation by healthy
institutions and to do so in a way that attracts private capital to
them as well. . . . In addition to the nine banks who announced their
participation last week, we have received indications of interest from
a broad group of banks of all sizes.'').
\188\ See Treasury Transactions Report for the Period Ending June
30, 2010, supra note 2.
\189\ May Oversight Report, supra note 6, at 68-72.
\190\ As discussed above, the cost to a bank of retaining CPP
capital depends on the particular bank, its access to alternative
sources of capital, and the degree of stigma it may be experiencing
(e.g. is it the only bank in its market to have accepted or to retain
CPP funds). As time has passed, further, the perception has become more
negative over time. See Phoenix Field Hearing on Small Business
Lending, supra note 38, at 98 (stating that CPP funds were initially
perceived as an endorsement of the bank).
\191\ See Section E.2, infra (discussing the consequences for banks
that cannot exit the CPP).
---------------------------------------------------------------------------
2. How Will the CPP Affect the Smaller Bank Sector in the Future?
In spite of the CPP, the small bank sector is generally
unhealthy now, although it may improve if market conditions
improve. While it is difficult to reach any definitive
conclusion about the role of the CPP in strengthening or
weakening the sector, several challenges face the smaller banks
that received CPP funds as these banks seek to exit the
program. The first option for exit is simply to redeem
Treasury's investments. As discussed above, it is not at all
clear, however, that these banks will have the means to do so
any time soon.\192\
---------------------------------------------------------------------------
\192\ Small banks are largely unable to access the capital markets
at reasonable cost or to tap existing shareholders in order to raise
capital and, in the current economy, many who might normally invest in
small banks are unwilling to take the risk or are short on investment
capital themselves. See Section D, supra.
---------------------------------------------------------------------------
Smaller banks also could face stiffer competition from the
19 stress-tested banks--CPP recipients or otherwise--since
those banks have been the beneficiaries of an implicit
guarantee conferred by their status as ``too big to fail.''
\193\ Officials have recognized that this guarantee could
threaten the competitiveness of the banks that were not
included in the stress tests.\194\ Chairman Bernanke proclaimed
that the guarantee could create ``competitive inequities that
may prevent our most productive and innovative firms from
prospering'' \195\ and Chairman Bair stated that this
``regulatory structure as it stands today puts community banks
at a sizeable competitive disadvantage.'' \196\ Such
disadvantage is likely to impair further these banks' ability
to raise capital, and smaller private banks may struggle
significantly to find a clear way out of the CPP.\197\
---------------------------------------------------------------------------
\193\ Large institutions may benefit from an implicit guarantee.
See January Oversight Report, supra note 92, at 14 (``The decisions to
rescue certain financial institutions have created an implicit
government guarantee, the limits of which are unknown and the reasons
for which are not fully articulated.''). The ramifications of this
implicit guarantee may be visible in certain comments by rating
agencies with regard to Citigroup. In its July 31, 2009 report,
Standard & Poor's gave Citigroup a credit rating of ``A'' but noted
``the potential for additional extraordinary government support, if
necessary,'' and further stated that Citigroup's rating ``reflects a
four-notch uplift from our assessment of Citigroup's stand-alone credit
profile.'' Standard & Poor's, Global Credit Portal, Citigroup Inc.
(July 31, 2009) (emphasis added). Treasury has also stated that it
could not allow any of the 19 stress-tested institutions to fail and
that doing so would have constituted a breach of the government's
promise to ensure that any stress-tested institution would have access
to government support. Treasury conversations with Panel staff (Feb.
18, 2010).
\194\ These banks have, in effect, a hidden subsidy. In September
2009, Dean Baker and Travis McArthur of the Center for Economic and
Policy Research conducted a study on implicit subsidies received by
banks considered ``too big to fail'' during the height of the financial
crisis. To determine the value of these subsidies, Baker and McArthur
compared the average cost of funds for banks with more than $100
billion in assets and for banks with under $100 billion in assets. With
respect to banks with more than $100 billion in assets, the average
cost of funds was 0.78 percentage points lower than the cost of funds
for smaller banks from the final quarter of 2008 to the second quarter
of 2009. Based on their calculations, this spread would translate into
a subsidy of $6.28 billion (low scenario) or $34.16 billion (high
scenario) for the large banks. Baker and McArthur's subsidy estimates
represent 8.8 percent and 47.7 percent, respectively, of projected
profits in 2009 for their sample institutions. Dean Baker and Travis
McArthur, The Value of the ``Too Big to Fail'' Big Bank Subsidy, Center
for Economic and Policy Research Paper, at 4 (Sept. 2009) (online at
www.cepr.net/documents/publications/too-big-to-fail-2009-09.pdf).
\195\ Ben S. Bernanke, chairman, Board of Governors of the Federal
Reserve System, Preserving a Central Role for Community Banking, Speech
before the Independent Community Bankers of America, at 4 (Mar. 20,
2010) (online at www.federalreserve.gov/newsevents/speech/
bernanke20100320a.pdf) (hereinafter ``Bernanke Speech before ICBA'').
\196\ Commercial Real Estate: A Drag for Some Banks but Maybe Not
for U.S. Economy, supra note 103.
\197\ As of June 23, 2010, 75 banks have redeemed their CPP
investments, leaving 625 still in the program. Of banks with less than
$1 billion in assets, 3.5 percent have repaid. Although some have found
the means to exit, the overwhelming majority have not. See Linus Wilson
and Yan Wendy Wu, Escaping TARP (June 3, 2010) (online at
papers.ssrn.com/sol3/
papers.cfm?abstract_id=1619689).
---------------------------------------------------------------------------
The second option for these banks is to keep the funds and
continue paying dividends. This would require ongoing
monitoring by Treasury, as well as oversight by several bodies
including the Financial Stability Oversight Board, SIGTARP, and
GAO, which have mandates to oversee the TARP until all TARP
investments are repaid.\198\ As the number of CPP recipients
still in the program dwindles, and small institutions' share of
the program increases, Treasury will have to make a decision
about what its role will look like in handling these small,
scattered investments. Treasury should disclose operational and
strategic elements of the program--such as its approach to
recapitalizations and its reluctance to take losses--making
generally available its management and investment approach. It
should not, however, reveal non-public information about
individual institutions.\199\
---------------------------------------------------------------------------
\198\ 12 U.S.C. Sec. Sec. 5214(h), 5226(e), 5231(k).
\199\ See January Oversight Report, supra note 92, at 45 (``This
traditional position of the regulators conflicts with the need for
Treasury as investor in particular banks to know as much as possible
about the financial condition of those banks. In these circumstances,
the regulators' traditional lack of transparency may do a disservice to
the taxpayers, investors, and to the marketplace in financial
institutions' securities.'').
---------------------------------------------------------------------------
Indefinite participation may, however, be unsustainable for
other reasons, such as the scheduled increase in the CPP
dividend after five years. Since the dividend increase was
designed to provide an incentive to repay the investments,
presumably those banks that can pay off the investment at that
point will do so. Banks that do not pay may run the risk of
signaling to the market that they are unable to redeem, which
may have the effect of creating further instability. In
addition, the jump in payments, coupled with the other
pressures on small banks--most notably troubled real estate
loans--and continued sluggishness in economic growth overall,
may force banks to miss dividend payments or default on other
obligations. Even without these pressures, a 9 percent dividend
is expensive, and bank earnings may be insufficient to cover
the increased dividend. Banks that cannot redeem their CPP
shares may be forced to find a buyer to take over the bank, or
wind up in FDIC receivership. A struggling bank with certain
attractive features, such as a desirable branch network, may be
able to find another bank interested in expanding. Other banks
may be unable to find a buyer, especially in the current
economic environment, and will wind up in the FDIC's resolution
process.\200\ If a buyer can be found for a failing CPP bank,
the CPP investment may be redeemed. If the bank fails and is
put into FDIC receivership, it is unlikely that the money will
be repaid.
---------------------------------------------------------------------------
\200\ See Annex I.C.4, infra.
---------------------------------------------------------------------------
Whether a bank is acquired by another bank or is completely
unwound by the FDIC, the result will be a concentration in the
banking sector resulting from consolidations or closures among
banks. Even before the dividend increase may have the potential
to force banks to sell or merge, the CPP had the effect of
increasing concentration in the banking sector: the largest
banks, after all, got most of the CPP funds. Of course, it is
also possible that certain mergers did not happen because of
the CPP: a small bank that would otherwise have been acquired
by a larger bank was instead able to continue operations on its
own because of the infusion of TARP capital. The question of
concentration was, however, a side issue in late 2008 when the
TARP was first developed. Former Treasury Secretary Paulson
noted in testimony in November 2008 that individual instances
of bank consolidation may be beneficial overall: ``I will make
the general point that, if there is a bank that is in distress
and it is acquired by a well capitalized bank, there is more
capital in the system, more available for lending, better for
communities, better for everyone.'' \201\ Interim Assistant
Secretary for Financial Stability Neel Kashkari expressed a
similar sentiment in his testimony before the Senate Committee
on Banking, Housing, and Urban Affairs just a month earlier:
---------------------------------------------------------------------------
\201\ House Committee on Financial Services, Testimony of Henry M.
Paulson, Jr., secretary, U.S. Department of the Treasury, Oversight of
the Implementation of the Emergency Economic Stabilization Act of 2008
and of Government Lending and Insurance Facilities: Impact on the
Economy and Credit Availability, at 34 (Nov. 18, 2008) (online at
frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:46593.pdf).
To the point of consolidation, I do not think we have
any specific program focus on consolidation. Again, I
think it will be a case-by-case analysis with our
regulatory colleagues. The example I gave I think is a
good one. If you had a small failing institution that
was being acquired by a much healthier, stronger
institution, the idea of putting Government/taxpayer
dollars into that combined entity, we think that is a
good use of taxpayer dollars because that community is
well served now by that combined stronger
institution.\202\
---------------------------------------------------------------------------
\202\ Kashkari Testimony before Senate Banking, supra note 17, at
35.
Although those working on the development of the TARP and the
CPP were aware of the potential for increased concentration,
they do not appear to have viewed the CPP's role as either
explicitly encouraging or discouraging such a trend.
Recently, however, the question of whether increased bank
concentration may have a positive, negative, or neutral effect
on financial stability has become a contested topic,
particularly in light of proposed changes to financial
regulation.\203\ Former Treasury Secretary Paulson testified in
May that ``I think that the level of concentration where we
have ten big institutions with 60 percent of the financial
assets . . . this is a dangerous risk.'' \204\ Economist Simon
Johnson has also argued in favor of breaking up large banks as
a means of increasing stability.\205\ Others, however, have
argued that banking concentration actually increases financial
stability. White House financial advisor Lawrence Summers
recently explained that observers who study this issue have
found that:
---------------------------------------------------------------------------
\203\ The proposed Safe, Accountable, Fair, and Efficient Banking
Act of 2010 or the SAFE Banking Act of 2010, would cap at 10 percent
the total U.S. assets that any one bank holding company could own.
Safe, Accountable, Fair, and Efficient Banking Act of 2010, S.3241
(online at thomas.loc.gov/cgi-bin/bdquery/z?d111:s3241:).
\204\ The Shadow Banking System, supra note 77, at 46.
\205\ Simon Johnson, Make the Call or Get Out of the Booth: After
the President's ``Wall Street'' Speech, The Baseline Scenario (Apr. 22,
2010) (online at baselinescenario.com/2010/04/22/make-the-call-or-get-
out-of-the-booth-after-the-president's-wall-street-speech/) (supporting
the Brown-Kaufman amendment on the grounds that it is ``our best near-
term chance to reduce the size of Wall Street megabanks that are too
big to fail and that threaten our economy.'').
to try to break banks up into a lot of little pieces
would hurt our ability to serve large companies and
hurt the competitiveness of the United States . . .
[And most observers who study this issue] believe that
it would actually make us less stable, because the
individual banks would be less diversified and,
therefore, at greater risk of failing, because they
wouldn't have profits in one area to turn to when a
different area got in trouble. And most observers
believe that dealing with the simultaneous failure of
many--many small institutions would actually generate
more need for bailouts and reliance on taxpayers than
the current economic environment.\206\
---------------------------------------------------------------------------
\206\ Lawrence Summers, director, White House National Economic
Council, PBS NewsHour (Apr. 22, 2010) (online at www.pbs.org/newshour/
bb/business/jan-june10/summers_04-22.html). To the extent that a
financial crisis is geographically or industry-specific, a banking
system populated with smaller, regional banks may be better able to
keep the crisis confined to those regions or industries. While a large
number of banks in one area or that cater to one industry may suffer,
the banking system as a whole may be less vulnerable. On the other
hand, however, large banks are more likely to have diversified business
units and therefore be able to absorb loss in one industry or region
without facing the collapse of the bank as a whole. And, given the
concentration that already exists in the sector, the smaller banks may
be an insufficient counterweight to any serious threat to the largest
institutions.
And some researchers have found that: ``[financial] crises are
less likely in economies with (i) more concentrated banking
systems, (ii) fewer regulatory restrictions on bank competition
and activities, and (iii) national institutions that encourage
competition.'' \207\ While the debate over whether increased
concentration in the banking sector will have a positive or
negative effect on our national economy is ongoing, the trend
toward concentration is clear.\208\
---------------------------------------------------------------------------
\207\ Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine, Bank
Concentration and Crises, National Bureau of Economic Research Working
Paper, No. 9921 (Aug. 2003) (online at www.nber.org/papers/w9921.pdf).
\208\ In addition, there are commercial pressures that may lead
towards concentration. Small banks may be unable to compete with larger
institutions as their customers demand certain complex services that
are beyond the capacity of small banks to provide. This pressure may
contribute to the trend toward concentration.
---------------------------------------------------------------------------
This trend was firmly established even before the current
crisis, but the trend has accelerated since the crisis, and
Treasury should evaluate the effect of the CPP on
concentration.\209\ Since 2006, there have been 860 bank
purchases and mergers of banks by other banks and bank holding
companies.\210\ In bank-to-bank acquisitions, the smallest
banks were targets for many consolidations, including those
involving other banks with less than $1 billion in total
assets, acting as a buyer for 379 transactions. In bank-to-bank
transactions, banks with $1 billion to $10 billion in assets
completed 214 purchases and mergers. Banks with $10 billion to
$100 billion in assets executed 49 bank-to-bank deals, while
the largest banks or bank holding companies were involved in 44
deals.\211\ Acquiring banks generally targeted other banks in
asset groups smaller than their own, and the location of the
targets of acquisition was generally consistent with the
distribution of banks across regions.\212\
---------------------------------------------------------------------------
\209\ See Annex I, infra.
\210\ This number references bank purchases by other banks and bank
holding companies. A total of 916 purchases and mergers were completed
during this period; the remaining banks were purchased by investor
groups, management groups, and private investors.
\211\ A significantly larger proportion of acquisitions, therefore,
are performed by Large/Medium banks relative to their numbers in the
market. However, these figures do not account for buyers that do not
report their size in regulatory filings, such as some smaller bank
holding companies, de novo bank purchasers, and other similar entities.
However, the bank holding companies with over $100 billion in assets
are accounted for in these numbers.
\212\ SNL Financial. The targets were concentrated in the Midwest,
with the Southeast next, followed by the Southwest, then the Mid-
Atlantic, the West, and the Northeast. Banks are generally concentrated
in the Midwest, followed by the Southwest, the Southeast, the Mid-
Atlantic, the West, and the Northeast.
---------------------------------------------------------------------------
FIGURE 4: NUMBER OF PURCHASES AND MERGERS BY SIZE OF TARGET BANK (2006-
2010) \213\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\213\ SNL Financial. As noted above this chart does not account for
buyers that do not report their size in regulatory filings, such as
some smaller bank holding companies, de novo bank purchasers, and other
similar entities. However, the bank holding companies with over $100
billion in assets are accounted for in these numbers.
---------------------------------------------------------------------------
Further bank failures either as a result of the crisis
alone, or as a result of some banks' inability to repay the
funds they received from Treasury, may accelerate the trend.
Because the largest banks that were included in the stress
tests were deemed to be too big to fail, the rate of small and
medium bank failures is much greater than the rate of large
bank failures. The result is that fewer banks serve a growing
population, and a greater percentage of those banks are large
institutions. As assets in the industry have grown, the number
of banks has fallen precipitously.
FIGURE 5: TOTAL BANKING ASSETS FROM 1934 TO 2009 COMPARED TO NUMBER OF
INSTITUTIONS \214\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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\214\ Data provided by Federal Deposit Insurance Corporation and
Rochdale Securities. Adjusted for inflation into 1982-1984 dollars.
Bureau of Labor Statistics, Consumer Price Index (Instrument: Annual,
All Urban Consumers) (online at www.bls.gov/cpi/).
---------------------------------------------------------------------------
This increase in concentration could potentially have the
ancillary, and likely unpopular, effect of reducing competition
and giving the remaining banks a freer hand in setting terms
for their depositors, possibly resulting in higher fees and
more restrictions on account holders. Individuals and families
with smaller accounts may receive diminished customer service,
and smaller businesses are likely to suffer as well. Moreover,
the limited systemic effect of small banks belies the critical
role they can play in local economies.\215\ For example,
community banks play a critical role in providing loans to
small businesses and farmers, representing 38 percent of all
loans to those businesses, despite holding only 11 percent of
bank industry assets.\216\ Smaller institutions are likely to
play an even more important role in lending in the wake of the
crisis, as large banks have cut back on lending to an even
greater degree than have smaller banks.\217\ The shift is due
in part to the increasing prevalence of ``relationship
lending'' and the decreasing use of credit scoring. The
former--which requires the use of ``soft data'' such as
personal knowledge of the individual or business seeking the
loan--is practiced almost exclusively by small banks, and the
latter almost exclusively by large banks.\218\ It is possible,
of course, that financial institutions would fill any void left
by failed smaller banks. In particular, larger banks would
likely pursue the profitable business opportunities previously
performed by those failed small banks, although the reduction
in competition in a particular market may raise fees. Further,
mismanaged banks that fail may enhance competition and market
discipline, which is good for the sector as a whole and leads
to better services for customers. In addition, Treasury should
not provide unquestioning support for weak banks. Swift
exercise of its shareholder rights may help create discipline.
Nonetheless, in light of the role community banks play in real
estate lending \219\ and lending to small businesses,\220\ a
further concentration in the small bank sector could have
challenging and possibly systemic spillover effects, and large
banks might choose not to pursue some bank services for which
there is a minimal but not non-existent market. To the extent
that participation in the CPP contributes to this process, it
would be regrettable.
---------------------------------------------------------------------------
\215\ See Section D.3, supra. Although community banks are not
systemically critical in terms of their effect on the capital markets,
there is still reason to be concerned that if a large number of
community banks were to fail, there could be substantial economic
effects, including job losses and a contraction in lending. It is
possible that these effects would be mitigated by the FDIC, which in
the past has relied successfully upon its resolution authority and
deposit insurance fund to address small bank failure. See Bernanke
Speech before ICBA, supra note 195, at 2 (``A prototype for such a
framework already exists--namely, the rules set forth in the Federal
Deposit Insurance Corporation Improvement Act of 1991 for dealing with
a failing bank.''). See also Sheila C. Bair, chairman, Federal Deposit
Insurance Corporation, Remarks to the Council of Institutional
Investors-Spring Meeting (Apr. 12, 2010) (online at www.fdic.gov/news/
news/
speeches/chairman/spapr1210.html). However, because the FDIC fund was
under tremendous pressure in 2008 and 2009, it is unlikely that it
could have served as an exclusive source of support for small banks,
and it might not have been well positioned to maintain systemic
continuity. Federal Deposit Insurance Corporation, 2009 Annual
Performance Plan (Apr. 29, 2009) (online at www.fdic.gov/about/
strategic/performance/2009/insurance.html) (Bank failures in 2008
resulted in significant losses to the Deposit Insurance Fund, causing
the reserve ratio to decline from 1.22 percent at the beginning of the
year to 0.4 percent on December 31, 2008); Federal Deposit Insurance
Corporation, FDIC-Insured Institutions Report Earnings of $914 Million
in the Fourth Quarter of 2009 (Feb. 23, 2010) (online at www.fdic.gov/
news/news/press/2010/pr10036.html) (stating that the balance of the
fund was negative $20.9 billion on December 31, 2009). In fact, as a
result of the crisis' sharp, steady drain on the fund, the FDIC took
the unusual step of requiring insured institutions make a lump sum
prepayment of 3.25 years' worth of insurance premiums. Federal Deposit
Insurance Corporation, Banks Tapped to Bolster FDIC Resources FDIC
Board Approves Proposed Rule to Seek Prepayment of Assessments (Sept.
29, 2009) (online at www.fdic.gov/news/news/press/2009/pr09178.html).
\216\ Congressional Oversight Panel, Written Testimony of Stan
Ivie, San Francisco regional director, Federal Deposit Insurance
Corporation, Phoenix Field Hearing on Small Business Lending, at 8
(Apr. 27, 2010) (online at cop.senate.gov/documents/testimony-042710-
ivie.pdf).
\217\ May Oversight Report, supra note 6, at 62.
\218\ May Oversight Report, supra note 6, at 64-65.
\219\ See Federal Deposit Insurance Corporation, The Future of
Banking in America: Community Banks: Their Recent Past, Current
Performance, and Future Prospects (Jan. 2005) (online at www.fdic.gov/
bank/analytical/banking/2005jan/article1.html) (noting that
``[a]lthough community banks control less than 14 percent of banking-
sector assets, they fund almost 29 percent of the industry's commercial
real estate lending'').
\220\ May Oversight Report, supra note 6, at 64-65.
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Finally, the potential consolidations among smaller CPP
banks should be examined in comparison to another crisis
program, the FDIC's Transaction Account Guarantee (TAG)
program. This program insures amounts in non-interest bearing
accounts at participating institutions, including amounts over
and above the $250,000 deposit insurance that is currently
provided to all member institutions.\221\ Originally set to
expire on December 31, 2009, the program has been extended
twice: once to June 30, 2010 and most recently to December 31,
2010.\222\ If signed into law, the Dodd-Frank Wall Street
Reform and Consumer Protection Act would extend the TAG an
additional two years.\223\
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\221\ 12 CFR Sec. 370 (online at www.fdic.gov/news/board/
08BODtlgp.pdf).
\222\ 12 CFR Sec. 370 Amendment RIN 3064-AD37 (online at
www.fdic.gov/news/board/rule2.pdf).
\223\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, supra note 92, at Sec. 343. The House of Representatives passed
the Dodd-Frank Wall Street Reform and Consumer Protection Act in a 237-
192 vote on June 30, 2010, but as of July 13, 2010, the Senate has not
yet taken action.
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The design of the TAG differed in a number of respects from
that of the CPP. Unlike the CPP, which required banks to apply
for funds, the TAG is an opt-out program; any FDIC insured
institution is included in the program unless it affirmatively
opts out. The result is that 80 percent of institutions are
covered.\224\ Further, in addition to being more widely
available than the CPP, the TAG quite specifically comes into
play only when an institution fails, but the confidence it
provides is available to all participants. While it is widely
available to all banks, healthy or otherwise, it only matters
when the bank fails. By using an opt-out and a guarantee
structure, the TAG side-stepped some of the primary issues that
have come to plague the CPP--stigma and repayment.
---------------------------------------------------------------------------
\224\ 12 CFR 370 (online at www.fdic.gov/news/board/08BODtlgp.pdf).
---------------------------------------------------------------------------
Industry sources state repeatedly that the TAG provided a
calming effect by assuring depositors that their money would be
as protected in a small TAG-participating bank as in one of the
largest stress tested banks. This may modulate the anti-
competitive effect of the implicit guarantee for the too-big-
to-fail stress-tested banks, preventing potential runs on
smaller banks, and stabilizing the sector. On the other hand,
the TAG may add to concentration in the sector, as depositors
with more than $250,000 may have less of a need to diversify by
searching out a second or third bank to provide insurance on
their deposits, and may therefore make depositors less likely
to use a smaller bank. As the Panel has stressed repeatedly,
``too big to fail'' continues to be a factor in the capital
markets, and it provides large institutions with competitive
advantages over small institutions.\225\
---------------------------------------------------------------------------
\225\ See January Oversight Report, supra note 92, at 14-15.
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The TAG, and its reputed success, have implications for
program design going forward. If the TAG, rather than the CPP,
is responsible for the current relative stability of the
smaller banking sector, then it might have been possible to
stabilize the non-systemic smaller banks using less aggressive,
but ultimately less destabilizing, means than the CPP. Of
course, although the TAG may have diminished the likelihood of
bank runs, it did not help small banks to remedy their capital
deficits. The TAG did not provide a critical benefit that was
provided by the CPP: capital. While the TAG may have assisted
in preventing the flight of deposits from small banks, these
deposits are not classified as Tier 1 capital, and so
maintaining a deposit base would not have helped small banks to
plug the serious capital holes they faced in 2008 and 2009. For
this reason, it is unlikely that the TAG would have been
sufficient on its own. An additional weakness of the TAG is
that it may create moral hazard problems by creating
disincentives for depositors to evaluate the strength of their
institutions.
The final chapter to this story has not yet been written.
Although not every bank on the FDIC's problem list fails, there
are several hundred banks on the list, and more failures are
likely to come, some of them, to be sure, unavoidable and
appropriate given the weakness of the bank.\226\ But when the
story is complete, it is likely that the largest banks will
have fewer competitors, that consumers will have a more limited
slate of banking options, and that fewer smaller banks will
exist to provide the services that make them a distinctive
player in the banking industry.\227\ Depending on the scope and
scale of future bank failures, the smaller bank sector may look
very different at the end of the crisis than it did at the
beginning. The likelihood that participation in the CPP will
produce divergent outcomes for small banks and large banks
underscores their different experiences in the program.
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\226\ See Annex I.2.c, infra.
\227\ For example, community banks inject a specific culture into
the market, a culture that results in the provision of specific
services that larger institutions may be unable to provide. The Panel's
May report, for example, documented the importance of ``relationship
lending'' to small businesses. Small banks are most likely to engage in
this type of lending. May Oversight Report, supra note 6, at 64-65.
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F. Conclusion
The banks that remain in the CPP are numerous, diverse,
and, in many cases, still stressed. Most importantly, many of
them, particularly the smaller or private institutions, have no
clear path for repaying their CPP investment and exiting the
program. Facing weak profits, without practical or cost-
efficient access to the capital markets, and generally below
the radar of private equity investments, these banks may be
dependent on retained earnings or neighbors, family, friends,
or angel investors to help them raise sufficient capital to
repay their CPP investments. The willingness of such informal
networks of investors to invest depends, of course, at least in
substantial part on whether a given bank is a good bet, which
in turn depends not only on the bank itself, but on broader
economic markers--real estate values and exposure, the
prognosis for the banking sector, and the outlook for the
economy as a whole. This may, ultimately, be one of the biggest
differences between the experiences of smaller and larger banks
in the CPP. For the stress-tested banks, the CPP proved to be a
short-term investment. They entered early, and most have exited
early--beneficiaries of capital market confidence resulting, in
part, from their status as ``too big to fail.'' For them, the
stigma and uncertainty associated with the program is time-
limited. For smaller banks, by contrast, the CPP is a long-term
investment, subject to market uncertainty, stigma, and
pressure. Without the benefits of the implicit government
guarantee, they enjoy no comparable capital market confidence,
because investors in smaller banks are more likely to pay the
price of making a bad bet.
Meanwhile, if the economy stays sluggish, Treasury will
continue to hold a large portion of functionally illiquid
investments in the banking sector. Although at approximately
$24.9 billion these investments are small relative to the size
of the TARP overall, they leave Treasury with difficult
challenges.
Treasury has no concrete plan for exiting its CPP
investments in smaller institutions. Treasury has, at present,
not laid out a concrete path for divestment of many of the
assets it holds, and it has not yet developed a plan for
appointing board members to institutions with the requisite
number of dividends in arrears, although it is in the process
of developing board-appointment policies and procedures.
Further, although Treasury is in the process of evaluating its
options for both elements of the ongoing investment, the long
term nature of the investment may give rise to additional
complex management concerns.
Treasury may remain invested in smaller banks through the
CPP for years to come, which could destabilize the sector. The
CPP was designed to provide Tier 1 capital to banks, so under
the terms of the program, Treasury cannot call the investments;
Treasury must remain invested in the CPP recipient until such
time as the relevant regulator and the bank determine that the
bank is able to pay off the CPP Preferred. While the dividend
increase in 2013 may create an incentive for banks to repay,
whether those repayments will be possible will depend on a
variety of concerns particular to each individual bank, and a
bank's inability to repay after the dividend increase may
signal weakness and increase stigma. Meanwhile, 9 percent may
prove a costly dividend, and indeed some, or many, smaller CPP
recipients may be forced to downsize or merge in order to pay
off their investments. Treasury's long time frame increases
uncertainty, and subjects the investments to future financial
shocks, management stresses, and other contingencies. In the
face of these concerns, and in view of the relatively small
sums involved, Treasury could consider writing off the
investments. A write-off, however, would not only increase
moral hazard, but might also contradict EESA's mandate.
If the CPP's design ultimately pushes smaller institutions
towards merger or sale, then the small bank sector may refuse
to participate in future financial stability efforts. The
Panel's May 2010 report discussed the consequences of stigma
and after-the-fact restrictions on CPP participants in the
context of participation in the Small Business Lending Fund
(SBLF). If pressures from the CPP push smaller banks to merge
or sell, in particular banks that would not have done so if
they were not in the CPP, the effects could extend beyond the
SBLF. Negative consequences from the CPP could tie
policymakers' hands and impair the use of capital infusions as
a tool in a future crisis. Further, while the effect of banking
concentration on systemic stability is unclear, less
competition may nonetheless have negative consequences for the
communities that lose their banks, including higher fees and
fewer services.
In light of the potentially long time frame and the
increased uncertainty of CPP investments in smaller banks, the
Panel recommends that Treasury:
Analyze ongoing information on which smaller
banks took CPP funds and which smaller banks have
repaid CPP funds, in order to determine commonalities
among them and use those commonalities to create a
strategy for exit, to help anticipate risks in the
portfolio, and to evaluate the effectiveness of capital
infusions for stabilizing smaller banks, given the
program design of the CPP (compared, for example, to
that of the TAG);
Review the CPP's impact on bank
consolidations and concentration in the banking sector
generally. Although concerns about bank consolidation
may not have informed the program at the outset,
increasing concentration in the banking sector could
have adverse effects on competition and services
offered to customers, and, potentially, systemic
stability;
Articulate and determine options for the
illiquid portions of its portfolio, such as warrants
that are too small to be listed on an exchange,
including bundling or pooling investments if that makes
them more attractive to investors;
Articulate clear measures for risk-testing
its own portfolio;
Expeditiously determine and articulate its
process and considerations for appointing board members
to banks that are in arrears, including the way in
which it will locate board members for those banks;
For banks that Treasury's asset manager
believes should raise additional capital, retain or
create a workout team that will swiftly negotiate a
deal;
In order to keep CPP-recipient banks
diligently searching for capital and to avoid moral
hazard concerns, clearly articulate its restructuring
policy and indicate to CPP participants that it will
protect the priority of its investments; and
Aggressively exercise its shareholder
rights, such as appointing directors, in those banks
that have missed the requisite number of dividends, in
order to protect the taxpayers' investment and maintain
market discipline.
Annex I: U.S. Banking Sector Data \228\
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\228\ All data in this annex is derived from SNL Financial unless
otherwise noted. Due to GMAC receiving assistance under the Automotive
Industry Financing Program rather than the CPP, Ally Bank, a commercial
bank subsidiary of GMAC, is excluded from this analysis. Also, although
KeyCorp's first quarter 2010 total assets were below $100 billion,
KeyCorp is included in the greater than $100 billion bucket due to its
inclusion in the Supervisory Capital Assessment Program (SCAP).
Furthermore, banks in organization have been excluded from this
analysis.
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The U.S. banking sector is dominated by a small number of
enormous institutions, followed by a larger number of regional
banks of significant size, and finally thousands of small
banks. Of the 17 stress-tested bank holding companies (BHCs)
that received CPP funds, all but four have repaid, leaving
$14.3 billion in CPP funds outstanding for larger BHCs and
approximately $24.9 billion outstanding for all other CPP
participants.\229\ The likelihood of repayment of CPP funds by
smaller BHCs is largely dependent on their overall health. This
annex of the report compares CPP-recipient institutions, using
data at the bank level, to the overall banking sector and to
non-TARP recipients, evaluating their capital condition, key
business characteristics, and exposure levels, in an effort to
determine correlations among them.\230\ As in the report, banks
have been broken into four asset categories: those with more
than $100 billion in assets (Large Banks),\231\ those with $10-
$100 billion in assets (Medium Banks), those with $1-$10
billion in assets (Smaller Banks), and those with less than $1
billion in assets (Smallest Banks).
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\229\ On September 11, 2009, Treasury's original $25 billion
preferred stock investment in Citigroup, Inc. was converted to 7.7
billion shares of common stock. Treasury is in the process of
liquidating its common stock holdings in Citigroup. Therefore, although
the Treasury department still maintains an ownership position in
Citigroup, for the purposes of this analysis it is deemed repaid.
Treasury Transactions Report for the Period Ending June 30, 2010, supra
note 2, at 15.
\230\ Although TARP CPP funds were distributed at the BHC level,
the data presented in this section is at the bank level. For example if
a BHC has five subsidiary banks, then the data for those five banks is
used in this section's analysis, with the understanding that those
banks roll up to the BHC level that received CPP funds. Thus, TARP-
assisted banks include all the subsidiary banks that roll up to a TARP-
assisted BHC.
\231\ When referring to Large Banks in the population of all banks,
three are included that did not receive TARP funding: HSBC USA, RBS
Citizens, and TD Bank. GMAC is also included in the Large Banks
population when analyzing ``all banks,'' but it is not included in the
data when only TARP or non-TARP banks are compared, because, as
discussed further below, it did not receive CPP funds, although it
received TARP AIFP funds. The inclusion of these banks in the ``all
banks'' category further distorts the data skew in all banks caused by
a few large banks holding the majority of total assets.
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1. Amount of CPP Funds
BHCs were initially limited to receiving CPP funds of only
a set percentage of risk-weighted assets.\232\ Those with less
than $500 million in assets could take CPP funds in an amount
up to 5 percent of risk-weighted assets.\233\ Those with more
than $500 million in assets could take CPP funds up to the
lesser of 3 percent of risk-weighted assets or $25
billion.\234\ Because CPP funds were based on risk-weighted
assets, of which larger BHCs hold more than smaller BHCs, the
larger BHCs received more funds than smaller BHCs, even though
smaller BHCs were able to receive a larger proportion of funds
relative to risk-weighted assets. The ultimate effect was that
81 percent of all CPP funds went to the 17 stress-tested BHCs
that received funding, with the remaining 19 percent was
disbursed among 690 other banks. Even though BHCs were able to
take CPP funds of up to 3 or 5 percent, depending on their
size, of their risk-weighted assets, many chose to take less.
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\232\ House Financial Services, Subcommittee on Financial
Institutions and Consumer Credit, Written Testimony of David N. Miller,
acting chief investment officer, Office of Financial Stability, U.S.
Department of the Treasury, The Condition of Financial Institutions:
Examining the Failure and Seizure of an American Bank, at 2 (Jan. 21,
2010) (online at www.house.gov/apps/list/hearing/financialsvcs_dem/
miller_house_testimony_final_1-21-10_5pm.pdf).
\233\ U.S. Department of the Treasury, Frequently Asked Questions
regarding the Capital Purchase Program (CPP) for Small Banks (online at
www.financialstability.gov/docs/CPP/FAQonCPPforsmallbanks.pdf)
(accessed July 7, 2010).
\234\ U.S. Department of the Treasury, Application Guidelines for
TARP Capital Purchase Program (Oct. 20, 2008) (online at
www.financialstability.gov/docs/CPP/application-guidelines.pdf).
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Although many of the Large Banks have repaid their CPP
funds, five of these institutions still make up over half of
the CPP funds outstanding as of June 30, 2010.\235\ As
illustrated in Figure 2 in Section C.3 above, approximately 75
percent of the funds received by Large Banks has been repaid.
The amount outstanding for the remaining banks (Medium,
Smaller, and Smallest) is $24.9 billion but is held by over 500
institutions. Furthermore, almost 70 percent, 80 percent, and
100 percent of CPP funds received by Medium, Smaller, and the
Smallest Banks, respectively, are still outstanding.
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\235\ Citigroup, SunTrust, Regions Financial, Fifth Third Bancorp,
and KeyCorp are the five Large Banks with CPP funds outstanding of $25
billion, $4.8 billion, $3.5 billion, $3.4 billion, and $2.5 billion,
respectively. Treasury Transactions Report for the Period Ending June
30, 2010, supra note 2, at 1, 4.
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2. Key Characteristics of Banks
The health of the CPP recipients remaining in the program
is a fundamental concern when reviewing the CPP. The health of
CPP recipients, however, is best evaluated in the context of
the larger banking sector, and as compared to non-CPP
recipients. This comparison helps determine whether there are
particular or unusual stresses on CPP recipients that will
impact their ability to raise capital or garner earnings
sufficient to repay Treasury. The U.S. banking sector, however,
has a distribution of assets that can obscure some
characteristics of the data, particularly when discussing CPP
recipients. Bank asset size is skewed toward a very small
number of very large banks. This distribution can distort data
when viewed in the aggregate.\236\ This report uses the
aforementioned groupings of banks based on asset sizes--Large,
Medium, Smaller, Smallest--as a way to demonstrate the effect
of the distribution.
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\236\ For example, in a group of 10 banks, in which nine banks have
$1 billion in assets and one has $100 billion, the mean asset size will
be $10.9 billion. The mean asset size of those 10 banks in the example,
however, misrepresents the small size of the majority of these 10
banks, as well as the large size of the single exception. In some
cases, therefore, the use of a median figure rather than a mean more
accurately portrays certain data. With respect to the banking system,
the differentiation between mean and median is important because the
largest banks sometimes obscure categorical averages. For example, the
mean asset value held by banks with over $100 billion in assets is
$637.7 billion. However, when one removes the three banks with the most
assets in the sample, the average declines markedly to $313.4 billion.
Therefore, the average is primarily a reflection of a handful of banks
at the very top of the respective category.
However, performing the same exercise with the median is
illustrative. The median asset value of banks with over $100 billion in
assets is $193.3 billion, not even a third of the mean for the same
sample. Furthermore, when one removes the three banks with the most
assets in the sample, the median declines comparatively slightly to
$172.3 billion. Therefore, the median is less a reflection of the
handful of banks at the top of the respective category and more a
reflection of relative asset distribution throughout the category. Both
categories, mean and median, are important when looking at the banking
sector. However, the relative strengths of each also must be recognized
and appreciated. The mean can disproportionately represent the top-end
of banking samples while providing a relatively narrow view of the
sample's distribution. The median can offer a more accurate view of the
middle quartiles of the distribution but it obscures the effect of
outliers because it is less affected by the extreme ends of the
respective distribution. When viewed in concert, the mean and median
offer more accurate observation points for scrutinizing the data than
would be the case if either measure were to be presented on its own.
---------------------------------------------------------------------------
a. Number of Banks
The vast majority of banks fall into the category of
Smallest Banks. As shown in Figure 6, 92 percent of banks have
less than $1 billion in assets. Smaller Banks, those with
between $1 billion and $10 billion in assets, make up 7 percent
of all banks. Medium Banks \237\ and Large Banks comprise only
1 percent and 0.3 percent, respectively, of all banks.
---------------------------------------------------------------------------
\237\ Banks of this size are also known as ``regional'' banks.
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FIGURE 6: NUMBER OF TARP-ASSISTED AND UNASSISTED BANKS, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The distribution of asset categories among unassisted banks
is fairly consistent with that among all banks, with Smallest
Banks making up 94 percent of the pool, Smaller Banks making up
5 percent, and Medium/Large Banks comprising a combined 1
percent of all unassisted banks. Only one of the 19 stress-
tested BHCs with assets over $100 billion did not receive TARP
funds.\238\ The composition of TARP-assisted banks is slightly
different, with Smallest and Smaller Banks making up 70 percent
and 23 percent, respectively, and Medium and Large Banks making
up 5 percent and 2 percent, respectively, of all assisted
banks. Thus, for TARP-assisted banks, there is a lower
concentration of Smallest Banks than that seen in the overall
population of banks, and a higher concentration of the other
bank asset sizes. Although Smallest and Smaller Banks dominate
the population of TARP-assisted banks, they represent only 9
percent and 37 percent, respectively, compared to the total
number of banks in those asset categories. Conversely, for
Medium and Large Banks, 53 percent and 85 percent of all banks
in those asset categories received CPP funds.
---------------------------------------------------------------------------
\238\ As noted above, in the spring of 2009, the Federal Reserve
along with the other bank supervisors engaged in a stress test of the
19 largest bank holding companies. All banks with over $100 billion in
assets were stress tested, except for three banks not wholly owned by
U.S. bank holding companies (HSBC USA, RBS Citizens, and TD Bank), as
mentioned earlier. Although not stress-tested and not part of TARP
banks, they are included in data referencing all banks with over $100
billion in assets. In addition, KeyCorp was stress tested, even though
it currently holds less than $100 billion in assets. Because it was
stress tested, it will be included in this Report's group of Large
Banks, in order to keep it with the other stress tested banks. MetLife,
which became a BHC in 2001, was the only stress tested BHC that did not
receive TARP funds. As mentioned earlier, GMAC is included in Large
Banks' data for the population of all banks. GMAC received TARP AIFP
funds, the terms of which were substantially similar to the CPP funds.
For purposes of this section of the report, however, GMAC is not
included in TARP banks. Similarly, Bank of America and Citigroup
received part of their TARP funds under the Targeted Investment Program
(TIP). Although the TIP funds carried a higher dividend rate, for
purposes of this report, they will be counted as equivalent to CPP
funds. Thus, the Large Banks category used in this section of the
report is an imperfect proxy for stress-tested banks but provides the
best reference data for those banks. See Board of Governors of the
Federal Reserve System, Order Approving Formation of a Bank Holding
Company and Determination on a Financial Holding Company Election, at 7
(Feb. 12, 2001) (online at www.federalreserve.gov/boarddocs/press/BHC/
2001/20010212/attachment.pdf).
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FIGURE 7: CONCENTRATION OF BANK ASSETS, BY SIZE (2007-2009) \239\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\239\ Data compiled using the Federal Deposit Insurance
Corporation's Statistics on Depository Institutions. Four asset
categories were created in order to facilitate a snapshot of the
industry at the end of each financial quarter. Federal Deposit
Insurance Corporation, Statistics on Depository Institutions (online at
www3.fdic.gov/sdi/) (Instrument: Past Due 90+ Days 1-4 Family
Residential) (accessed July 1, 2010).
---------------------------------------------------------------------------
As shown in Figure 7, the number of banks has decreased by
719 banks from the third quarter of 2007 to the first quarter
of 2010, while the total assets of all banks has increased by
approximately $2 billion, primarily driven by the increase in
Large Banks' assets. The total assets of Medium Banks decreased
by roughly $500 million during this same period, suggesting
that they were either acquired by Large Banks or grew into
Large Banks through their own acquisitions and mergers. The
total assets of Smaller and Smallest Banks remained relatively
constant, which, when combined with the total decrease in
overall number of banks, suggests that these banks cannibalized
among themselves, or failures and acquisitions in these bank
categories allowed the remaining banks to gain the leftover
market share. Overall, the graph clearly shows a more
concentrated banking sector in 2010 compared to before the
economic crisis.
b. Bank Asset Sizes and Regional Distribution
Large Banks hold 58 percent of the total assets of all
banks, followed by Medium Banks, Smallest Banks, and Smaller
Banks with 17 percent, 15 percent, and 10 percent,
respectively. Isolating TARP-recipient banks produces a greater
skew towards Large Banks, as they hold 80 percent of all assets
for CPP recipients. Medium, Smaller, and Smallest Banks' assets
comprise 12 percent, 6 percent, and 2 percent of the total bank
assets for CPP recipients.\240\
---------------------------------------------------------------------------
\240\ Within size groups, assisted banks tend to be slightly larger
than non-TARP assisted banks. Of the banks with assets under $1
billion, the median size of non-TARP banks is $125 million. Among
assisted banks, the median size among banks under $1 billion is $267
million. A comparison within the $1 to $10 billion groups shows a
similar trend: the median size of banks in this group among non-TARP
banks is $1.67 billion, while the median size of assisted banks in this
group is $1.96 billion. Among banks with between $10 and $100 billion
in assets, the trend reverses, with TARP banks holding a median of
$17.58 billion and non-TARP assisted banks holding a median of $19.25
billion.
---------------------------------------------------------------------------
Functionally, in addition to holding the vast majority of
TARP funds, banks with more than $100 billion in assets hold
the vast majority of assets held by all assisted banks. Of the
$11.8 trillion of assets held by all assisted banks, 80 percent
is held by banks with more than $100 billion in assets. Banks
with between $10 and $100 billion hold 12 percent of the
assets. Banks with assets between $1 and $10 billion hold 6
percent. Finally, banks with less than $1 billion, which
represent 70 percent of all assisted banks, hold only 2 percent
of the assets held by assisted banks.\241\
---------------------------------------------------------------------------
\241\ The small percentage of Smaller and Smallest TARP Banks
compared to the total population of Smaller and Smallest Banks may
reflect a variety of factors. To begin with, nearly 50 percent of the
Large Banks received funds prior to the institution of a formal
application process and were thus simply enrolled in the program
without application evaluation. This not only skews the percentage of
Large Banks, but it also means that the application process differed
enormously for Large Banks. By way of comparison, the equivalent for
the Smallest Banks would be if 3,000 of them had simply been enrolled
without a required application evaluation, making it more of an opt-out
program than an opt-in program. CPP Applications Audit, supra note 25,
at 9. For the Smaller and Smallest banks that did apply, it is possible
that the cost of the TARP application process is more burdensome on
those banks, as they do not have specialized staff or excess resources
to cover the time and costs. Smaller institutions generally face higher
compliance costs than larger institutions, and it is reasonable to
assume that a bank with few employees will be more burdened by the
application process than one with many. Cf. May Oversight Report, supra
note 6, at note 325. Time of entry may also have affected willingness
to participate: although the largest banks received their funds early,
smaller banks did not begin to enter the TARP until early 2009, at
which point a stigma had begun to develop around banks that accepted
TARP funds, and many withdrew their applications as a result.
Congressional Oversight Panel, Written Testimony of Candace Wiest,
president and chief executive officer, West Valley National Bank,
Phoenix Field Hearing on Small Business Lending, at 2 (Apr. 27, 2010)
(online at cop.senate.gov/documents/testimony-042710-wiest.pdf). An
unknown number presumably decided not to apply.
---------------------------------------------------------------------------
FIGURE 8: TOTAL BANK ASSETS, BY REGION AND SIZE \242\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\242\ Region in which the company is headquartered. Mid-Atlantic
(MA): DC, DE, MD, NJ, NY, PA, PR; Midwest (MW): IA, IL, IN, KS, KY, MI,
MN, MO, ND, NE, OH, SD, WI; New England (NE): CT, MA, ME, NH, RI, VT;
Southeast (SE): AL, AR, FL, GA, MS, NC, SC, TN, VA, VI, WV; Southwest
(SW): CO, LA, NM, OK, TX, UT; West (WE): AK, AS, AZ, CA, FM, GU, HI,
ID, MT, NV, OR, WA, WY.
---------------------------------------------------------------------------
Generally, the total number of banks by region mirrors the
asset distribution across regions. Banking assets are
concentrated in the Midwestern and Southeastern banks, but this
is largely due to the presence of Large Banks in those regions.
FIGURE 9: TOTAL BANK ASSETS, BY REGION AND SIZE, EXCLUDING BANKS WITH
MORE THAN $100 BILLION IN ASSETS \243\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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\243\ Region in which the company is headquartered. Mid-Atlantic
(MA): DC, DE, MD, NJ, NY, PA, PR; Midwest (MW): IA, IL, IN, KS, KY, MI,
MN, MO, ND, NE, OH, SD, WI; New England (NE): CT, MA, ME, NH, RI, VT;
Southeast (SE): AL, AR, FL, GA, MS, NC, SC, TN, VA, VI, WV; Southwest
(SW): CO, LA, NM, OK, TX, UT; West (WE): AK, AS, AZ, CA, FM, GU, HI,
ID, MT, NV, OR, WA, WY.
---------------------------------------------------------------------------
When banks with assets over $100 billion are removed,
banking assets are concentrated in Southwestern banks, with
Mid-Atlantic and Midwestern banks close behind. The Southwest
has the largest concentration of Smallest Banks. The Northeast
holds the smallest portion of banking assets.
FIGURE 10: TOTAL ASSETS BY REGION \244\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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\244\ Region in which the company is headquartered. Mid-Atlantic
(MA): DC, DE, MD, NJ, NY, PA, PR; Midwest (MW): IA, IL, IN, KS, KY, MI,
MN, MO, ND, NE, OH, SD, WI; New England (NE): CT, MA, ME, NH, RI, VT;
Southeast (SE): AL, AR, FL, GA, MS, NC, SC, TN, VA, VI, WV; Southwest
(SW): CO, LA, NM, OK, TX, UT; West (WE): AK, AS, AZ, CA, FM, GU, HI,
ID, MT, NV, OR, WA, WY.
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FIGURE 11: TOTAL ASSETS BY REGION, EXCLUDING BANKS WITH MORE THAN $100
BILLION IN ASSETS \245\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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\245\ Region in which the company is headquartered. Mid-Atlantic
(MA): DC, DE, MD, NJ, NY, PA, PR; Midwest (MW): IA, IL, IN, KS, KY, MI,
MN, MO, ND, NE, OH, SD, WI; New England (NE): CT, MA, ME, NH, RI, VT;
Southeast (SE): AL, AR, FL, GA, MS, NC, SC, TN, VA, VI, WV; Southwest
(SW): CO, LA, NM, OK, TX, UT; West (WE): AK, AS, AZ, CA, FM, GU, HI,
ID, MT, NV, OR, WA, WY.
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The distribution of TARP-assisted institutions is fairly
proportional to the total asset concentration in each region,
with the Southwest being an outlier, although this is due to
the absence of banks with assets over $100 billion in this
region. The Southwest exhibits similar proportions to the other
regions when banks with assets over $100 billion are excluded
from the population. As TARP-assisted institutions are
proportional across regions, an initial comparison shows no
regional distinction or preference for TARP-recipient banks
versus those that did not receive funding. Accordingly, TARP
banks are not necessarily any more exposed to particular
regional stresses or concentrations than non-TARP banks.\246\
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\246\ SNL Financial data.
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c. Loan Exposures and Delinquencies, by Type
Loan exposures, loan delinquencies, and non-performing
loans provide greater insight into the health of a bank and the
strength of its assets.\247\ Exposures provide detail about the
types of loans banks have originated and their susceptibility
to negative market trends relating to those loans, as well as
the diversification of their loan portfolios. Delinquencies
show the actual balance sheet effects of poor loans or market-
related factors. As more loans become past due for longer
periods of time, the likelihood they will be repaid decreases.
This has immediate cash-flow implications and can cause long-
term liquidity concerns.
---------------------------------------------------------------------------
\247\ For the purposes of this report, a delinquent loan is one
that is over 30 days past due, and a non-performing loan is one that is
over 90 days past due.
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i. Commercial and Industrial (C&I) Loans
FIGURE 12: C&I LOANS AS A PERCENTAGE OF TOTAL LOANS, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Large and Medium Banks hold a slightly greater percentage
of Commercial and Industrial (C&I) loans than Smaller and
Smallest Banks. C&I loans are generally issued by Large and
Medium Banks because of the loan size and exposure to
industrial sectors and commercial projects. It is possible that
because TARP banks held a larger percentage of C&I loans than
non-TARP banks, they were more susceptible to the economic
downturn.
FIGURE 13: C&I LOANS 90+ DAYS PAST DUE AS A PERCENTAGE OF ALL LOANS 90+
DAYS PAST DUE, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The percentage of non-performing C&I loans to all non-
performing loans for Smallest Banks is approximately equal to
the percentage of C&I loans to all loans at those banks. This
is the expected trend, as the proportion of non-performing C&I
loans mirrors the proportion of all C&I loans. For the other
bank categories, however, the percentages of non-performing C&I
loans to all non-performing loans are much lower than that of
C&I loans to all loans, which implies that the C&I portfolio is
healthier than that of other loan types at those banks.
ii. Single Family Residential Loans
FIGURE 14: 1-4 FAMILY RESIDENTIAL LOANS AS A PERCENTAGE OF TOTAL LOANS,
BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As exhibited in Figure 14 above, banks' exposure to 1-4
family residential (single family) loans is fairly equal across
bank asset categories, varying between roughly 28 and 37
percent of total loans.\248\ The exposure to single family
loans is slightly higher at non-TARP banks, except in the case
of Large Banks. Although the percentages of single family loans
30-89 days past due mirror the proportions of single family
loans as a percentage of all loans across bank asset sizes, the
non-performing loans, or those 90 days or more past due, show
significant differences.
---------------------------------------------------------------------------
\248\ The data on single family loans in Figures 14, 15, and 16
includes revolving and permanent loans secured by real estate as
evidenced by mortgages (FHA, Farmers Home Administration, VA, or
conventional) or other liens secured by 1-4 family residential
property, for domestic offices only. It includes liens on: nonfarm
property containing 1-4 dwelling units or more than 4 dwelling units if
each is separated from other units by dividing walls that extend from
ground to roof, mobile homes where (a) state laws define the purchase
or holding of a mobile home as the purchase of real property and where
(b) the loan to purchase the mobile home is secured by that mobile home
as evidenced by a mortgage or other instrument on real property,
individual condominium dwelling units and loans secured by an interest
in individual cooperative housing units, even if in a building with 5
or more dwelling units, vacant lots in established single-family
residential sections or areas set aside primarily for 1-4 family homes,
housekeeping dwellings with commercial units combined where use is
primarily residential and where only 1-4 family dwelling units are
involved. See generally Congressional Oversight Panel, March Oversight
Report: Foreclosure Crisis: Working Toward a Solution (Mar. 6, 2009)
(online at cop.senate.gov/documents/cop-030609-report.pdf);
Congressional Oversight Panel, August Oversight Report: The Continued
Risk of Troubled Assets (Aug. 11, 2009) (online at cop.senate.gov/
documents/cop-081109-report.pdf); Congressional Oversight Panel,
October Oversight Report: An Assessment of Foreclosure Mitigation
Efforts After Six Months (Oct. 9, 2009) (online at cop.senate.gov/
documents/cop-100909-report.pdf); April Oversight Report, supra note
104.
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FIGURE 15: 1-4 FAMILY RESIDENTIAL LOANS 90+ DAYS PAST DUE AS A
PERCENTAGE OF ALL LOANS 90+ DAYS PAST DUE, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 16: SINGLE FAMILY LOANS 90+ DAYS PAST DUE (Q1 2007_Q1 2010), BY
SIZE \249\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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\249\ Data compiled using the Federal Deposit Insurance
Corporation's Statistics on Depository Institutions. Four asset
categories were created in order to facilitate a snapshot of the
industry at the end of each financial quarter. Federal Deposit
Insurance Corporation, Statistics on Depository Institutions
(Instrument: Assets and Liabilities) (online at www3.fdic.gov/sdi/)
(accessed July 1, 2010).
---------------------------------------------------------------------------
As noted in Figure 14, in the case of Large Banks, single
family loans comprise 35 percent of the total loan portfolio,
but, as Figure 16 shows, non-performing single family loans
represent over 70 percent of all non-performing loans at these
banks. Thus, delinquent single family loans comprise over two-
thirds of Large Banks' non-performing loans, whereas these
loans drive only one-third of the total loan portfolio.\250\
Conversely, as shown when comparing Figures 14 and 15 above,
although there are only three non-TARP Large Banks, their
percentage of single family loans to all loans is similar to
that of Large TARP Banks, but the proportion that are non-
performing compared to all non-performing loans is nearly
zero.\251\ The comparative results for Large TARP and non-TARP
Banks are statistically significant, meaning there is a 95
percent confidence level that the observed results indicate a
more than random variability.\252\
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\250\ In the case of Large Banks, because the pool of banks is much
smaller, results at one bank can greatly impact the results for all
Large Banks. For instance, JPMorgan Chase Bank accounts for 51.5
percent of non-performing loans at Large Banks, due to its acquisition
of Washington Mutual, which was at one time the third largest mortgage
lender in the United States. Wells Fargo, Citibank, and Bank of America
hold a combined 36.2 percent of the non-performing single family loans
at Large Banks, also due to either their own mortgage lending or their
acquisition of mortgage lenders in recent years. Thus, only four of the
Large Banks drive the startling proportion of non-performing single
family loans to all non-performing loans when compared to the amount of
these loans in the Large Banks' loan portfolios.
\251\ The three non-TARP Large Banks are HSBC Bank USA, RBS
Citizens, and TD Bank. TD Bank has no loans 90+ days past due as of the
first quarter of 2010, although 1.6 percent of its total loans and
leases are 30-89 days past due, primarily in the real estate sector.
Credit card loans 90+ days past due at HSBC Bank USA account for 83
percent of the total loans 90+ days past due at the three Large non-
TARP Banks. The other loans 90+ past due at HSBC Bank USA are
construction and development loans and C&I loans, with a negligible
amount related to single family loans. Almost half of the loans 90+
days past due at RBS Citizens are single family loans, but they are
only 2.4 percent of all loans 90+ days past due at these three banks.
\252\ The Panel conducted a t-test for the significance of mean
differences between TARP and non-TARP banks across asset sizes for each
loan type, with a p value of 5 percent (p =.05). Statistical
significance is measured through a test of significance, using certain
data points, the results of which determine whether a data
characteristic is statistically significant. Statistical significance
indicates that a data result is unlikely to have occurred by chance,
but this does not necessarily mean that the result is therefore
meaningful to the overall population or that other sources of error did
not influence the results. Also, not finding that a result is
statistically significant does not mean that there is no difference
between the data points.
---------------------------------------------------------------------------
The other bank asset categories' percentages of non-
performing single family loans to all non-performing loans are
proportional to their percentages of these loans to all loans
for TARP banks, with the percentage that is non-performing
being slightly higher than the percentage of all single family
loans at non-TARP banks. This suggests either that single
family loans at non-TARP banks are potentially of lower credit
quality than those at TARP banks, or that non-single family
loans at TARP banks are of proportionally lower quality than
those at non-TARP banks. As shown in Figure 16, the value of
single family loans 90+ days past due has increased
significantly over the past three years, as the number of
institutions has decreased. The non-performing single family
loans as of the first quarter of 2010 show increases of 1,195
percent, 191 percent, 132 percent, and 52 percent at Large,
Medium, Smaller, and Smallest Banks, respectively, from the
first quarter of 2007. Thus, while Large Banks comprise the
bulk of these non-performing loans, the defaults seen currently
are not the historical norm. Furthermore, as the concentration
of banks increases, fewer banks share a higher value of non-
performing loans.
iii. Construction and Land Loans
FIGURE 17: CONSTRUCTION AND LAND DEVELOPMENT LOANS AS A PERCENTAGE OF
TOTAL LOANS, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Construction and land loans represent a larger percentage
of the loan portfolios of Smaller and Smallest Banks than
Medium and Large Banks. The concentration of construction loans
in Smaller and Smallest Banks is expected because these banks
provide a disproportionate amount of credit to local and
regional businesses involved in construction. As a result of
their exposure to these volatile businesses, Smaller and
Smallest Banks were particularly vulnerable to the crash in
real estate prices and to the credit freeze. TARP banks hold a
greater percentage of construction loans than non-TARP banks,
which might have affected banks' decisions on whether to apply
to the CPP. These banks might have needed TARP funds to
stabilize their balance sheets from these problem loans.\253\
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\253\ Due to the complicated application process to obtain CPP
funds, it is difficult to establish causation between exposures and CPP
participants, as some banks voluntarily withdrew their applications as
a stigma developed and others were encouraged to do so by regulators.
---------------------------------------------------------------------------
FIGURE 18: CONSTRUCTION AND LAND DEVELOPMENT LOANS 90+ DAYS PAST DUE AS
A PERCENTAGE OF ALL LOANS 90+ DAYS PAST DUE, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In all bank asset categories except Smaller Banks, the
percentages of non-performing construction and land development
loans to all non-performing loans at non-TARP banks are higher
than those at TARP banks, although the percentages of these
loans to all loans at the TARP banks is higher.
iv. Commercial Real Estate Loans
FIGURE 19: COMMERCIAL REAL ESTATE LOANS AS A PERCENTAGE OF ALL LOANS,
BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The loan distribution and proportion of commercial real
estate (CRE) loans resembles that for construction and
development loans, with Smallest Banks being disproportionately
represented.
FIGURE 20: COMMERCIAL REAL ESTATE LOANS 90+ DAYS PAST DUE AS A
PERCENTAGE OF ALL LOANS 90+ DAYS PAST DUE, BY SIZE
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The percentages of non-performing CRE loans to all non-
performing loans are much smaller than the percentages of CRE
loans to all loans across all bank asset categories and
slightly smaller at the Smallest Banks. Roughly one-quarter of
all loans and all non-performing loans at the Smallest Banks
are comprised of CRE loans.
FIGURE 21: PERCENTAGE OF INSTITUTIONS WITH ``CRE CONCENTRATION'' AS OF
Q1 2010 \254\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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\254\ Data provided by Foresight Analytics.
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Smaller and Smallest Banks carry the highest ``CRE
Concentrations'' among all banks.\255\ And as noted in Figure
21 above, in the Medium, Smaller, and Smallest Banks asset
categories a higher percentage of TARP banks are ``CRE
Concentrated,'' compared to the percentages of non-TARP banks.
These high percentages in TARP banks could denote potential
weaknesses in their loan portfolios and need for TARP funds. As
noted in the Panel's February 2010 report, smaller banks took
on riskier commercial real estate loans, so the high
concentration of both CRE loans to total loan portfolio and
non-performing CRE loans in the Smallest and Smaller Banks is
to be expected.\256\ Whereas the Large Banks had a
disproportionately larger percentage of non-performing single
family loans, Large Banks have negligible non-performing CRE
loans.\257\
---------------------------------------------------------------------------
\255\ An institution is ``CRE Concentrated'' when its total
reported loans for construction, land development, and other land
represent 100 percent or more of the institution's total capital; or
when its total CRE loans represent 300 percent or more of its total
capital, and the outstanding balance of the institution's CRE loan
portfolio has increased by 50 percent or more during the past 36
months.
\256\ February Oversight Report, supra note 103, at 42.
\257\ The Smallest Banks also originate the majority of farm loans,
because they are primarily located in smaller communities and direct
their lending to the local businesses and residents. These banks are
often the only source of credit for farmers and rural residents. Panel
staff briefing with Paul Merski, senior vice president and chief
economist, Independent Community Bankers of America (June 23, 2010).
Non-performing farm loans as a percentage of all non-performing loans
almost precisely mirrors the proportion of farm loans to all loans,
although for the Smallest Banks, the non-performing farm loans are a
bit higher proportionally.
---------------------------------------------------------------------------
For the most part, the distribution of loans across bank
asset sizes and between TARP and non-TARP banks reveals few
differences. The number of TARP banks across asset categories
does not mirror the proportions of all banks across those same
categories, due to the fast assimilation of the largest banks
into the program. While the regional distribution of all banks
shows concentrations in the Southeast and Midwest driven by the
number of Large Banks in these regions, smaller banks are
chiefly in the Midwest and Southwest. The Southwest is slightly
less represented in the TARP, but not significantly enough to
be considered an outlier. When comparing TARP and non-TARP
banks, the proportion of loan types to all loans is
statistically significant at the Smallest Banks. Whereas the
proportion of all loan types, except the proportion of single
family loans to all loans, is statistically significant at
Smaller Banks. As far as problem loans, Large TARP Banks and
smaller non-TARP banks have a statistically significant number
of single family loans weighing down their portfolios, while
construction and land loans are slightly worse at non-TARP
banks. The other loan types and asset categories are fairly
consistent in the proportion of non-performing loans by type to
all non-performing loans compared to the proportion of loans by
type to all loans. Thus, while single family loans were
potentially a driving factor in Large Banks' need for CPP
funds, there is no other clear loan type that caused a similar
need in other bank sizes, although their exposure to real
estate is also significant.
3. Examination of Capital Conditions
There are a number of measures of bank capital.\258\ Tier 1
capital is the highest quality capital and is generally made up
of common stockholders' equity, certain forms of preferred
stock, and certain trust preferred securities.\259\ High-
quality capital is liquid capital that banks hold to absorb
losses arising from troubled assets. From a strictly regulatory
point of view, TARP funds are included in Tier 1 capital.
However, analysts and investors tend to focus more closely on
Tier 1 common, which does not count TARP funds and other forms
of non-common equity, and tangible common equity, a GAAP
measure of capital that also does not count all non-common
equity.\260\ At this point, the TARP is viewed by the market as
an expensive source of funding and lower quality capital.\261\
---------------------------------------------------------------------------
\258\ For a more complete discussion of bank capital measures, see
June Oversight Report, supra note 76, at 9-10.
\259\ Tier 1 (core) capital is the sum of the following capital
elements: (1) common stockholders' equity; (2) perpetual preferred
stock; (3) senior perpetual preferred stock issued by Treasury under
the TARP; (4) certain minority interests in other banks; (5) qualifying
trust preferred securities; and (6) a limited amount of other
securities. Board of Governors of the Federal Reserve System, BHC
Supervision Manual, Sec. 4060.3.2.1.1 (Jan. 2008) (online at
www.federalreserve.gov/boarddocs/SupManual/bhc/4000p1.pdf). Disputes
may arise as to the value of an institution's Tier 1 capital because
parties may disagree on the value of the institution's capital
elements. For example, there may be disagreements on the fair value of
the institution's trading assets or the estimated fair value of the
institution's goodwill and intangible assets.
An amendment to the financial reform bill offered by Senator Susan
Collins (R-Maine) provides that trust preferred securities will no
longer constitute Tier 1 capital. As passed out of conference, however,
the amendment excludes securities issued before May 19, 2010 by
depository institution holding companies of less than $15 billion.
Dodd-Frank Wall Street Reform and Consumer Protection Act, supra note
92, at Sec. 171. As a result, the immediate effect on the capital
levels of small banks will be limited, but it will likely further
constrain the capital-raising options for small banks in the future.
The House of Representatives passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act in a 237-192 vote on June 30, 2010, but as
of July 13, 2010, the Senate has not taken action yet.
\260\ Generally Accepted Accounting Principles (GAAP) is a
collection of guidelines and rules used by the accounting industry and
set in the United States by the Financial Accounting Standards Board
(FASB).
\261\ U.S. Large Cap Banks sell-side analyst conversations with
Panel staff (June 22, 2010).
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The Tier 1 risk-based capital ratio and the Tier 1 leverage
ratio are two important measures of the quality of a bank's
capital reserves. The Tier 1 risk-based capital ratio is
calculated by dividing the bank's Tier 1 capital by the risk-
weighted value of its assets (``risk-weighted assets'').\262\
This ratio attempts to measure the bank's capital relative to
its risk exposure. The Tier 1 leverage ratio is calculated by
dividing the bank's Tier 1 capital by its average total
consolidated assets.\263\ This ratio provides a measure of the
bank's capital relative to its overall assets without adjusting
for risk. The Tier 1 capital ratio is a useful tool for
comparing a bank's health to that of other banks, and the Tier
1 leverage ratio is an additional measure of capital adequacy.
Figure 22 shows the median Tier 1 capital ratio for different
bank sizes, for all banks, and for those that received TARP
assistance. It shows that the Tier 1 capital ratios on average
are higher for banks that did not receive assistance.
---------------------------------------------------------------------------
\262\ Under 12 CFR Sec. 225, at Appendix A Sec. III.C, each asset
on the balance sheet is assigned a risk weighting according to its
level of risk. Financial institutions adjust the value of their assets
according to the assets' risk profiles and aggregate the adjusted
values to get the risk-weighted assets. For example, cash is assigned a
0 percent risk weighting because its face value cannot vary. By
contrast, a mortgage-backed security would be assigned a higher risk
weighting than other, safer assets. Similar adjustments are made for
certain portions of an institution's capital elements. Federal Deposit
Insurance Corporation, Director's Corner: San Francisco Region
Director's College Computer--Based Training Capital (June 29, 2005)
(online at www.fdic.gov/regulations/resources/directors_college/sfcb/
capital/instruction2.html).
\263\ Average total consolidated assets are defined as the
quarterly average total assets (defined net of the allowance for loan
and lease losses) reported on the organization's Consolidated Financial
Statements, less goodwill. Federal Deposit Insurance Corporation,
6000--Bank Holding Company Act, Appendix D to Part 225--Capital
Adequacy Guidelines for Bank Holding Companies: Tier 1 Leverage Measure
(Dec. 3, 2009) (online at fdic.gov/regulations/laws/rules/6000-
2200.html) (accessed July 12, 2010).
---------------------------------------------------------------------------
FIGURE 22: MEDIAN TIER 1 RISK RATIOS, BY SIZE (AS OF Q1 2010) \264\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\264\ The median ratios are used rather than the average ratios
because the data contain extreme values which skew the average. Because
the median represents the ``middle'' of the data, it provides a more
accurate reflection of the ratios.
---------------------------------------------------------------------------
FIGURE 23: MEDIAN TIER 1 LEVERAGE RATIOS, BY SIZE (AS OF Q1 2010)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
According to the FDIC's criteria, a ``well capitalized''
financial institution has a Tier 1 Risk Ratio and Tier 1
Leverage Ratio of at least 6 percent and 5 percent,
respectively. An ``adequately capitalized'' financial
institution has a Tier 1 Risk Ratio and Tier 1 Leverage Ratio
each of at least 4 percent.\265\ The underlying data for these
graphs reveal that less than 1 percent of Smaller and Smallest
Banks are undercapitalized using the Tier 1 Risk Ratio (5 and
44 banks, respectively). None of the Largest banks are
undercapitalized. Over 98 percent of banks in each asset
category are ``well capitalized:'' 82 out of 83 of the Medium
Banks, 549 out of 558 of the Smaller Banks, and 7134 out of
7248 of the Smallest banks are well capitalized, with 100
percent--all 20--of Large Banks ``well capitalized.'' \266\
According to the Tier 1 Leverage Ratio, less than 2 percent of
banks in each asset category are undercapitalized: 1 out of 83
Medium Banks, 9 out of 558 Smaller banks, and 93 out of 7248
Smallest banks. No Large Banks are undercapitalized. More than
97 percent of all banks in each asset category are ``well
capitalized'' using the leverage ratio: 82 out of 83 of the
Medium Banks, 541 out of 558 of the Smaller Banks, and 7098 out
of 7248 of the Smallest Banks.\267\
---------------------------------------------------------------------------
\265\ Federal Deposit Insurance Corporation, Capital Groups and
Supervisory Groups (July 13, 2007) (online at www.fdic.gov/deposit/
insurance/risk/rrps_ovr.html).
\266\ It is possible for a bank to be deemed ``well capitalized''
according to regulatory capital ratio calculation definitions and still
appear on the FDIC's Problem List due to being subject to a written
agreement or order pursuant to Section 8 of the FDI Act.
\267\ SNL Financial.
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FIGURE 24: MEDIAN LOAN GROWTH RATE AT MEDIUM BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 25: MEDIAN LOAN GROWTH RATE AT SMALLER BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 26: MEDIAN LOAN GROWTH RATE AT SMALLEST BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As noted in the graphs above, except for a few quarters of
slight increases in growth rates, loan growth quarter-over-
quarter has decreased since the second quarter of 2008, with
both TARP and non-TARP banks' loan growth decreasing in tandem.
In fact, TARP banks' decrease in loan growth has been more
drastic than that of non-TARP banks, showing that TARP funds
are not associated with increased lending. Medium and Smaller
Banks' loan growth rates have shown negative percentage changes
since the economic crisis, meaning their actual loan growth has
decreased, while the growth rates at Smaller Banks remained
positive until recent quarters. This suggests that, although at
a lesser rate, loan growth at the Smallest Banks was increasing
up until the fourth quarter of 2009.
FIGURE 27: MEDIAN LIQUIDITY RATIOS AT MEDIUM BANKS \268\
---------------------------------------------------------------------------
\268\ The Liquidity Ratio is equal to institutions' liquid assets
divided by total liabilities. Liquid assets are the sum of
institutions' cash, securities, federal funds and repurchases, and
trading accounts minus pledged securities. SNL Financial.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 28: MEDIAN LIQUIDITY RATIOS AT SMALLER BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 29: MEDIAN LIQUIDITY RATIOS AT SMALLEST BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As noted in the graphs above, the median liquidity ratio
for non-TARP banks has been historically higher than that of
TARP banks. Though the liquidity ratios for TARP and non-TARP
banks dipped at the height of the economic crisis, the ratios
for both have returned to or exceeded the level in the first
quarter of 2007. These graphs would thus suggest that the
liquidity levels of all banks have bounced back from the
economic downturn, although the liquidity of TARP banks could
be aided by TARP funds received.
FIGURE 30: MEDIAN RETURN ON AVERAGE EQUITY AT MEDIUM BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 31: MEDIAN RETURN ON AVERAGE EQUITY AT SMALLER BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FIGURE 32: MEDIAN RETURN ON AVERAGE EQUITY AT SMALLEST
BANKS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The results of the above figures suggest that TARP banks
have struggled to regain their return on average equity levels
seen before the crisis. While the return on equity across all
banks is much lower than it was in 2007, non-TARP banks'
returns have exceeded those at TARP banks. The smaller returns
on average equity at TARP banks are likely impacted by
increased shareholders' equity due to the TARP preferred stock
investment, which decreases the return on equity.\269\
---------------------------------------------------------------------------
\269\ Return on average equity is calculated by dividing net income
by average shareholders' equity. Federal Deposit Insurance Corporation,
FDIC Quarterly Banking Profile: Glossary (May 1, 2010) (online at
www2.fdic.gov/qbp/Glossary.asp?menuitem=GLOSSARY).
---------------------------------------------------------------------------
The capital measures utilized by regulators suggest that
nearly all banks are reasonably well capitalized, with no
significant difference between TARP and non-TARP institutions.
A closer look at performance metrics utilized by analysts and
investors suggests that TARP institutions have suffered greater
loan growth losses and are not as well leveraged. The TARP
preferred stock investment also hurts those institutions in the
way certain metrics are calculated.
4. Bank Failures
The FDIC assesses the health of FDIC-insured financial
institutions using the CAMELS composite rating system. The
CAMELS composite rating ranges from 1 to 5, with 1 indicating a
healthy institution and 5 indicating a weak institution on the
brink of failure. Since the beginning of 2007 through the
present there have been 254 bank failures, compared to only 41
failures in the prior ten years. From 2007 to 2009, the number
of bank failures increased by 137 institutions.\270\ The FDIC
expects the number of failures to remain high in 2010.\271\
Based upon the current rate of failures in 2010, an estimated
179 banks could fail by the end of 2010, which represents an
increase of 28 percent from the number of institutions that
failed in 2009.\272\ The more recent bank failures were
concentrated in the Midwest, Southeast, and West regions.\273\
Four CPP-recipient banks have failed during this time: two in
California, one in Illinois, and one in New York.\274\
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\270\ Federal Deposit Insurance Corporation, Statistics at a
Glance: Historical Trends (Mar. 31, 2010) (online at www.fdic.gov/bank/
statistical/stats/2010mar/FDIC.pdf) (hereinafter ``Statistics at a
Glance: Historical Trends'').
\271\ House Committee on Financial Services, Written Testimony of
Mitchell L. Glassman, director, Division of Resolutions and
Receiverships, Federal Deposit Insurance Corporation, The Condition of
Financial Institutions: Examining the Failure and Seizure of an
American Bank, at 1 (Jan. 21, 2010) (online at www.house.gov/apps/list/
hearing/financialsvcs_dem/fdic_glassman_statement_final.pdf).
\272\ SNL Financial. As of July 2, 2010, there have been 86 bank
failures in 2010.
\273\ The first two concentrations are consistent with the
concentration of a large numbers of banks under $100 billion in those
regions.
\274\ See Section C.5, supra, for information on the failures of
the CPP recipients.
---------------------------------------------------------------------------
The FDIC places highly vulnerable institutions on the
Problem List, which is published quarterly.\275\ The FDIC does
not disclose the identities or CAMELS ratings of these
entities, nor does it disclose the number of CPP recipients on
the list.\276\ The start of the recession in December 2007 saw
a spike in the number of banks placed on the Problem List. From
2007 to 2009, the number of banks placed on the Problem List
grew from 76 to 702, an increase of 824 percent. From the end
of 2009 to the first quarter of 2010, the number of
institutions on the Problem List grew from 702 to 775, an
increase of 10 percent.\277\ The graph below shows that
``problem'' institutions currently represent approximately 10
percent of operating financial institutions.\278\
---------------------------------------------------------------------------
\275\ FDIC Quarterly Banking Profile: First Quarter 2010, supra
note 176, at 4, 25. The FDIC only publishes the number of ``problem''
institutions but not the names of the institutions for fear of starting
a run on the vulnerable banks.
\276\ Because the Treasury Department relies on public information
when assessing the financial condition of CPP recipients (see Section
D.2, supra), Treasury does not know when or if there are CPP
institutions on the FDIC's Problem List. Treasury conversation with
Panel staff (June 28, 2010).
\277\ FDIC Quarterly Banking Profile: First Quarter 2010, supra
note 176, at 4, 5
\278\ Statistics at a Glance: Historical Trends, supra note 270.
---------------------------------------------------------------------------
FIGURE 33: PERCENTAGE OF OPERATING FINANCIAL INSTITUTIONS ON FDIC'S
PROBLEM LIST \279\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\279\ Statistics at a Glance: Historical Trends, supra note 270.
---------------------------------------------------------------------------
Although the Problem List does not include the failed banks
(those banks are removed from the Problem List upon failure),
the Problem List has experienced substantial growth since
December 2007. According to the FDIC, historically an average
of 19 percent of the institutions on the Problem List have
failed.\280\ The FDIC has not specified the percent of
``problem'' banks that have failed during the current financial
crisis; however, assuming that all failed banks appeared on the
Problem List, approximately 24 percent of ``problem''
institutions failed from December 2007 to the present.\281\
---------------------------------------------------------------------------
\280\ FDIC conversation with Panel staff (June 14, 2010). See
Federal Deposit Insurance Corporation, FDIC-Insured Institutions Earned
$18 Billion in the First Quarter of 2010 (May 20, 2010) (online at
www.fdic.gov/news/news/press/2010/pr10117.html). FDIC Chairman Sheila
Bair noted that the vast majority of ``problem'' institutions do not
fail.
\281\ Statistics at a Glance: Historical Trends, supra note 270.
From December 2007 to the present, there have been 254 bank failures.
Over the same period, 1,080 financial institutions appeared on the
Problem List.
Annex II: CPP Missed Dividend Payments
----------------------------------------------------------------------------------------------------------------
Total
missed Amount of missed
Institution name FN Dividend type dividend dividends
payments*
----------------------------------------------------------------------------------------------------------------
1st Federal Bancshares of Arkansas, ...... Cumulative..................... 2 $412,500.00
Inc..
Alliance Financial Services, Inc....... ...... Cumulative..................... 2 503,400.00
Anchor BanCorp Wisconsin, Inc.......... ...... Cumulative..................... 5 7,104,166.67
Bankers' Bank of the West Bancorp, Inc. ...... Cumulative..................... 1 172,207.50
Blue Valley Ban Corp................... ...... Cumulative..................... 5 1,359,375.00
BNCCORP, Inc........................... ...... Cumulative..................... 2 547,550.00
Bridgeview Bancorp, Inc................ ...... Cumulative..................... 1 517,750.00
Cascade Financial Corporation.......... ...... Cumulative..................... 3 1,461,375.00
Cecil Bancorp, Inc..................... ...... Cumulative..................... 2 289,000.00
Central Pacific Financial Corp......... ...... Cumulative..................... 4 6,750,000.00
Central Virginia Bankshares, Inc....... ...... Cumulative..................... 2 284,625.00
Centrue Financial Corporation.......... ...... Cumulative..................... 4 1,633,400.00
Citizens Bancorp....................... ...... Cumulative..................... 4 566,800.00
Citizens Bancshares Co................. ...... Cumulative..................... 2 681,000.00
Citizens Bank & Trust Company.......... ...... Non-Cumulative................. 4 130,800.00
Citizens Commerce Bancshares, Inc...... ...... Cumulative..................... 3 257,512.50
Citizens Republic Bancorp, Inc......... ...... Cumulative..................... 2 7,500,000.00
City National Bancshares Corporation... ...... Cumulative..................... 2 235,975.00
Commonwealth Business Bank............. ...... Non-Cumulative................. 5 524,625.00
Community Bank of the Bay.............. ...... Non-Cumulative................. 4 72,549.03
Community First Bank................... ...... Non-Cumulative................. 3 80,708.83
Congaree Bancshares, Inc............... FN1 Cumulative..................... 2 134,257.50
Dickinson Financial Corporation II..... ...... Cumulative..................... 4 7,959,920.00
Duke Financial Group, Inc. (Peoples ...... Cumulative..................... 2 503,400.00
Bank of Commerce)
Exchange Bank.......................... ...... Cumulative..................... 1 585,875.00
FC Holdings, Inc....................... ...... Cumulative..................... 3 860,085.00
Fidelity Federal Bancorp............... ...... Cumulative..................... 2 177,374.17
First BanCorp.......................... ...... Cumulative..................... 4 20,000,000.00
First Banks, Inc....................... ...... Cumulative..................... 4 16,099,300.00
First Community Bancshares, Inc........ ...... Cumulative..................... 1 201,650.00
First Security Group, Inc.............. ...... Cumulative..................... 2 825,000.00
First Sound Bank....................... ...... Non-Cumulative................. 2 185,000.00
First Southwest Bancorporation, Inc.... ...... Cumulative..................... 2 149,875.00
First Trust Corporation................ ...... Cumulative..................... 1 376,884.25
FNB United Corp........................ ...... Cumulative..................... 1 643,750.00
FPB Bancorp, Inc....................... ...... Cumulative..................... 2 145,000.00
Fresno First Bank...................... ...... Non-Cumulative................. 2 33,357.33
Georgia Primary Bank................... ...... Non-Cumulative................. 4 254,787.50
Gold Canyon Bank....................... ...... Non-Cumulative................. 1 21,167.50
Goldwater Bank, N.A.................... FN2 Non-Cumulative................. 1 104,940.00
Grand Mountain Bancshares, Inc......... ...... Cumulative..................... 4 161,139.89
Gregg Bancshares, Inc.................. ...... Cumulative..................... 1 11,235.00
Hampton Roads Bankshares, Inc.......... ...... Cumulative..................... 3 3,013,012.50
Heartland Bancshares, Inc.............. ...... Cumulative..................... 2 186,160.00
Heritage Commerce Corp................. ...... Cumulative..................... 3 1,500,000.00
Heritage Oaks Bancorp.................. ...... Cumulative..................... 1 262,500.00
Idaho Bancorp.......................... ...... Cumulative..................... 4 376,050.00
Independent Bank Corporation........... FN3 Cumulative..................... 1 2,099,771.39
Integra Bank Corporation............... ...... Cumulative..................... 3 3,134,475.00
Intermountain Community Bancorp/ ...... Cumulative..................... 2 675,000.00
Panhandle State Bank
Intervest Bancshares Corporation....... ...... Cumulative..................... 2 625,000.00
Investors Financial Corporation of ...... Cumulative..................... 2 167,800.00
Pettis County, Inc. (Excel Bank).
Lone Star Bank......................... ...... Non-Cumulative................. 5 213,511.50
Madison Financial Corporation.......... ...... Cumulative..................... 1 45,927.50
Maryland Financial Bank................ ...... Non-Cumulative................. 3 69,487.50
MetroCorp Bancshares, Inc.............. ...... Cumulative..................... 1 562,500.00
Midtown Bank & Trust Company........... FN4 Non-Cumulative................. 1 142,295.00
Millennium Bancorp, Inc................ FN5 Cumulative..................... 1 197,835.00
Monarch Community Bancorp, Inc......... ...... Cumulative..................... 2 169,625.00
Northern States Financial Corporation.. ...... Cumulative..................... 3 645,412.50
Northwest Bancorporation, Inc.......... ...... Cumulative..................... 1 143,062.50
Omega Capital Corp..................... ...... Cumulative..................... 3 115,117.50
One Georgia Bank....................... ...... Non-Cumulative................. 4 305,578.47
OneUnited Bank......................... ...... Non-Cumulative................. 5 753,937.50
OSB Financial Services, Inc............ ...... Cumulative..................... 3 383,842.50
Pacific Capital Bancorp................ ...... Cumulative..................... 5 11,289,625.00
Pacific City Financial Corporation/ ...... Cumulative..................... 4 882,900.00
Pacific City Bank.
Pacific Commerce Bank.................. FN6 Non-Cumulative................. 1 87,278.72
Pacific International Bancorp Inc...... ...... Cumulative..................... 4 325,000.00
Patapsco Bancorp, Inc.................. ...... Cumulative..................... 1 81,750.00
Pathway Bancorp........................ ...... Cumulative..................... 3 152,317.50
Patterson Bancshares, Inc.............. ...... Cumulative..................... 4 201,150.00
Peninsula Bank Holding Co.............. ...... Cumulative..................... 4 312,500.00
Pierce County Bancorp.................. ...... Cumulative..................... 3 277,950.00
Plumas Bancorp......................... ...... Cumulative..................... 1 149,362.50
Popular, Inc........................... ...... Cumulative..................... 1 11,687,500.00
Prairie Star Bancshares, Inc........... ...... Cumulative..................... 1 38,150.00
Premier Bank Holding Company........... ...... Cumulative..................... 1 129,437.50
Premier Service Bank................... ...... Non-Cumulative................. 4 214,972.22
Premierwest Bancorp.................... ...... Cumulative..................... 3 1,552,500.00
Presidio Bank.......................... ...... Non-Cumulative................. 2 276,718.75
Ridgestone Financial Services, Inc..... ...... Cumulative..................... 3 445,537.50
Rising Sun Bancorp..................... ...... Cumulative..................... 3 244,545.00
Rogers Bancshares, Inc................. ...... Cumulative..................... 3 1,021,875.00
Royal Bancshares of Pennsylvania, Inc.. ...... Cumulative..................... 4 1,520,350.00
Saigon National Bank................... ...... Non-Cumulative................. 6 117,663.22
Santa Clara Valley Bank................ ...... Non-Cumulative................. 1 39,512.50
Seacoast Banking Corporation of Florida/ ...... Cumulative..................... 5 3,125,000.00
Seacoast National Bank
Security State Bank Holding-Company ...... Cumulative..................... 2 450,997.00
(Bank Forward)
Sonoma Valley Bancorp.................. ...... Cumulative..................... 2 235,810.00
South Financial Group, Inc./ Carolina ...... Cumulative..................... 2 8,675,000.00
First Bank.
Sterling Financial Corporation/Sterling ...... Cumulative..................... 4 15,150,000.00
Savings Bank.
Stonebridge Financial Corp............. ...... Cumulative..................... 1 149,515.00
Syringa Bancorp........................ ...... Cumulative..................... 3 327,000.00
TCB Holding Company.................... ...... Cumulative..................... 1 159,832.50
Tennessee Valley Financial Holdings, ...... Cumulative..................... 2 81,750.00
Inc..
The Bank of Currituck.................. ...... Non-Cumulative................. 2 109,570.00
The Connecticut Bank and Trust Company. ...... Non-Cumulative................. 3 178,573.33
The Freeport State Bank................ ...... Non-Cumulative................. 3 12,300.00
TIB Financial Corp..................... ...... Non-Cumulative................. 3 1,387,500.00
Timberland Bancorp, Inc................ ...... Cumulative..................... 1 208,012.50
Treaty Oak Bancorp, Inc................ ...... Cumulative..................... 1 44,517.50
U.S. Century Bank...................... ...... Non-Cumulative................. 2 1,368,940.00
United American Bank................... ...... Non-Cumulative................. 5 586,102.08
Valley Financial Corporation........... ...... Cumulative..................... 1 200,237.50
----------------------------------------------------------------------------------------------------------------
* As of May 2010. This table does not include missed dividends from four failed CPP institutions or one bank
that missed dividends but subsequently redeemed its CPP preferred equity.
FN1: Paid the November 2009 dividend of $44,752.50 on 11/20/09.
FN2: Paid the August 2009 dividend of $34,980 on 8/21/09. Paid the February 2010 dividend of $34,980 on 2/23/10.
FN3: Capitalized their missed dividends totaling $1,800,000 in an exchange dated 4/16/10.
FN4: Paid the August 2009 dividend of $71,147.50 on 8/19/09.
FN5: Paid the February 2010 dividend of $98,917.50 on 2/26/10.
FN6: Paid the May 2009 dividend of $55,317.50 on 6/5/09.
SECTION TWO: ADDITIONAL VIEWS
A. J. Mark McWatters and Professor Kenneth Troske
We concur with the issuance of the July report and offer
the additional observations noted below. We appreciate the
spirit with which the Panel and the staff approached this
complex issue and incorporated suggestions during the drafting
process.
The taxpayers still have an investment of over $24 billion
of TARP funds in smaller financial institutions through the
Capital Purchase Program (CPP), and Treasury should undertake
to oversee and protect those investments in a prudent and
market-oriented manner.\282\ CPP recipients that are
experiencing financial distress should enter into workout
negotiations with their investors and creditors so as to
restructure their equity capital and debt obligations. The
asset managers retained by Treasury should actively participate
in the negotiations with the objective of implementing a
reasonable and market driven restructuring of Treasury's CPP
investments. For failing institutions, converting some or all
of the CPP preferred stock/subordinated debt into another form
of investment and/or reducing the dividend/interest rate on the
CPP allocations is preferable to waiting for the FDIC to
resolve an institution. We appreciate that some may argue with
conviction against the restructuring of CPP allocations where
the taxpayers accept any economic loss. Regrettably, since the
CPP allocations have been funded--that is, the ``money is out
the door''--Treasury may have little choice but to accept
restructuring plans that assign a portion of the overall loss
to the taxpayers. Such an approach, however, may yield a
greater return for the taxpayers than an FDIC resolution.
---------------------------------------------------------------------------
\282\ In order to accomplish this goal, Treasury should organize a
team of attorneys, accountants, and banking experts and proceed to
restructure its distressed CPP investments. In accordance with the
terms of the documents evidencing the CPP allocations and applicable
law, Treasury should also designate directors to serve on the board of
each troubled CPP recipient. Treasury may wish to consider retaining
the services of retired bank officers, attorneys, and financial
services professionals as potential directors. Treasury should consider
ways to address potential director concerns about liability, including
considering indemnifying the directors or, if that is not possible,
purchasing D&O insurance.
---------------------------------------------------------------------------
CPP recipients that are not distressed should honor their
contractual obligations to the taxpayers in full as they come
due. Treasury should not undertake an across-the-board write-
off of CPP allocations to small bank recipients. Any write-offs
should be negotiated on an as-necessary, case-by-case basis
with Treasury's overarching strategy mandating the repayment of
all CPP advances together with unpaid and accrued dividends and
interest. Any across-the-board effort to forgive part or all of
Treasury's investments in small bank CPP recipients will send
the wrong message to the markets and create significant moral
hazard risks.
More than three years remain for TARP recipients to
refinance their 5 percent CPP capital before the contractual
rate resets to 9 percent.\283\ It is certainly not unusual for
well-run smaller financial institutions to obtain private
capital at market rates, and Treasury and Federal and state
banking supervisors should encourage CPP recipients promptly to
repay their TARP allocations. That some small banks have
experienced difficulty in refinancing their CPP obligations may
speak more to the under performance of the institutions than to
the unavailability of private capital in general. Some may
assert there is a dearth of prospective capital for small bank
CPP recipients. It is possible, however, that some CPP
recipients are not diligently searching for new capital based
upon the expectation that Treasury will undertake an across-
the-board write-off of its CPP allocations to small banks.
Treasury should thoroughly discourage such an expectation so as
to deter CPP recipients from undertaking a tepid search for
capital.
---------------------------------------------------------------------------
\283\ Is it not ironic that the financial crisis was caused in part
by the reset of ``teaser-rate'' residential mortgages, yet Treasury
adopted the same approach in structuring the CPP program? Is it not
surprising that similar difficulties have arisen for CPP recipients as
they attempt to refinance their TARP allocations before the teaser rate
resets from 5 percent to 9 percent?
---------------------------------------------------------------------------
Although we support the restructuring of distressed CPP
allocations as a sensible investment strategy, we do not
recommend that Treasury allocate additional TARP funds to
troubled CPP recipients.\284\ We are concerned that such action
will again send the wrong message to the markets and create
significant moral hazard risks. Little will be gained from
propping up underperforming financial institutions other than
the creation of more institutions with a Treasury-sanctioned
competitive advantage over their unsubsidized peers. Why should
the taxpayers underwrite poorly performing CPP recipients when
most financial institutions are competently managed and capable
of returning an appropriate risk-adjusted rate of return to
their investors? What public policy goals support the long-term
subsidization of the financial sector by the taxpayers? If the
TARP was enacted to negate the risk of a systemic collapse, it
is not clear why so many smaller institutions received TARP
allocations unless the failure of such institutions in the
aggregate would have caused a systemic collapse of the
financial system. The failure of some--if not many--of these
institutions, however, would not appear to present any systemic
risk to the financial system. Some may argue that small banks
face extinction and should be protected as an endangered
species. To the contrary, there appears little reason to
conclude that investors will not organize new financial
institutions to replace those that fail or are incapable of
providing their investors with an appropriate risk-adjusted
return.
---------------------------------------------------------------------------
\284\ Troubled CPP recipients should look to the private markets
for additional equity and debt capital and not to the TARP.
---------------------------------------------------------------------------
Many of the presently troubled small bank CPP recipients
may have profited from their overindulgence in commercial real
estate, among other ill-advised ventures, only to be bailed out
by the taxpayers through the CPP when the going got really
rough. By authorizing the allocation of additional TARP funds
to these institutions, Treasury will promote less-than-prudent
management policies and encourage financial institutions to
adopt needlessly risky investment strategies with the
expectation--if not a sense of entitlement--that they will be
bailed out when the markets turn. As seasoned managers know,
the markets always turn.
Some of the troubled small bank CPP recipients were no
doubt mismanaged and they should be permitted to fail if a
workout proves unrealistic. The removal of these institutions
from the marketplace will inject a much needed dose of
discipline and clear the field for more competently run
institutions to prosper. In a market economy, failure must
remain a well respected option and competitive advantage must
arise from innovative and prescient management and not from a
government subsidized thumb on the scales.
Finally, Treasury should begin to explicitly recognize the
long-run effect that the CPP program has on the level of
competition and efficiency in the financial sector. While it is
true that in a competitive market large firms are often more
efficient and stable than small firms, increases in
concentration in a sector that comes about through government
subsidies of some firms at the expense of others usually result
in less efficient firms that are dependent on continued
government support for their survival. As we show in this
report, the CPP program has the potential to increase
concentration in the banking sector, thus creating more and
larger too-big-to-fail firms, setting the stage for future
problems in the financial sector. In order to enhance the
stability of the financial sector we need to return to a world
where the market determines which firms grow and which firms
decline.
SECTION THREE: TARP UPDATES SINCE LAST REPORT
A. TARP Repayments
In June 2010, five institutions have fully redeemed
Treasury's investments under the CPP. Treasury received $1.1
billion in repayments from Lincoln National Corporation, Boston
Private Financial Holdings, Inc., FPB Financial Corp., First
Southern Bancorp Inc., and Lakeland Financial Corp. Boston
Private Financial Holdings, Inc. and FPB Financial Corp. repaid
$104 million and $2.2 million, respectively, which represents
the remaining balance from earlier partial repayments. A total
of 20 banks have fully repaid $13.8 billion in preferred equity
CPP investments in 2010.
B. CPP Warrant Dispositions
As part of its investment in senior preferred stock of
certain banks under the CPP, Treasury received warrants to
purchase shares of common stock or other securities in those
institutions. On June 16, 2010, SVB Financial Group repurchased
its warrants from Treasury for $6.8 million in total proceeds.
In addition, an auction was held on June 9, 2010, for 2,615,557
warrants to purchase Sterling Bancshares, Inc. common stock.
The price per share was $1.15, and Treasury received
approximately $2.9 million in aggregate net proceeds from the
secondary public offering. The Panel's best valuation estimates
at repurchase date for SVB Financial and Sterling warrants were
$7.9 million and $5.3 million, respectively.
C. Sales of Citigroup Common Stock
On June 30, 2010, Treasury completed the sale of another
1.1 billion shares of Citigroup common stock at $4.03 per
share. This is in addition to the 1.5 billion shares that were
sold on May 26, 2010. To date, Treasury has earned
approximately $10.5 billion in total gross proceeds from both
sales, with a net profit of $2 billion. Treasury obtained this
stock in June 2009 when it agreed to exchange its $25 billion
investment in Citigroup for 7.7 billion shares of the company's
common stock at a price of $3.25 per share.
D. Automotive Industry Financing Program
On June 10, 2010, Treasury announced that it provided
General Motors Company (GM) ``guidance on its role in the
exploration of a possible initial public offering (IPO)'' for
GM common stock. The IPO would allow Treasury to dispose of the
GM common equity it currently holds. Treasury acquired 60.8
percent of the company's common shares in 2009 as part of the
company's restructuring under the TARP. The IPO is expected to
include the sale of shares held by Treasury, GM, and other
shareholders who are willing to participate. The date of the
offering and overall amount of primary and secondary shares to
be offered are still to be determined.
E. HFA Hardest Hit Fund
On June 23, 2010, the administration approved the use of
$1.5 billion in ``Hardest Hit Fund'' foreclosure-prevention
funding by Housing Finance Agencies (HFAs) in Arizona,
California, Florida, Michigan, and Nevada. Last February,
President Obama announced the Housing Finance Agency Innovation
Fund for the Hardest Hit Housing Markets (HFA Hardest Hit Fund)
for the five states most affected by the decline in housing
prices. After submitting a proposal to Treasury detailing their
objectives, requested amount, and use of funds, the state HFAs
will receive the following amounts from the HFA Hardest Hit
Fund: Arizona ($125.1 million), California ($699.6 million),
Florida ($418 million), Michigan ($154.5 million), and Nevada
($102.8 million). Program objectives include reducing principal
and interest rates for homeowners with negative equity,
mortgage assistance through subsidies for the unemployed or
under-employed, reduction or settlement of second liens,
payment for arrearages, and facilitation of short sales and/or
deeds-in-lieu to avoid foreclosure.
F. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, the
Government Accountability Office (GAO), Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and
the Financial Stability Oversight Board, consider useful in
assessing the effectiveness of the Administration's efforts to
restore financial stability and accomplish the goals of EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's June report.
Financial Indices. Since its post-crisis trough in
April 2010, the St. Louis Federal Reserve Financial Stress
Index has increased over ninefold.\285\ Such an increase
indicates that recently more stress is being felt across the
financial spectrum. The index has, however, decreased over
three standard deviations from the starting date of EESA in
October 2008.
---------------------------------------------------------------------------
\285\ Federal Reserve Bank of St. Louis, Series STLFSI: Business/
Fiscal: Other Economic Indicators (Instrument: St. Louis Financial
Stress Index (STLFSI), Frequency: Weekly) (online at
research.stlouisfed.org/fred2/categories/98) (hereinafter ``Series
STLFSI: Business/Fiscal: Other Economic Indicators'') (accessed July 6,
2010). The index includes 18 weekly data series, beginning in December
1993 to the present. The series are: effective federal funds rate, 2-
year Treasury, 10-year Treasury, 30-year-Treasury, Baa-rated corporate,
Merrill Lynch High Yield Corporate Master II Index, Merrill Lynch
Asset-Backed Master BBB-rated, 10-year Treasury minus 3-month Treasury,
Corporate Baa-rated bond minus 10-year Treasury, Merrill Lynch High
Yield Corporate Master II Index minus 10-year Treasury, 3-month LIBOR-
OIS spread, 3-month TED spread, 3-month commercial paper minus 3-month
Treasury, the J.P. Morgan Emerging Markets Bond Index Plus, Chicago
Board Options Exchange Market Volatility Index, Merrill Lynch Bond
Market Volatility Index (1-month), 10-year nominal Treasury yield minus
10-year Treasury Inflation Protected Security yield, and Vanguard
Financials Exchange-Traded Fund (equities). The index is constructed
using principal components analysis after the data series are de-meaned
and divided by their respective standard deviations to make them
comparable units. The standard deviation of the index is set to 1. For
more details on the construction of this index, see Federal Reserve
Bank of St. Louis, National Economic Trends Appendix: The St. Louis
Fed's Financial Stress Index (Jan. 2010) (online at
research.stlouisfed.org/publications/net/NETJan2010Appendix.pdf).
---------------------------------------------------------------------------
Volatility has increased of late. The Chicago Board Options
Exchange Volatility Index (VIX) has nearly doubled since its
post-crisis low on April 12, 2010, although current levels are
short of mid-May's heights.
FIGURE 34: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX \286\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\286\ Series STLFSI: Business/Fiscal: Other Economic Indicators,
supra note 285.
---------------------------------------------------------------------------
FIGURE 35: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX \287\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\287\ Data accessed through Bloomberg data service on July 2, 2010.
---------------------------------------------------------------------------
Interest Rate Spreads. Since the Panel's June
report, interest rate spreads have stayed fairly constant,
suggesting the previously noted slowdown in economic growth has
leveled off. The conventional mortgage spread, which measures
the 30-year mortgage rate over 10-year Treasury bond yields,
decreased by less than 1 percent in June to date. The 30-year
mortgage interest rates have also decreased very slightly.\288\
The TED Spread, which serves as an indicator for perceived risk
in the financial markets, eased its upward trend, growing less
than 10 percent in June to date as opposed to nearly doubling
over the month of May.
---------------------------------------------------------------------------
\288\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.15: Selected Interest Rates: Historical
Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (accessed June 24, 2010).
---------------------------------------------------------------------------
The LIBOR-OIS spread reflects the health of the banking
system. While it increased over 150 percent in the month of
May, it has also slowed its rise, increasing less than 10
percent in June to date.\289\ Increases in the LIBOR rates and
TED Spread suggest more hesitation among banks to lend to other
counterparties.\290\
---------------------------------------------------------------------------
\289\ Data accessed through Bloomberg data service on June 24,
2010.
\290\ Federal Reserve Bank of Minneapolis, Measuring Perceived
Risk--The TED Spread (Dec. 2008) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=4120).
---------------------------------------------------------------------------
The interest rate spread for AA asset-backed commercial
paper, which is considered mid-investment grade, has increased
by nearly 15 percent since the Panel's June report. The
interest rate spread on A2/P2 commercial paper, a lower grade
investment than AA asset-backed commercial paper, increased by
nearly 30 percent during June to date. The widening commercial
paper spreads in June could be affected by recent problems in
the Euro zone. Money market mutual funds are divesting from
Greece, Spain, and Portugal. European CP due in a month has
been trading on average at more than double the rate of 30-day
U.S. AA-rated Financial Commercial Paper.\291\
---------------------------------------------------------------------------
\291\ The Bank of England, Statistical Interactive Database: Euro-
Commercial Paper Rates (Instrument: 1 month--euro, Frequency: Daily)
(online at www.bankofengland.co.uk/mfsd/iadb/NewIntermed.asp) (accessed
July 1, 2010). Board of Governors of the Federal Reserve System,
Federal Reserve Statistical Release: Commercial Paper Rates and
Outstandings: Data Download Program (Instrument: AA Financial Discount
Rate, Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed June 25, 2010).
FIGURE 36: INTEREST RATE SPREADS
----------------------------------------------------------------------------------------------------------------
Current spread (as of 6/ Percent change since
Indicator 24/2010) last report (6/2/2010)
----------------------------------------------------------------------------------------------------------------
Conventional mortgage rate spread \292\....................... 1.52 2.70
TED Spread (basis points)..................................... 40.83 8.15
Overnight AA asset-backed commercial paper interest rate 0.13 14.29
spread \293\.................................................
Overnight A2/P2 nonfinancial commercial paper interest rate 0.25 28.57
spread \294\.................................................
----------------------------------------------------------------------------------------------------------------
\292\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (accessed June 24, 2010); Board of
Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates:
Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year,
Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt)
(accessed June 25, 2010).
\293\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily)
(online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed June 25, 2010); Board of
Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and
Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed June 25, 2010). In order to provide a more
complete comparison, this metric utilizes the average of the interest rate spread for the last five days of
the month.
\294\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
Rates and Outstandings: Data Download Program (Instrument: A2/P2 Nonfinancial Discount Rate, Frequency: Daily)
(online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed June 25, 2010). In order to
provide a more complete comparison, this metric utilizes the average of the interest rate spread for the last
five days of the month.
LIBOR Rates. As of June 24, 2010, the 3-month and
1-month London Interbank Offer Rates (LIBOR), the prices at
which banks lend and borrow from each other, are 0.537 and
0.347, respectively. Beginning on March 1, 2010, the 3-month
LIBOR has more than doubled to date, although it has increased
by less than 1 percent since the Panel's June report. The 1-
month LIBOR has also increased significantly in the past three
months, albeit decreasing about 1 percent since June 2, 2010.
Since March 1, the 1-month LIBOR rate rose by half again. These
heightened levels indicate continuing concern among banks about
lending and borrowing from one another.\295\
---------------------------------------------------------------------------
\295\ Data accessed through Bloomberg data service on June 25,
2010.
FIGURE 37: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF JUNE 24, 2010)
----------------------------------------------------------------------------------------------------------------
Percent Change from
Current rates (as of 6/ data available at time
Indicator 24/2010) of last Report (6/2/
2010)
----------------------------------------------------------------------------------------------------------------
3-Month LIBOR \296\........................................... .537 (1.05)
1-Month LIBOR \297\........................................... .347 (0.06)
----------------------------------------------------------------------------------------------------------------
\296\ Data accessed through Bloomberg data service on June 25, 2010.
\297\ Data accessed through Bloomberg data service on June 25, 2010.
FIGURE 38: 3-MONTH AND 1-MONTH LIBOR \298\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\298\ Data accessed through Bloomberg data service on June 25,
2010.
---------------------------------------------------------------------------
LIBOR-OIS Spread. The LIBOR-OIS Spread serves as
an indicator of the health of the banking system. It is the
difference between LIBOR and the overnight indexed swap rate.
It has been gradually rising since late April and has nearly
tripled since early May. While the spread is nowhere near the
landmark values seen during the peak of the financial crisis,
recent LIBOR-OIS spread values are over three times the
historic norm of approximately 11 basis points, from December
2001 to June 2007.
FIGURE 39: LIBOR-OIS SPREAD \299\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\299\ Data accessed through Bloomberg data service on June 25,
2010.
---------------------------------------------------------------------------
Corporate Bond Spread. The spread between Moody's
Baa Corporate Bond Yield Index and 30-year constant maturity
U.S. Treasury Bond yields has been steadily increasing since
late April. Since early May, this spread has increased by over
a third. This indicates the difference in perceived risk
between corporate and government bonds, and an increasing
spread could indicate either that corporate bonds are viewed as
becoming relatively more risky, or that U.S. government debt is
being viewed as relatively less risky (or both).
FIGURE 40: MOODY'S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY
YIELD \300\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\300\ The Federal Reserve Bank of St. Louis, Series DGS30: Selected
Interest Rates (Instrument: 30-Year Treasury Constant Maturity Rate,
Frequency: Daily) (online at research.stlouisfed.org/fred2/) (accessed
June 28, 2010). Corporate Baa rate data accessed through Bloomberg data
service on June 25, 2010.
---------------------------------------------------------------------------
Housing Indicators. Foreclosure actions, which
consist of default notices, scheduled auctions, and bank
repossessions, dropped 3 percent in May to 322,920. This metric
is over 15 percent above the foreclosure action level at the
time of the EESA enactment.\301\ Both the Case-Shiller
Composite 20-City Composite as well as the FHFA Housing Price
Index decreased slightly in March 2010. The Case-Shiller and
FHFA indices are 7 percent and 6 percent, respectively, below
their levels of October 2008.\302\ Sales of new homes collapsed
in May to 300,000, the lowest level since 1963.\303\ Market
consensus is that this is due in part to the April 30th
expiration of federal tax credits for new-home buyers.\304\
---------------------------------------------------------------------------
\301\ RealtyTrac, Foreclosure Activity Increases 5 Percent In
October (Nov. 13, 2008) (online at www.realtytrac.com/
contentmanagement/pressrelease.aspx?channelid=9&itemid=5420).
\302\ Most recent data available for April 2010. Standard and
Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Case-Shiller
20-City Composite Seasonally Adjusted, Frequency: Monthly) (online at
www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/
us/?indexId=spusa-cashpidff--p-us----) (accessed June 28, 2010).
Federal Housing Finance Agency, U.S. and Census Division Monthly
Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at
www.fhfa.gov/Default.aspx?Page=87) (hereinafter ``U.S. and Census
Division Monthly Purchase Only Index'') (accessed July 12, 2010). S&P
has cautioned that the seasonal adjustment is potentially being
distorted by irregular factors. These distortions could include
distressed sales and the various government programs. S&P Indices:
Index Analysis, S&P Indices, S&P/Case-Shiller Home Price Indices and
Seasonal Adjustment (Apr. 2010) (online at www.standardandpoors.com/
servlet/BlobServer?blobheadername3=MDT-Type&blobcol= urldata&blobtable=
MungoBlobs&blobheadervalue2=inline%3B+filename%3DCaseShiller_Seasonal
Adjustment2%2C0.pdf&blobheadername2=Content-
Disposition&blobheadervalue1=application%2Fpdf&blobkey=
id&blobheadername1=content-
type&blobwhere=1243679046081&blobheadervalue3=UTF-8).
\303\ U.S. Census Bureau and U.S. Department of Housing and Urban
Development, New Residential Sales in May 2010 (June 23, 2010) (online
at www.census.gov/const/newressales.pdf); U.S. Census Bureau, Houses
Sold by Region (online at www.census.gov/ftp/pub/const/sold_cust.xls)
(accessed June 25, 2010).
\304\ Mortgage Bankers Association, June 2010 Mortgage Finance
Commentary (June 11, 2010) (online at www.mbaa.org/NewsandMedia/
PressCenter/73095.htm) (``Early data from MBA's Weekly Application
Survey continue to suggest a fairly sharp pullback in home sales
following the expiration of the homebuyer tax credit.'').
FIGURE 41: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Percent change from data
Indicator Most recent monthly available at time of Percent change since
data last Report October 2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \305\.. 322,920 (3.3) 15.5
S&P/Case-Shiller Composite 20 Index 145.1 (.05) (6.7)
\306\.............................
FHFA Housing Price Index \307\..... 194.7 0.9 (3.7)
----------------------------------------------------------------------------------------------------------------
\305\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com/ContentManagement/
PressRelease.aspx) (accessed June 28, 2010). Most recent data available for May 2010.
\306\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20
Index) (online at www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-
cashpidff--p-us----) (accessed July 12, 2010). Most recent data available for March 2010.
\307\ U.S. and Census Division Monthly Purchase Only Index, supra note 302. Most recent data available for April
2010.
Additionally, Case-Shiller futures \308\ prices indicate a
market expectation that home-price values will stay constant or
decrease through the end of 2010. These futures are cash-
settled to a weighted composite index of U.S. housing prices,
as well as to specific markets in 10 major U.S. cities, and are
used both to hedge by businesses whose profits and losses are
related to any area of the housing industry and to balance
portfolios by businesses seeking exposure to an uncorrelated
asset class. As such, futures prices are a composite indicator
of market information known to date and can be used to indicate
market expectations for home prices.
---------------------------------------------------------------------------
\308\ Data accessed through Bloomberg data service on June 28,
2010. The Case-Shiller Futures contract is traded on the CME and is
settled to the Case-Shiller Index two months after the previous
calendar quarter. For example, the February contract will be settled
against the spot value of the S&P Case-Shiller Home Price Index values
representing the fourth calendar quarter of the previous year, which is
released in March. Note that utility of futures as forecasts diminishes
the further out one looks.
---------------------------------------------------------------------------
FIGURE 42: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES \309\
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
---------------------------------------------------------------------------
\309\ All data normalized to 100 at January 2000. Futures data
accessed through Bloomberg data service on June 28, 2010. Futures
values data presented here are from June 28, 2010. Standard and Poor's,
S&P/Case-Shiller Home Price Indices (Instrument: Case-Shiller U.S. Home
Price Values, Seasonally Adjusted, Frequency: Monthly) (online at
www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/
us/?indexId=spusa-cashpidff--p-us----) (accessed June 28, 2010).
---------------------------------------------------------------------------
G. Financial Update
Each month, the Panel summarizes the resources that the
federal government has committed to economic stabilization. The
following financial update provides: (1) an updated accounting
of the TARP, including a tally of dividend income, repayments,
and warrant dispositions that the program has received as of
May 31, 2010; and (2) an updated accounting of the full federal
resource commitment as of June 23, 2010.
1. The TARP
a. Costs: Expenditures and Commitments
Treasury has committed or is currently committed to spend
$520.3 billion of TARP funds through an array of programs used
to purchase preferred shares in financial institutions, provide
loans to small businesses and automotive companies, and
leverage Federal Reserve loans for facilities designed to
restart secondary securitization markets.\310\ Of this total,
$196.61 billion is currently outstanding under the $698.7
billion limit for TARP expenditures set by EESA, leaving
$497.69 billion available for fulfillment of anticipated
funding levels of existing programs and for funding new
programs and initiatives.\311\ The $196.61 billion includes
purchases of preferred and common shares, warrants and/or debt
obligations under the CPP, AIGIP/SSFI Program, PPIP, and
AIFP.\312\ Additionally, Treasury has spent $247.5 million
under the Home Affordable Modification Program (HAMP).
Originally, $50 billion of TARP funds were designated for
foreclosure mitigation, primarily under HAMP; however, $2.1
billion was redirected to the HFA Hardest Hit Fund, a fund
created by the Administration to assist states that have
experienced the largest declines in home prices as a result of
the foreclosure crisis.
b. Income: Dividends, Interest Payments, CPP Repayments,
and Warrant Sales
---------------------------------------------------------------------------
\310\ EESA, as amended by the Helping Families Save Their Homes Act
of 2009, limits Treasury to $698.7 billion in purchasing authority
outstanding at any one time as calculated by the sum of the purchase
prices of all troubled assets held by Treasury. 12 U.S.C. Sec. 5225(a),
(b); Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22
Sec. 402(f) (reducing by $1.23 billion the authority for the TARP
originally set under EESA at $700 billion).
\311\ On June 30, 2010, the House & Senate Conference Committee
agreed to reduce the amount authorized under the TARP from $700 billion
to $475 billion as part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The revision to the TARP also prohibits
allocating available funds to new programs and initiatives. See Dodd-
Frank Wall Street Reform and Consumer Protection Act, supra note 92, at
770. The House of Representatives passed the Dodd-Frank Wall Street
Reform and Consumer Protection Act in a 237-192 vote on June 30, 2010,
but as of July 13, 2010, the Senate has not taken action yet. With the
official passage of the bill still pending, the Panel will continue to
report the total funding authorized through the TARP under EESA to be
$698.7 billion.
\312\ Treasury Transactions Report for the Period Ending June 30,
2010, supra note 2.
---------------------------------------------------------------------------
As of June 30, 2010, a total of 76 institutions have
completely repurchased their CPP preferred shares. During the
month of June, Treasury received $1.1 billion in total
repayments from five institutions, including FPB Financial
Corp. and Boston Private Financial Holdings, Inc., which
redeemed the $104 million balance on their CPP investments. The
largest repayment this month was $950 million from Lincoln
National Corporation.
Of these institutions that have fully repaid Treasury, 37
have repurchased their warrants for common shares that Treasury
received in conjunction with its preferred stock investments;
Treasury sold the warrants for common shares for 14 other
institutions at auction.\313\ Warrants for common shares of
First Financial Bancorp and Sterling Bancshares, Inc. were sold
at auction on June 2 and June 9, 2010, respectively, for $6.1
million in total proceeds. On June 16, 2010, First Southern
Bancorp repurchased its warrants for preferred stock from
Treasury for $545,000.
---------------------------------------------------------------------------
\313\ Id.
---------------------------------------------------------------------------
In addition, Treasury receives dividend payments on the
preferred shares that it holds, usually 5 percent per annum for
the first five years and 9 percent per annum thereafter.\314\
To date, Treasury has received approximately $22.4 billion in
net income from warrant repurchases, dividends, interest
payments, and other considerations deriving from TARP
investments,\315\ and another $1.2 billion in participation
fees from its Guarantee Program for Money Market Funds.\316\
---------------------------------------------------------------------------
\314\ Securities Purchase Agreement: Standard Terms, supra note 75,
at 7.
\315\ Treasury Cumulative Dividends and Interest Report, supra note
51.
\316\ U.S. Department of the Treasury, Treasury Announces
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009)
(online at www.treasury.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
c. TARP Accounting
FIGURE 43: TARP ACCOUNTING (AS OF JUNE 30, 2010) i
[Dollars in billions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total
Anticipated Actual repayments/ Funding Funding
TARP Initiative funding funding reduced outstanding Losses available
exposure
--------------------------------------------------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP) ii....................... $204.90 $204.90 $137.45 iii $67.45 iv $2.33 $0
Targeted Investment Program (TIP) v..................... 40.00 40.00 40.00 0 - 0
AIG Investment Program (AIGIP)/ Systemically Significant 69.80 vi 49.10 0 49.10 - 20.70
Failing Institutions Program (SSFI)....................
Automobile Industry Financing Program (AIFP)............ 81.30 81.30 vii 10.80 67.10 viii 3.50 0
Asset Guarantee Program (AGP) ix........................ 5.00 5.00 x 5.00 0 - 0
Capital Assistance Program (CAP) xi..................... - - - - - -
Term Asset-Backed Securities Lending Facility (TALF).... 20.00 xii 0.10 0 0.10 - 19.90
Public-Private Investment Program (PPIP) xiii........... 30.00 12.00 0 11.00 - 18.00
Auto Supplier Support Program (ASSP) xiv................ xv 3.50 3.50 3.50 0 - 0
Unlocking SBA Lending................................... xvi 15.00 xvii 0.11 0 0.11 - 14.89
Home Affordable Modification Program (HAMP)............. xviii 47.90 xix 0.25 0 0.25 - 47.65
Hardest Hit Funds (HHF) Program......................... xx 2.10 xxi 1.50 0 1.50 - 0.60
Community Development Capital Initiative (CDCI)......... xxii 0.78 0 0 0 - 0.78
Total Committed......................................... 520.28 397.76 - 196.61 - 122.52
Total Uncommitted....................................... 178.42 - 196.75 - - xxiii 375.17
-----------------------------------------------------------------------------------------------
Total............................................... $698.70 $397.76 $196.75 $196.61 $5.83 $497.69
--------------------------------------------------------------------------------------------------------------------------------------------------------
i U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
ii As of December 31, 2009, the CPP was closed. U.S. Department of the Treasury, FAQ on Capital Purchase Program Deadline (online at
www.financialstability.gov/docs/FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
iii Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as
losses on the Transactions Report. Therefore Treasury's net current CPP investment is $65.1 billion due to the $2.3 billion in losses thus far. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 4, 6 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
iv This figure represents the TARP losses associated with CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million). This number does
not include UCBH Holdings or Midwest Bank Holdings, Inc. UCBH Holdings, Inc. received $299 million in TARP funds and is currently in bankruptcy
proceedings. As of May 26, 2010, the banking subsidiary of the TARP recipient Midwest Bank Holdings, Inc. ($89.4 million) was in receivership. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 15 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
v Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under the TIP on December 9 and December 23, 2009,
respectively. Therefore the Panel accounts for these funds as repaid and uncommitted. See U.S. Department of the Treasury, Treasury Receives $45
Billion in Repayments from Wells Fargo and Citigroup (Dec. 23, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm); U.S. Department
of the Treasury, Treasury Receives $45 Billion Payment from Bank of America (Dec. 9, 2009) (online at www.financialstability.gov/latest/
pr_12092009c.html).
vi AIG has completely utilized the $40 billion made available on November 25, 2008 and drawn-down $7.54 billion of the $29.8 billion made available on
April 17, 2009. This figure also reflects $1.6 billion in accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of
Treasury's investment from cumulative preferred shares to non-cumulative shares. American International Group, Inc., Form 10-K for the Fiscal Year
Ending December 31, 2009, at 45 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/5272/ 000104746910001465/a2196553z10-k.htm); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 20 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf); information provided by Treasury staff in
response to Panel request.
vii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment from Chrysler Holding to satisfy Chrysler Holdco's existing debt. In addition,
Chrysler LLC, ``Old Chrysler,'' repaid $30.5 million of its debt obligations to Treasury on May 10, 2010 from proceeds earned from collateral sales.
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 17-18 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
viii The $1.9 billion settlement payment represents a $1.6 billion loss on Treasury's Chrysler Holding Investment. This amount is in addition to losses
connected to the $1.9 billion loss from the $4.1 billion debtor-in-possession credit facility, or Chrysler DIP Loan. U.S. Department of the Treasury,
Chrysler Financial Parent Company Repays $1.9 Billion in Settlement of Original Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/
latest/pr_05172010c.html); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1,
2010) (online at www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
ix Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation terminated the asset guarantee with Citigroup on December 23, 2009. The
agreement was terminated with no losses to Treasury's $5 billion second-loss portion of the guarantee. Citigroup did not repay any funds directly, but
instead terminated Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now counted as uncommitted.
U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from Wells Fargo and Citigroup (Dec. 22, 2009) (online at www.treas.gov/
press/releases/20091229716198713.htm).
x Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available, Treasury did not receive a repayment in the same
sense as with other investments. Treasury did receive other income as consideration for the guarantee, which is not a repayment and is accounted for
in Figure 43.
xi On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC, was in need of further capital from
Treasury. GMAC subsequently received an additional $3.8 billion in capital through the AIFP on December 30, 2009. U.S. Department of the Treasury,
Treasury Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html); U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 17-18 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xii Treasury has committed $20 billion in TARP funds to a loan funded through TALF LLC, a special purpose vehicle created by the Federal Reserve Bank of
New York. The loan is incrementally funded and as of May 26, 2010, Treasury provided $104 million to TALF LLC. This total includes accrued payable
interest. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 20 (July 1, 2010)
(online at www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf); Federal Reserve Bank of New
York, Factors Affecting Reserve Balances (H.4.1) (May 27, 2010) (online at www.federalreserve.gov/releases/h41/). As of June 30, 2010, the TALF
program is closed. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility New Issue: Terms and Conditions (online at
www.newyorkfed.org/markets/talf_terms.html) (accessed July 6, 2010).
xiii On April 20, 2010, Treasury released its second quarterly report on the Legacy Securities Public-Private Investment Partnership. As of March 31,
2010, the total value of assets held by the PPIP managers was $10 billion. Of this total, 88 percent was non-agency Residential Mortgage-Backed
Securities and the remaining 12 percent was Commercial Mortgage-Backed Securities. U.S. Department of the Treasury, T3Legacy Securities Public-Private
Investment Program, Program Update--Quarter Ended March 31, 2010 (Apr. 20, 2010) (online at www.financialstability.gov/docs/External%20Report%20-%2003-
10%20Final.pdf). Information on PPIP disbursements and funds outstanding are from Treasury Secretary Geithner's written testimony for a hearing with
the Congressional Oversight Panel on June 22, 2010. Congressional Oversight Panel, Written Testimony of Timothy F. Geithner, secretary, U.S.
Department of the Treasury, COP Hearing with Treasury Secretary Timothy Geithner, at 6 (Jun. 22, 2010) (online at cop.senate.gov/documents/testimony-
062210-geithner.pdf).
xiv On April 5, 2010 and April 7, 2010, Treasury's commitment to lend to the GM SPV and the Chrysler SPV respectively under the ASSP ended. In total,
Treasury received $413 million in repayments from loans provided by this program ($290 million from the GM SPV and $123 million from the Chrysler
SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this program. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 18 (July 1, 2010) (online at www.financialstability.gov/docs/
transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xv On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5 billion. This action reduced GM's portion from
$3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion to $1 billion. GM Supplier Receivables LLC, the special purpose vehicle (SPV)
created to administer this program for GM suppliers has made $290 million in partial repayments and Chrysler Receivables SPV LLC, the SPV created to
administer the program for Chrysler suppliers, has made $123 million in partial repayments. These were partial repayments of drawn-down funds and did
not lessen Treasury's $3.5 billion in total exposure under the ASSP. Total proceeds from these Additional Notes total $101.1 million. U.S. Department
of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 18 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xvi U.S. Department of the Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at www.financialstability.gov/
roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit Markets For Small Businesses By Purchasing Up to $15 Billion in
Securities'').
xvii Treasury settled on the purchase of three floating rate Small Business Administration 7(a) securities on March 24, 2010, one on April 30, 2010,
three on June 30, 2010, two on July 30, 2010, and two on August 30, 2010. Treasury anticipates a settlement on one floating rate SBA 7a security on
May 28, 2010. As of June 23, 2010, the total amount of TARP funds invested in these securities was $184.09 million. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010, at 35 (July 1, 2010) (online at www.financialstability.gov/docs/
transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xviii On February 19, 2010, President Obama announced the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit
Fund). The proposal commits $1.5 billion of the $50 billion in TARP funds allocated to HAMP to assist the five states with the highest home price
declines stemming from the foreclosure crisis: Nevada, California, Florida, Arizona, and Michigan. The White House, President Obama Announces Help for
Hardest Hit Housing Markets (Feb. 19, 2010) (online at www.whitehouse.gov/the-press-office/president-obama-announces-help-hardest-hit-housing-
markets). On March 29, 2010, Treasury announced $600 million in funding for a second HFA Hardest Hit Fund which includes North Carolina, Ohio, Oregon,
Rhode Island, and South Carolina. U.S. Department of the Treasury, Administration Announces Second Round of Assistance for Hardest-Hit Housing Markets
(Mar. 29, 2010) (online at www.financialstability.gov/latest/pr_03292010.html). For further discussion of the newly announced HAMP programs and the
effect these initiatives may have on the $50 billion in committed TARP funds, see Section D.1 of the Panel's April report. Congressional Oversight
Panel, April Oversight Report: Evaluating Progress on TARP Foreclosure Mitigation Programs, at 30 (Apr. 14, 2010) (online at cop.senate.gov/documents/
cop-041410-report.pdf).
xix In response to a Panel inquiry, Treasury disclosed that, as of June 30, 2010, $247.5 million in funds had been disbursed under HAMP. As of June 30,
2010, the total of all the caps set on payments to each mortgage servicer was $39.8 billion. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at www.financialstability.gov/docs/transaction-reports/7-1-
10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xx This figure represents the amount announced by the Administration and the Treasury for funding of the HFA Hardest Hit Fund. See footnote 594 of the
Panel's April Oversight Report for details about proposed funding for the two HFA Hardest Hit Funds. Congressional Oversight Panel, April Oversight
Report: Evaluating Progress on TARP Foreclosure Mitigation Programs, at 211 (Apr. 14, 2010) (online at cop.senate.gov/documents/cop-041410-
report.pdf).
xxi On June 23, 2010, the Administration approved the use of $1.5 billion for Hardest Hit Fund foreclosure-prevention funding. This amount will be
invested in housing finance agencies (HFAs) in Nevada, California, Florida, Arizona, and Michigan. Each investment will be incrementally funded up to
each state's proposed investment amount. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30,
2010 (July 1, 2010) (online at www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf). Each HFA
was required to submit a proposal detailing requested investment amount and individual programs designed to prevent foreclosure. For details on each
HFA's programs and copies of their proposals, see U.S. Department of the Treasury, Making Home Affordable: Hardest Hit Fund (June 22, 2010) (online at
www.financialstability.gov/roadtostability/hardesthitfund.html).
xxii On February 3, 2010, the Administration announced an initiative under the TARP to provide low-cost financing for Community Development Financial
Institutions (CDFIs). Under this program, CDFIs are eligible for capital investments at a two percent dividend rate as compared to the five percent
dividend rate under the CPP. In response to a Panel request, Treasury stated that it projects the CDFI program to utilize $780.2 million.
xxiii This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($178.42 billion) and the repayments ($196.75 billion).
FIGURE 44: TARP PROFIT AND LOSS
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Dividends xxiv Interest xxv Warrant Other Losses xxvii
TARP Initiative (as of 5/31/ (as of 5/31/ repurchases xxvi proceeds (as (as of 6/30/ Total
10) 10) (as of 6/30/10) of 5/31/10) 10)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................ $15,700 $749 $7,045 $4,692 ($5,822) $22,364
CPP.................................................. 9,317 38 5,774 xxviii 2,015 (2,334) 14,810
TIP.................................................. 3,004 - 1,256 - ............... 4,260
AIFP................................................. xxix 3,013 675 15 - (3,488) 215
ASSP................................................. - 15 - xxx 101 ............... 116
AGP.................................................. 366 - 0 xxxi 2,234 ............... 2,600
PPIP................................................. - 21 - xxxii 66 ............... 87
Bank of America Guarantee............................ - - - xxxiii 276 ............... 276
--------------------------------------------------------------------------------------------------------------------------------------------------------
xxiv U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of May 31, 2010 (June 11, 2010) (online at financialstability.gov/docs/
dividends-interest-reports/May%202010%20Dividends%20and%20Interest%20Report.pdf).
xxv Id.
xxvi U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xxvii Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as
losses on the Transactions Report. A third institution, UCBH Holdings, Inc., received $299 million in TARP funds and is currently in bankruptcy
proceedings. Finally, as of May 26, 2010, the banking subsidiary of the TARP recipient Midwest Banc Holdings, Inc. ($89.4 million) was in
receivership. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010)
(online at www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xxviii This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. The net proceeds account for Treasury's exchange
in June 2009 of $25 billion in Citigroup preferred shares for 7.7 billion shares of the company's common stock at $3.25 per share. On May 26, 2010,
Treasury completed the sale of 1.5 billion shares of Citigroup common stock at an average weighted price of $4.12 per share. On June 30, 2010,
Treasury announced the sale of 1,108,971,857 additional shares of Citigroup stock at an average weighted price of $3.90 per share. As of June 30,
2010, Treasury has received $10.5 billion in gross proceeds from these sales. U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at www.financialstability.gov/docs/transaction-reports/7-1-
10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xxix This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and mandatory convertible preferred shares.
The dividend total also includes a $748.6 million senior unsecured note from Treasury's investment in General Motors. Information provided by
Treasury.
xxx This represents the total proceeds from additional notes. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending May 26, 2010 (May 28, 2010) (online at www.financialstability.gov/docs/transaction-reports/5-28-10%20Transactions%20Report%20as%20of%205-
26-10.pdf).
xxxi As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks for trust preferred securities in June
2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with a
$2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. At the end of Citigroup's participation in the FDIC's
TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP
to the Treasury. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010)
(online at www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xxxii As of May 31, 2010, Treasury has earned $45 million in membership interest distributions from the PPIP. Additionally Treasury has earned $20.6
million in total proceeds following the termination of the TCW fund. U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of
May 31, 2010 (June 11, 2010) (online at financialstability.gov/docs/dividends-interest-reports/May%202010%20Dividends%20and%20Interest%20Report.pdf);
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xxxiii Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
%20executed.pdf).
d. Rate of Return
As of July 7, 2010, the average internal rate of return for
all financial institutions that participated in the CPP and
fully repaid the U.S. government (including preferred shares,
dividends, and warrants) was 9.9 percent. The internal rate of
return is the annualized effective compounded return rate that
can be earned on invested capital.
e. Warrant Disposition
FIGURE 45: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS AS OF JULY 7, 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel's best
Investment Warrant Warrant valuation Price/ IRR
Institution date repurchase repurchase/ estimate at estimate (percent)
date sale amount repurchase date ratio
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp............................................. 12/12/2008 5/8/2009 $1,200,000 $2,150,000 0.558 9.3
Iberiabank Corporation........................................... 12/5/2008 5/20/2009 1,200,000 2,010,000 0.597 9.4
Firstmerit Corporation........................................... 1/9/2009 5/27/2009 5,025,000 4,260,000 1.180 20.3
Sun Bancorp, Inc................................................. 1/9/2009 5/27/2009 2,100,000 5,580,000 0.376 15.3
Independent Bank Corp............................................ 1/9/2009 5/27/2009 2,200,000 3,870,000 0.568 15.6
Alliance Financial Corporation................................... 12/19/2008 6/17/2009 900,000 1,580,000 0.570 13.8
First Niagara Financial Group.................................... 11/21/2008 6/24/2009 2,700,000 3,050,000 0.885 8.0
Berkshire Hills Bancorp, Inc..................................... 12/19/2008 6/24/2009 1,040,000 1,620,000 0.642 11.3
Somerset Hills Bancorp........................................... 1/16/2009 6/24/2009 275,000 580,000 0.474 16.6
SCBT Financial Corporation....................................... 1/16/2009 6/24/2009 1,400,000 2,290,000 0.611 11.7
HF Financial Corp................................................ 11/21/2008 6/30/2009 650,000 1,240,000 0.524 10.1
State Street..................................................... 10/28/2008 7/8/2009 60,000,000 54,200,000 1.107 9.9
U.S. Bancorp..................................................... 11/14/2008 7/15/2009 139,000,000 135,100,000 1.029 8.7
The Goldman Sachs Group, Inc..................................... 10/28/2008 7/22/2009 1,100,000,000 1,128,400,000 0.975 22.8
BB&T Corp........................................................ 11/14/2008 7/22/2009 67,010,402 68,200,000 0.983 8.7
American Express Company......................................... 1/9/2009 7/29/2009 340,000,000 391,200,000 0.869 29.5
Bank of New York Mellon Corp..................................... 10/28/2008 8/5/2009 136,000,000 155,700,000 0.873 12.3
Morgan Stanley................................................... 10/28/2008 8/12/2009 950,000,000 1,039,800,000 0.914 20.2
Northern Trust Corporation....................................... 11/14/2008 8/26/2009 87,000,000 89,800,000 0.969 14.5
Old Line Bancshares Inc.......................................... 12/5/2008 9/2/2009 225,000 500,000 0.450 10.4
Bancorp Rhode Island, Inc........................................ 12/19/2008 9/30/2009 1,400,000 1,400,000 1.000 12.6
Centerstate Banks of Florida Inc................................. 11/21/2008 10/28/2009 212,000 220,000 0.964 5.9
Manhattan Bancorp................................................ 12/5/2008 10/14/2009 63,364 140,000 0.453 9.8
Bank of the Ozarks............................................... 12/12/2008 11/24/2009 2,650,000 3,500,000 0.757 9.0
Capital One Financial............................................ 11/14/2008 12/3/2009 148,731,030 232,000,000 0.641 12.0
JPMorgan Chase & Co.............................................. 10/28/2008 12/10/2009 950,318,243 1,006,587,697 0.944 10.9
TCF Financial Corp............................................... 1/16/2009 12/16/2009 9,599,964 11,825,830 0.812 11.0
LSB Corporation.................................................. 12/12/2008 12/16/2009 560,000 535,202 1.046 9.0
Wainwright Bank & Trust Company.................................. 12/19/2008 12/16/2009 568,700 1,071,494 0.531 7.8
Wesbanco Bank, Inc............................................... 12/5/2008 12/23/2009 950,000 2,387,617 0.398 6.7
Union First Market Bankshares Corporation (Union Bankshares 12/19/2008 12/23/2009 450,000 1,130,418 0.398 5.8
Corporation)....................................................
Trustmark Corporation............................................ 11/21/2008 12/30/2009 10,000,000 11,573,699 0.864 9.4
Flushing Financial Corporation................................... 12/19/2008 12/30/2009 900,000 2,861,919 0.314 6.5
OceanFirst Financial Corporation................................. 1/16/2009 2/3/2010 430,797 279,359 1.542 6.2
Monarch Financial Holdings, Inc.................................. 12/19/2008 2/10/2010 260,000 623,434 0.417 6.7
Bank of America.................................................. \317\ 10/28/ 3/3/2010 1,566,210,714 1,006,416,684 1.533 6.5
2008
\318\ 1/9/2009
\319\ 1/14/
2009
Washington Federal Inc./Washington Federal Savings & Loan 11/14/2008 3/9/2010 15,623,222 10,166,404 1.537 18.6
Association.....................................................
Signature Bank................................................... 12/12/2008 3/10/2010 11,320,751 11,458,577 0.988 32.4
Texas Capital Bancshares, Inc.................................... 1/16/2009 3/11/2010 6,709,061 8,316,604 0.807 30.1
Umpqua Holdings Corp............................................. 11/14/2008 3/31/2010 4,500,000 5,162,400 0.872 6.6
City National Corp............................................... 11/21/2008 4/7/2010 18,500,000 24,376,448 0.759 8.5
First Litchfield Financial Corporation........................... 12/12/2008 4/7/2010 1,488,046 1,863,158 0.799 15.9
PNC Financial Services Group Inc................................. 12/31/2008 4/29/2010 324,195,686 346,800,388 0.935 8.7
Comerica Inc..................................................... 11/14/2008 5/4/2010 183,673,472 276,426,071 0.664 10.8
Valley National Bancorp.......................................... 11/14/2008 5/18/2010 5,571,592 5,955,884 0.935 8.3
Wells Fargo Bank................................................. 10/28/2008 5/20/2010 849,014,998 1,064,247,725 0.798 7.8
First Financial Bancorp.......................................... 12/23/2008 6/2/2010 3,116,284 3,051,431 1.021 8.2
Sterling Bancshares, Inc./Sterling Bank.......................... 12/12/2008 6/9/2010 3,007,891 5,287,665 0.569 10.8
SVB Financial Group.............................................. 12/12/2008 6/16/2010 6,820,000 7,884,633 0.865 7.7
--------------------------------------------------------------------------------------
Total........................................................ $7,024,771,217 $7,144,680,741 0.983 9.90
--------------------------------------------------------------------------------------------------------------------------------------------------------
\317\ Investment date for Bank of America in the CPP.
\318\ Investment date for Merrill Lynch in the CPP.
\319\ Investment date for Bank of America in TIP.
FIGURE 46: VALUATION OF CURRENT HOLDINGS OF WARRANTS AS OF JULY 7, 2010
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Warrant valuation
Stress Test financial institutions with warrants outstanding -----------------------------------------------
Low estimate High estimate Best estimate
----------------------------------------------------------------------------------------------------------------
Citigroup, Inc.................................................. $14.12 $1,055.10 $182.50
SunTrust Banks, Inc............................................. 12.84 330.47 157.33
Regions Financial Corporation................................... 7.35 195.69 95.83
Fifth Third Bancorp............................................. 96.25 389.48 213.65
Hartford Financial Services Group, Inc.......................... 378.15 724.40 520.45
KeyCorp......................................................... 19.38 166.31 91.92
AIG............................................................. 202.12 1,657.63 996.91
All Other Banks................................................. 898.09 2,122.20 1,531.06
-----------------------------------------------
Total....................................................... $1,628.29 $6,641.28 $3,789.66
----------------------------------------------------------------------------------------------------------------
2. Federal Financial Stability Efforts
a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has
undertaken through the TARP, the federal government has engaged
in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs, such as
the interaction between PPIP and TALF. Other programs, like the
Federal Reserve's extension of credit through its Section 13(3)
facilities and SPVs and the FDIC's Temporary Liquidity
Guarantee Program, operate independently of the TARP.
Since the Panel's last report, the Federal Reserve ended
the TALF program, which received a $20 billion debt obligation
from Treasury. As of June 30, 2010, the program ended loan
issues collateralized by newly issued commercial mortgage-
backed securities. The SPV also ceased all loan issues
collateralized by other types of TALF-eligible legacy and new
issue Asset-Backed Securities on March 31, 2010.\320\ By the
program's end, investors had requested $73.3 billion in TALF
loans, $13.2 billion for CMBS-related operations and $60.1 for
non-CMBS operations. Of the total requested, $71.1 billion of
the loans were settled at the closing of the March 2010
facility.\321\
---------------------------------------------------------------------------
\320\ Federal Reserve Bank of New York, Term Asset-Backed
Securities Loan Facility New Issue: Terms and Conditions (online at
www.newyorkfed.org/markets/talf_terms.html) (accessed July 6, 2010).
\321\ Federal Reserve Bank of New York, Term Asset-Backed
Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/
cmbs_operations.html) (accessed July 6, 2010); Federal Reserve Bank of
New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online
at www.newyorkfed.org/markets/talf_operations.html) (accessed July 6,
2010).
---------------------------------------------------------------------------
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives as outlays, loans, or guarantees. Although the
Panel calculates the total value of these resources at
approximately $3 trillion, this would translate into the
ultimate ``cost'' of the stabilization effort only if: (1)
assets do not appreciate; (2) no dividends are received, no
warrants are exercised, and no TARP funds are repaid; (3) all
loans default and are written off; and (4) all guarantees are
exercised and subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's
November report, the FDIC assesses a premium of up to 100 basis
points on TLGP debt guarantees.\322\ In contrast, the Federal
Reserve's liquidity programs are generally available only to
borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the
borrower. If the assets securing a Federal Reserve loan realize
a decline in value greater than the ``haircut,'' the Federal
Reserve is able to demand more collateral from the borrower.
Similarly, should a borrower default on a recourse loan, the
Federal Reserve can turn to the borrower's other assets to make
the Federal Reserve whole. In this way, the risk to the
taxpayer on recourse loans only materializes if the borrower
enters bankruptcy. The only loan currently ``underwater''--
where the outstanding principal loan amount exceeds the current
market value of the collateral--is the loan to Maiden Lane LLC,
which was formed to purchase certain Bear Stearns assets.
---------------------------------------------------------------------------
\322\ Congressional Oversight Panel, November Oversight Report:
Guarantees and Contingent Payments in TARP and Related Programs, at 36
(Nov. 11, 2009) (online at cop.senate.gov/documents/cop-110609-
report.pdf).
FIGURE 47: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JUNE 23, 2010) xxxiv
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Program Treasury (TARP) Federal Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total............................... $698.7 $1,637.1 $703.4 $3,039.2
Outlays xxxv........................ 271.2 1,319.7 188.4 1,779.3
Loans............................... 32.4 317.4 0 349.8
Guarantees xxxvi.................... 20 0 515 535
Uncommitted TARP Funds.............. 375.1 0 0 375.1
AIG xxxvii.......................... 69.8 89.5 0 159.3
Outlays............................. xxxviii 69.8 xxxix 25.4 0 95.2
Loans............................... 0 x1 64.1 0 64.1
Guarantees.......................... 0 0 0 0
Citigroup........................... 25 0 0 25
Outlays............................. xli25 0 0 25
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 0 0
Capital Purchase Program (Other).... 42.4 0 0 42.4
Outlays............................. xlii 42.4 0 0 42.4
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 0 0
Capital Assistance Program.......... N/A 0 0 xliii N/A
TALF................................ 20 180 0 200
Outlays............................. 0 0 0 0
Loans............................... 0 xlv 180 0 180
Guarantees.......................... xliv 20 0 0 20
PPIP (Loans) xlvi................... 0 0 0 0
Outlays............................. 0 0 0 0
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 0 0
PPIP (Securities)................... xlvii 30 0 0 30
Outlays............................. 10 0 0 10
Loans............................... 20 0 0 20
Guarantees.......................... 0 0 0 0
Home Affordable Modification Program 50 0 0 50
Outlays............................. xlviii 50 0 0 50
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 0 0
Automotive Industry Financing xlix 67.1 0 0 67.1
Program............................
Outlays............................. 59.0 0 0 59.0
Loans............................... 8.1 0 0 8.1
Guarantees.......................... 0 0 0 0
Auto Supplier Support Program....... 3.5 0 0 3.5
Outlays............................. 0 0 0 0
Loans............................... l 3.5 0 0 3.5
Guarantees.......................... 0 0 0 0
Unlocking SBA Lending............... li 15 0 0 15
Outlays............................. 15 0 0 15
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 0 0
Community Development Capital lii 0.78 0 0 0.78
Initiative.........................
Outlays............................. 0 0 0 0
Loans............................... 0.78 0 0 0.78
Guarantees.......................... 0 0 0 0
Temporary Liquidity Guarantee 0 0 515 515
Program............................
Outlays............................. 0 0 0 0
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 liii 515 515
Deposit Insurance Fund.............. 0 0 188.4 188.4
Outlays............................. 0 0 liv 188.4 188.4
Loans............................... 0 0 0 0
Guarantees.......................... 0 0 0 0
Other Federal Reserve Credit 0 1,367.6 0 1,367.6
Expansion..........................
Outlays............................. 0 lv 1,294.3 0 1,294.3
Loans............................... 0 lvi 73.3 0 73.3
Guarantees.......................... 0 0 0 0
Uncommitted TARP Funds.............. 375.1 0 0 375.1
----------------------------------------------------------------------------------------------------------------
xxxiv All data in this exhibit is as of June 23, 2010, except for information regarding the FDIC's Temporary
Liquidity Guarantee Program (TLGP). This data is as of May 31, 2010.
xxxv The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays used here represent investment and asset purchases
and commitments to make investments and asset purchases and are not the same as budget outlays, which under
section 123 of EESA are recorded on a ``credit reform'' basis.
xxxvi Although many of the guarantees may never be exercised or exercised only partially, the guarantee figures
included here represent the federal government's greatest possible financial exposure.
xxxvii AIG received an $85 billion credit facility (reduced to $60 billion in November 2008 to $35 billion in
December 2009, and then to $34 billion in May 2010) from the Federal Reserve Bank of New York. A Treasury
trust received Series C preferred convertible stock in exchange for the facility and $0.5 million. The Series
C shares amount to 79.9 percent ownership of common stock, minus the percentage common shares acquired through
warrants. In November 2008, Treasury received a warrant to purchase shares amounting to 2 percent ownership of
AIG common stock in connection with its Series D stock purchase (exchanged for Series E noncumulative
preferred shares on 4/17/2009). Treasury also received a warrant to purchase 3,000 Series F common shares in
May 2009. Warrants for Series D and Series F shares represent 2 percent equity ownership, and would convert
Series C shares into 77.9 percent of common stock. However, in May 2009, AIG carried out a 20:1 reverse stock
split, which allows warrants held by Treasury to become convertible into 0.1 percent common equity. Therefore,
the total benefit to the Treasury would be a 79.8 percent voting majority in AIG in connection with its
ownership of Series C convertible shares. U.S. Government Accountability Office, Troubled Asset Relief
Program: Status of Government Assistance Provided to AIG (Sept. 2009) (GAO-09-975) (online at www.gao.gov/
new.items/d09975.pdf). Additional information was also provided by Treasury in response to Panel inquiry.
xxxviii This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November
25, 2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million
representing bonuses paid to AIG Financial Products employees). As of July 13, 2010, AIG had utilized $47.5
billion of the available $69.8 billion under the AIGIP/SSFI and owed $1.6 billion in unpaid dividends. This
information was provided by Treasury in response to a Panel inquiry.
xxxix As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009, the
amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
preferred equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These SPVs
were established to hold the common stock of two AIG subsidiaries: American International Assurance Company
Ltd. (AIA) and American Life Insurance Company (ALICO). As of June 23, 2010, the book value of the Federal
Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $16.27 billion and $9.15
billion in preferred equity respectively. Hence, the book value of these securities is $25.416 billion, which
is reflected in the corresponding table. Federal Reserve Bank of New York, Factors Affecting Reserve Balances
(H.4.1) (June 24, 2010) (online at www.federalreserve.gov/releases/h41/).
xl This number represents the full $34 billion that is available to AIG through its revolving credit facility
with the Federal Reserve Bank of New York (FRBNY) ($25.1 billion had been drawn down as of June 23, 2010) and
the outstanding principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of
May 26, 2010, $14.3 billion and $15.8 billion, respectively). The amounts outstanding under the ML2 and ML3
facilities do not reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to
pay down the loans to the SPVs, reducing the taxpayers' exposure to losses over time. Federal Reserve Bank of
New York, Factors Affecting Reserve Balances (H.4.1) (June 24, 2010) (online at www.federalreserve.gov/
releases/h41/); Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on
Credit and Liquidity Programs and the Balance Sheet, at 17 (Oct. 2009) (online at www.federalreserve.gov/
monetarypolicy/ files/monthlyclbsreport200910.pdf). On December 1, 2009, AIG entered into an agreement with
FRBNY to reduce the debt AIG owes FRBNY by $25 billion. In exchange, FRBNY received preferred equity interests
in two AIG subsidiaries. This also reduced the debt ceiling on the loan facility from $60 billion to $35
billion. American International Group, Inc., AIG Closes Two Transactions That Reduce Debt AIG Owes Federal
Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1). The maximum available amount from the
credit facility was reduced from $34.1 billion to $34 billion on May 6, 2010, as a result of the sale of
HighStar Port Partners, L.P. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly
Report on Credit and Liquidity Programs and the Balance Sheet, at 17 (May 2010) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201005.pdf).
xli May 26, 2010, Treasury completed sales of 1.5 billion shares of Citigroup common stock for $6.1 billion in
gross proceeds and $1.3 billion in net proceeds. On June 30, 2010, Treasury completed another sale of
1,108,971,857 billion shares of Citigroup stock. To date, a total of 2.6 billion shares has been sold for a
total of $10.5 billion in gross proceeds and $2 billion in net proceeds. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf);
U.S. Department of the Treasury, Treasury Announces the Completion of Its Current Trading Plan to Sell
Citigroup Common Stock (July 1, 2010) (online at www.financialstability.gov/latest/pr_07012010.html).
xlii This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion
investment in Citigroup identified above, and the $137.5 billion in repayments that are reflected as available
TARP funds. This figure does not account for future repayments of CPP investments, dividend payments from CPP
investments, or losses under the program. U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at www.financialstability.gov/docs/
transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xliii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
need of further capital from Treasury. GMAC, however, received further funding through the AIFP. Therefore,
the Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding
the Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
xliv This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. However, as of June 23,
2010, TALF LLC had drawn only $104 million of the available $20 billion. Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (May 27, 2010) (online at www.federalreserve.gov/
Releases/H41/Current/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period Ending May 26, 2010 (May 28, 2010) (online at www.financialstability.gov/docs/transaction- reports/5-28-
10%20Transactions%20Report%20as%20of%205-26-10.pdf). On June 30, 2010, the Federal Reserve ceased issuing
loans collateralized by newly issued CMBS. As of this date, investors had requested a total of $73.3 billion
in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF loans had been
settled ($12 billion in CMBS and $59 billion in non-CMBS). Earlier, it ended its issues of loans
collateralized by other TALF-eligible newly issued and legacy ABS on March 31, 2010. Federal Reserve Bank of
New York, Term Asset-Backed Securities Loan Facility New Issue: Terms and Conditions (online at
www.newyorkfed.org/markets/talf_terms.html) (accessed July 6, 2010); Term Asset-Backed Securities Loan
Facility: CMBS (online at www.newyorkfed.org/markets/cmbs_operations.html) (accessed July 6, 2010); Federal
Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/
markets/talf_operations.html) (accessed July 6, 2010).
xlv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
(Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
$100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
xlvi It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design
as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit
Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at
www.fdic.gov/news/news/press/2009/pr09084.html); Federal Deposit Insurance Corporation, Legacy Loans Program--
Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html). The
sales described in these statements do not involve any Treasury participation, and FDIC activity is accounted
for here as a component of the FDIC's Deposit Insurance Fund outlays.
xlvii As of June 30, 2010, Treasury reported commitments of $19.9 billion in loans and $9.9 billion in
membership interest associated with the program. On January 4, 2010, Treasury and one of the nine fund
managers, TCW Senior Management Securities Fund, L.P., entered into a ``Winding-Up and Liquidation
Agreement.'' U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
Ending June 30, 2010 (July 1, 2010) (online at www.financialstability.gov/docs/transaction- reports/7-1-
10%20Transactions%20Report%20as%20of%206-30-10.pdf).
xlviii Of the $50 billion in announced TARP funding for this program, $39.8 billion has been allocated as of
June 29, 2010. However, as of June 30, 2010, only $247.5 million in non-GSE payments have been disbursed under
HAMP. The total anticipated funding for HAMP was reduced to $47.9 billion when $2.1 billion was redirected to
the HFA Hardest Hit Funds Program under the Housing Financing Agency Innovation Fund for the Hardest Hit
Housing Markets. Disbursement information and amount of anticipated HAMP funding reduction provided by
Treasury in response to Panel inquiry; U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at www.financialstability.gov/docs/
transaction- reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf); U.S. Department of the Treasury,
Obama Administration Approves Plans for Use of $1.5 Billion in `Hardest Hit Fund' Foreclosure-Prevention
Funding (online at www.financialstability.gov/latest/pr_06232010.html).
xlix A substantial portion of the total $81.3 billion in loans extended under the AIFP have since been converted
to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first lien
debt (with $1 billion committed to old GM, and $7.1 billion to Chrysler). This figure ($67.1 billion)
represents Treasury's current obligation under the AIFP after repayments. U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for Period Ending June 30, 2010 (July 1, 2010) (online at
www.financialstability.gov/docs/transaction-reports/7-1-10%20Transactions%20Report%20as%20of%206-30-10.pdf).
l U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending June 30,
2010 (July 1, 2010) (online at www.financialstability.gov/docs/transaction-reports/7-1-
10%20Transactions%20Report%20as%20of%206-30-10.pdf).
li U.S. Department of the Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at
www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit Markets
For Small Businesses By Purchasing Up to $15 Billion in Securities'').
lii This information was provided by Treasury staff in response to Panel inquiry.
liii This figure represents the current maximum aggregate debt guarantees that could be made under the program,
which is a function of the number and size of individual financial institutions participating. $305.4 billion
of debt subject to the guarantee is currently outstanding, which represents approximately 59.2 percent of the
current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (May 31, 2010) (online at www.fdic.gov/
regulations/resources/TLGP/total_issuance05-10.html). The FDIC has collected $10.4 billion in fees and
surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance
Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program (May 31, 2010) (online at
www.fdic.gov/regulations/resources/tlgp/fees.html).
liv This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
failures in the third and fourth quarters of 2008, the first, second, third, and fourth quarters of 2009, and
the first quarter of 2010. Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to
the Board: DIF Income Statement (Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/
cfo_report_4qtr_08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report
to the Board: DIF Income Statement (Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/
cfo_report_3rdqtr_08/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO)
Report to the Board: DIF Income Statement (First Quarter 2009) (online at www.fdic.gov/about/strategic/
corporate/cfo_report_1stqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's
(CFO) Report to the Board: DIF Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/
corporate/cfo_report_2ndqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's
(CFO) Report to the Board: DIF Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/
corporate/cfo_report_3rdqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's
(CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2009) (online at www.fdic.gov/about/strategic/
corporate/cfo_report_4thqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's
(CFO) Report to the Board: DIF Income Statement (First Quarter 2010) (online at www.fdic.gov/about/strategic/
corporate/cfo_report_1stqtr_10/income.html). This figure includes the FDIC's estimates of its future losses
under loss-sharing agreements that it has entered into with banks acquiring assets of insolvent banks during
these five quarters. Under a loss-sharing agreement, as a condition of an acquiring bank's agreement to
purchase the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's
future losses on an initial portion of these assets and 95 percent of losses of another portion of assets.
See, e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of
Guaranty Bank, Austin, Texas, FDIC and Compass Bank, at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/
individual/failed/ guaranty-tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC
disclosed that there were approximately $132 billion in assets covered under loss-sharing agreements as of
December 18, 2009. Furthermore, the FDIC estimates the total cost of a payout under these agreements to be
$59.3 billion. Since there is a published loss estimate for these agreements, the Panel continues to reflect
them as outlays rather than as guarantees.
lv Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
(online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed July 13, 2010). Although the
Federal Reserve does not employ the outlays, loans, and guarantees classification, its accounting clearly
separates its mortgage-related purchasing programs from its liquidity programs. See Board of Governors of the
Federal Reserve, Credit and Liquidity Programs and the Balance Sheet November 2009, at 2 (Nov. 2009) (online
at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf).
On September 7, 2008, Treasury announced the GSE Mortgage Backed Securities Purchase Program (Treasury MBS
Purchase Program). The Housing and Economic Recovery Act of 2008 provided Treasury the authority to purchase
Government Sponsored Enterprise (GSE) MBS. Under this program, Treasury purchased approximately $214.4 billion
in GSE MBS before the program ended on December 31, 2009. As of May 2010, there was $174.7 billion still
outstanding under this program. U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month
(online at www.financialstability.gov/docs/May%202010%20Portfolio%20by%20month.pdf) (accessed July 9, 2010).
Treasury has received $46.0 billion in principal repayments and $11.1 billion in interest payments from these
securities. U.S. Department of the Treasury, MBS Purchase Program Principal and Interest (online at
www.financialstability.gov/docs/May%202010%20MBS%20 Principal%20and%20Interest%20Monthly%20Breakout.pdf)
(accessed July 9, 2010).
lvi Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary
credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
Paper, Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding
Facility LLC, Seasonal credit, Term auction credit, Term Asset-Backed Securities Loan Facility, and loans
outstanding to Bear Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors
Affecting Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41)
(accessed July 9, 2010).
SECTION FOUR: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced 20
oversight reports, as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. Since the release of the
Panel's June oversight report, which examined government
assistance to American International Group, the following
developments pertaining to the Panel's oversight of the TARP
took place:
The Panel held a hearing in Washington, DC on June
22, 2010, with Treasury Secretary Timothy Geithner, his fourth
appearance before the Panel since its inception. The Panel
received a general update from the Secretary on the current
status and future direction of the TARP, and raised a number of
questions on a wide-range of TARP-related topics including
questions related to small banks and small business lending,
Treasury's continued foreclosure mitigation efforts, and banks'
continued exposure to a troubled commercial real estate market.
A video recording of the hearing, Secretary Geithner's written
testimony, and Panel Members' opening statements all can be
found online at cop.senate.gov/hearings.
Upcoming Reports and Hearings
The Panel will release its next oversight report in August.
While the Panel's previous reports have been focused almost
exclusively on efforts here in the United States, the August
report will examine the international aspects of the
government's response to the financial crisis.
SECTION FIVE: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating financial crisis, on October
3, 2008, Congress provided Treasury with the authority to spend
$700 billion to stabilize the U.S. economy, preserve home
ownership, and promote economic growth. Congress created the
Office of Financial Stability (OFS) within Treasury to
implement the TARP. At the same time, Congress created the
Congressional Oversight Panel to ``review the current state of
financial markets and the regulatory system.'' The Panel is
empowered to hold hearings, review official data, and write
reports on actions taken by Treasury and financial institutions
and their effect on the economy. Through regular reports, the
Panel must oversee Treasury's actions, assess the impact of
spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the
American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
Professor of Law at Harvard Law School, to the Panel. With the
appointment on November 19, 2008, of Congressman Jeb Hensarling
to the Panel by House Minority Leader John Boehner, the Panel
had a quorum and met for the first time on November 26, 2008,
electing Professor Warren as its chair. On December 16, 2008,
Senate Minority Leader Mitch McConnell named Senator John E.
Sununu to the Panel. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat. Senate Minority Leader Mitch
McConnell appointed Kenneth Troske, Sturgill Professor of
Economics at the University of Kentucky, to fill the vacancy
created by the resignation of Paul Atkins on May 21, 2010.