Obama's TARP Commitments

January 16, 2009

Authored by: Robert Klingler

In connection with the Senate’s rejection of the withholding of the second $350 billion under the Emergency Economic Stabilization Act of 2008, Director-designate of the National Economic Council, Larry Summers, submitted a letter to Senator Reid containing additional commitments of the Obama administration.  The letter is generally focused on the use of the second $350  billion, but also contains several provisions that may affect existing TARP Capital programs.

The Obama administration has committed that the TARP funds will be used to protect the financial and housing markets, and will not be used to implement a broader industrial policy, and that at least $50 to $100 billion of the remaining funds will be allocated to an effort to address foreclosures.  In addition, the letter highlights four areas of reform that it intends to implement:

  1. Provide a  Clean and Transparent Explanation for Investments
  2. Measure, Monitor and Track the Impact on Lending
  3. Impose Clear Conditions on Firms Receiving Government Support
  4. Focus Support on Increasing the Flow of Credit

The letter provides that the Treasury will make a condition of federal assistance for healthy banks that they “will increase lending above baseline levels.”  It appears that Treasury will require quarterly reports, perhaps in conjunction with Call Reports of SEC filings.

Among the conditions that Summers lists (which may or may not apply to TARP Capital investments), community bankers may find both positive and negative implications.  On the positive side, the only additional limitation on executive compensation is that compensation “above a specified threshold” must be paid in restricted stock or similar form that cannot be liquidated until the government has been repaid.  Substantive dividend restrictions appear limited to those banks that receive “exceptional assistance.”  For all others, dividends must be “approved” by their primary federal banking regulator; presumably, federal banking regulators will continue to use the same standards to determine whether dividends are acceptable.  “Summers also provides that the investments will be designed to “promote early repayment and to encourage private capital to replace public investments as soon as economic conditions permit.”  The Obama administration will not permit government funds to be used to purchase “healthy” institutions.

Positively, the Summers letter specifically provides that funds should be provided to “ensure the soundness of community banks throughout the country.”