Son of TARP: What We Know So Far

February 11, 2009

Authored by: Robert Klingler

On February 10, 2009, Treasury Secretary Geithner laid out the preliminary aspects of how the Obama administration intends to move forward with the Troubled Asset Relief Program.  As outlined by the Treasury’s Fact Sheet, there are six elements to the new “Financial Stability Plan.”

1. New Capital Investments – The Treasury will invest an indeterminate amount of preferred stock, to be held in a newly formed “Financial Stability Trust,” to provide a “capital buffer” to help absorb losses and serve as a bridge to private capital.  The terms of the preferred stock were generally not announced, but will be convertible at a discount to the institution’s stock price as of February 9, 2009.  It appears the capital  plan, and the required “comprehensive stress test” is designed primarily for the largest institutions, however the Treasury states that the banking institutions with less than $100 billion “will also be eligible.”  Recipients will be subject to the new additional restrictions addressed below.

2. A Public-Private “Bad Bank” – The Treasury plans to leverage public funds with private capital to form a bad bank to purchase “toxic assets.”  Pricing, how assets will be chosen, and the structure of the private capital partnership have not been detailed.

3. Expansion of TALF to $1 Billion and Inclusive of CMBS – The Treasury will expand the previously announced Term Asset-Backed Securities Loan Facility from $200 billion to $1 trillion, and include commercial mortgage-backed securities.  Only newly packaged AAA loan packages will be purchased.

4.  New Requirements and Executive Compensation Limitations – Banks receiving assistance under the new Financial Stability Trust will be required to indicate in their application that they intend to use the funds to expand lending and will be required to file monthly reports with the Treasury demonstrating such use.  Recipients will also generally not be permitted to pay more than $0.01 per share in dividends, repurchase shares, or make cash acquisitions of other healthy banks until the government’s investment is repaid.  Recipients will also be subject to the restrictions on senior executive compensation previously announced by the TreasuryNone of these additional restrictions appear to apply to the existing TARP Capital Purchase program, regardless of whether the investment has been completed.

5. Foreclosure Prevention. The Treasury and the Federal Reserve will establish guidelines for loan modification programs to reduce monthly payments on owner-occupied homes.  It is expected that $50 billion in government assistance will be allocated to this program, and that all Financial Stability Plan recipients will be required  to participate.

6. Small Business Lending Initiative. The administration plans to finance the purchase of AAA-rated SBA loans, increase guarantees for SBA loans from 75% to 90% and reduce fees while improving the bureaucratic process for SBA lending.

The Treasury also announced the formation of FinancialStability.gov as a new location for increasing the transparency of the Treasury’s actions.