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.
On January 30, 2009, the Government Accounting Office (GAO) released its second report on the Troubled Asset Relief Program (TARP).
The report indicates that “thousands of applications are under review.” As of January 16, 2009, the Treasury was in the process of reviewing approval recommendations from fewer than 150 financial institutions; however, the bank regulators reported that they are reviewing applications “from more than 2,000 institutions that have not yet been forwarded to Treasury.” Furthermore, there is a backlog of closings due to the need for some institutions to require shareholder approval and/or to finalize closing documents.
The report follows up on the nine recommendations from its prior report, finding that Treasury has yet to fully address eight of the recommendations, and includes further recommendations on how to monitor TARP funds and more clearly articulate and communicate a strategic vision for the program.
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:
- Provide a Clean and Transparent Explanation for Investments
- Measure, Monitor and Track the Impact on Lending
- Impose Clear Conditions on Firms Receiving Government Support
- 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.”
On December 31, 2008, the Treasury announced the establishment of an Asset Guarantee Program, as required by Section 102(a) of the Emergency Economic Stabilization Act. The program provides guarantees for assets originated before March 14, 2008 held by systemically significant financial institutions that face a high risk of losing market confidence due in part to a large portfolio of distressed or illiquid assets. While the program is required by statute, it appears unlikely that the Asset Guarantee Program will be a significant part of the Troubled Asset Relief Program. “The program will be applied with extreme discretion in order to improve market confidence in the systematically significant institution and in financial markets broadly. It is not anticipated that the program will be made widely available.”
On November 25, 2008, Treasury and the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (“TALF”). The intent of TALF is to assist the credit markets in meeting the needs of consumers and small businesses by facilitating the issuance of, and improving the market for, asset-backed securities (“ABS”). To fulfill this intent, the Federal Reserve Bank of New York (“FRBNY”) will provide up to $200 billion for non-recourse loans that are fully secured by eligible ABS. Treasury will use funds from TARP to provide $20 billion in credit protection to the FRBNY.
Collateral eligible for a TALF loan includes dollar-denominated, ABS that not only must receive the highest possible long-term investment rating from at least two nationally recognized ratings agencies but also cannot be rated by any rating agency below the highest possible long-term rating. Newly or recently originated auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration must comprise all or substantially all of the credit exposure underlying the ABS. The underlying credit exposure cannot include exposures that are themselves cash or synthetic ABS.
On November 25, 2008, the Treasury announced it will allocate $20 billion under the Troubled Asset Relief Program (TARP) to back the Federal Reserve Bank of New York’s new lending facility for consumer asset-backed securities. The Federal Reserve Bank of New York is creating this Term Asset-Backed Securities Loan Facility (TALF) to assist the credit markets in accommodating the credit needs of consumers and small business by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally. Our summary of the TALF term sheet is available here.
When combined with the previously announced TARP programs, the Treasury has $15 billion left under TARP that it can invest or otherwise use without Congressional approval (in addition to the amounts that remain available under the TARP Capital Purchase Program).
On November 12, 2008, Secretary Paulson made remarks on the financial rescue package. We have highlighted certain passages below, with emphasis added.
Today banking regulators issued a statement emphasizing that the extraordinary government actions taken by the Fed, Treasury and FDIC to stabilize and strengthen the banking system are not merely one-sided; all banks – not just those participating in the Capital Purchase Program – have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation. I commend this action and I am particularly focused on the importance of prudent bank lending to restore our economic growth.
Secretary Paulson appears to read the Interagency Statement as we have; TARP Capital was designed to benefit the entire industry, and the entire industry will bear the costs of future regulation.
Due to popular demand, we are going to be offering the Economic Stabilization Presentation via conference call for clients, contacts, and PoGo attorneys outside of the Atlanta office. Please note below whether the link is for the the audio or in-person presentation. If one registers for the audio version of the presentation, then you will NOT be reserving a space at the in-person presentation.
The conference is scheduled to begin promptly at 8:00 am, Eastern Time, on Friday, October 31, 2008.
Register for In-Person Presentation [We are currently at capacity for in-person attendance. Please consider registering for the Audio Presentation instead.]
- Walt Moeling – Dealing with Community Bank Distressed Assets – What Is Needed to Grease the Skids
- Jerry Blanchard – The Shifting Boundaries of the Asset Relief Program (“TARP”)
- David Minkin – What Happened to the Golden Rule? And What Do We Do Now?