I don’t know where this originated from, but I’ve received it from multiple sources and laughed each time. I hope you enjoy this pictorial take on the Troubled Asset Relief Program (click on the picture for the full set).
As a side note, the pictures appear to be the newest iteration of an internet hoax.
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 February 4, 2009, the Treasury Department announced it was issuing a new set of “guidelines” on executive pay for financial institutions receiving governmental assistance. The Treasury states that its new guidelines are intended to strike a balance between the need for monitoring and accountability with the need for financial institutions to fully function and attract needed talent.
The new guidelines provide only minimal additional obligations for companies that have participated (or will participate) under the TARP Capital Purchase Program. The majority of new restrictions are limited to new “exceptional assistance” or future programs that are “generally available capital access programs.” However, the guidelines also provide a road map for future reforms that would affect all financial institutions, whether they receive governmental assistance or not.
New Requirements for All Companies Receiving Assistance
All companies that have received governmental assistance, or that will receive any assistance, must provide an annual certification signed by it chief executive officer that the company has “strictly complied” with all statutory, Treasury and contractual executive compensation restrictions. In addition, the compensation committee of such companies must “provide an explanation” of how their senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.
On January 30, 2009, Rob Klingler presented An Update on All Things TARP at the Alabama Bankers Association Community Bank Directors College. The presentation gives an overview of the TARP Capital Purchase Program and FDIC’s Temporary Liquidity Guarantee Program.
On December 29, 2008, the Treasury announced an additional TARP investment in GMAC of $5 billion in senior preferred equity plus an additional loan to General Motors of up to $1 billion. In addition to the $348.4 billion already allocated under the TARP program, the Treasury has now committed $4.4 billion more than than the $350 billion that the Treasury is authorized to commit without congressional action under the Troubled Asset Relief Program. The Treasury Department noted that it could provide financing to GMAC because they have not actually used all of the money allocated for recapitalizing banks. The investment in GMAC is not under the TARP Capital Purchase program, but the terms of the investment are generally similar to the private company TARP Capital term sheet (but the preferred shares will pay an 8% dividend).
On December 23, 2008, American Express and CIT Group received approval to get $5.72 billion under the TARP Capital Purchase program, as a result of their new status as bank holding companies. In addition to the investments closed through December 23, 2008, the Treasury has now allocated $178.2 billion of the $250 billion allocated to recapitalize banks under the TARP Capital Purchase program.
Assuming the Treasury ultimately requests approval for the second $350 billion and Congress approves the request, there is $71.8 billion remaining to be allocated under the TARP Capital Purchase program. Without such congressional approval, there is $67.4 billion remaining.
Last week, the federal government provided several updates on the status of the Troubled Asset Relief Program: the Third Tranche Report to Congress (December 2nd); a speech by SEC Chairman Cox (December 4th); the first Section 105(a) Report to Congress (December 5th); and a speech by Treasury Interim Assistant Secretary Kashkari (December 5th). We have highlighted the more important components of each update below.
Third Tranche Report to Congress
The Third Tranche Report to Congress provides the basic factors that the Treasury will use in analyzing whether an institution should be supported under the Systemically Significant Failing Institutions (SSFI) Program. It was under the SSFI Program that Treasury closed a $40 billion transaction with AIG on November 26, 2008. Participation in the SSFI Program will continue to be on a case-by-case basis, based on these and other factors:
- The extent to which the failure of an institution could threaten the viability of its creditors and counterparties because of their direct exposure to the institution.
- The number and size of financial institutions that are seen by investors or counterparties as similarly situated to the failing institution, or that could otherwise be likely to experience indirect contagion effects from the failure of the institution.
- Whether the institution is sufficiently important to the nation’s financial and economic system that a disorderly failure would, with a high probability, cause major disruptions to credit markets or payments and settlement systems, seriously destabilize key asset prices, significantly increase uncertainty or losses of confidence thereby materially weakening overall economic performance.
- The extent and probability of the institution’s ability to access alternative sources of capital and liquidity, whether from the private sector or other sources of government funds.
It seems unlikely that the Treasury will include any financial institutions other than the largest ones in the SSFI Program, unless an institution can make a strong case that its stability is critical to the overall stability of the nation’s financial and economic system.
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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.