On December 29, 2008, the Treasury announced the completion of the seventh round of TARP Capital infusions. The Treasury purchased a total of approximately $1.9 billion in securities from 43 financial institutions on Tuesday, December 23, and has now invested in 208 institutions, totaling $172.5 billion. This leaves approximately $77 billion for the Treasury to invest under the TARP Capital program.
M&T Bank Corporation of Buffalo, New York, received the largest infusion of the round, $600 million, while Saigon National Bank of Westminster, California, received the smallest infusion of the round, $1.5 million.
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.
On December 23, 2008, the Treasury issued a press release announcing that “Treasury Provides TARP Funds to Local Banks.” Through December 23, 2008, the Treasury had purchased preferred stock and warrants from 207 financial institutions, totaling $162.5 billion dollars (plus an additional $10 billion to Merrill Lynch pending its sale to Bank of America).
Out of the 207 completed TARP Capital transactions through December 23, 2008, the Treasury has completed 34 transactions for a total investment of $469.9 million under the private TARP Capital terms. While this still represents a minuscule number of the private financial institutions that should be eligible for TARP Capital investments, these private transactions were all completed in the last two rounds of capital infusions (December 19 and December 23).
We have updated our TARP Map to include the locations of the institutions that received TARP Capital infusions in round 6.
The Treasury’s sixth round of TARP Capital infusions included five more public companies companies that are traded on the Over-The-Counter Bulletin Board. Three institutions received TARP Capital under the public company term sheet, while the other two institutions received TARP Capital under the non-public company term sheet.
As a result, it appears clear that the Treasury is willing to allow public reporting companies that are traded over the OTCBB participate in the TARP Capital program under either the public company terms or the non-public company terms. We still haven’t seen any public reporting companies that are traded over the Pink Sheets receive TARP Capital funds, but one would presume that they will receive the same deference shown to OTCBB companies.
The Treasury has provided us with more detailed calculations for the Warrant Preferred Shares to be issued by private companies participating in the TARP Capital program. (As a reminder, the “warrants” for private companies are essentially warrants only in name, as the Treasury intends to exercise them immediately, causing additional shares of preferred stock, the Warrant Preferred Shares, to be outstanding immediately following the capital infusion.)
In order to calculate the number of Warrant Preferred Shares that are subject to the warrant (before net settlement), the following calculations need to be made:
- (Aggregate Purchase Price x 5%)/$1,000 = Number of Warrant Preferred Shares (following net settlement of the warrant).
- (Number of Warrant Preferred Shares x $0.01)/$1,000 = Net Settlement Amount
- Number of Warrant Preferred Shares + Net Settlement Amount = Number of Shares subject to Warrant.
These calculations result in the Treasury receiving the full 5% of their TARP Capital investment as Warrant Preferred Shares, and avoids any reduction as a result of the net exercise (and further emphasizes that the warrants are only warrants in name.)
On December 19, 2008, the Treasury announced that it would be supporting General Motors and Chrysler using the authority provided by the Troubled Asset Relief Program. As a result, the Treasury has allocated effectively all of the first $350 billion, and will need to seek approval from Congress to allocate additional funds.
However, as noted by the Treasury, the actual disbursement of the first $350 billion remains subject to the approval of TARP Capital applications submitted by banks, many of which remain with the regulators and are not expected to reach the Treasury for review until the first quarter of 2009.
The first $350 billion under TARP has been allocated as follows:
- TARP Capital Purchase Program – $250 billion;
- Systemically Significant Failing Institutions Program – $40 billion (all of which was used to purchase senior preferred stock in AIG)
- Term Asset-Backed Securities Loan Facility (TALF) – $20 billion;
- Citigroup Financial Assistance Package – $25 billion ($20 billion in preferred stock and $5 billion in loss absorption);
- Chrysler – Up to $4 billion loan;
- General Motors – Up to $9.4 billion loan (plus an additional $4.0 billion conditioned on Congress releasing the second $350 billion).
In total, $348.4 billion has been allocated. (Note: while much of the commentary states that Treasury is “out of money” pending Congressional approval to release the remaining TARP funds, the Treasury still has $1,600,000,000 that it can disperse at its discretion.)
On December 23, 2008, the Treasury announced the completion of the sixth round of TARP Capital infusions. The Treasury purchased a total of approximately $2.8 billion in securities from 49 financial institutions on Friday, December 19, and has now invested in 165 institutions, totaling $170.6 billion. This leaves approximately $80 billion for the Treasury to invest under the TARP Capital program.
Round six marked the first time that funds were invested in institutions participating under the Treasury’s Non-Public terms. These “non-public” institutions issued to the Treasury warrants, which the Treasury immediately exercised. One institution, OneUnited Bank, of Boston, Massachusetts, qualified as a Community Development Financial Institution (a CDFI), eliminating the requirement to issue warrants to the Treasury.
Synovus Financial Corporation of Columbus, Georgia, received the largest infusion of the round, $967.9 million, while Monadnock Bancorp of Petersborough, New Hampshire, received the smallest infusion of the round, $1.8 million.
This round saw five new states, Colorado, Idaho, Iowa, New Hampshire, and Rhode Island, join the ranks of states whose institutions have received funds under the TARP Capital program. In total, 41 states and 1 U.S. territory are home to institutions that have received TARP Capital infusions.
We have previously posted on the possibility of bank holding companies using the TLGP Debt Guarantee to provide capital to subsidiary banks. In that post, we commented on the odds of success and noted that the FDIC had not taken a formal position. Today, the FDIC updated its TLGP FAQ and confirmed that the odds of success are in fact very low.
The FDIC’s revised answer states:
Can guaranteed debt issued by the parent company be put in a subsidiary bank as capital?
The FDIC envisions few if any circumstances under which it would approve holding company applications to establish a cap or to increase a cap where the proceeds from the resulting guaranteed debt issuance would be injected as capital into a subsidiary bank. The Temporary Liquidity Guarantee Program was not intended to be a capital enhancement program. The Treasury Department’s TARP program has been set up for that purpose. The purpose of the Temporary Liquidity Guarantee Program is to restore liquidity to the intermediate term debt market.
As a reminder, the TLGP’s alternative guarantee cap of 2% of liabilities only applies to depository institutions. Bank holding companies are not entitled to use the 2% of liabilities test and are only eligible to issue 125% of the amount of senior unsecured debt that was outstanding as of September 30, 2008. As a result, we believe most community bank holding companies will be required to seek FDIC approval to establish a cap or to increase a cap in order to issue FDIC guaranteed debt. Based on the FDIC’s updated analysis, this approval seems highly unlikely.
In the BT Capital Partners Fourth Quarter 2008 Newsletter, Jim Wheeler explores the impact that the deleveraging of Wall Street will have on the ability of banks to provide liquidity to main street.
An equally important factor that has not received much press is the paradigm shift in lending caused by the deleveraging of Wall Street. With all of the large Wall Street investment banks now conspicuously absent from the landscape, we have lost all of those major lenders who leveraged their assets 40:1 and who were willing to aggressively price car loans, credit card receivables, and home mortgages, based on their model of packaging them and selling them, without regard to credit quality, since they were backed with credit default guarantees. Those packages and re-sales are no longer viable. All of the capital that was available just months ago is no longer available, and most eyes are turning to the banks who are lining up to receive the TARP capital payments as the likely suspects for injecting capital into our economy.