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Monthly Archives: April 2009

The Stress Test Facts

By Rob Klingler - Friday, April 24, 2009

On April 24, 2009, the Federal Reserve published a white paper describing the process and methodologies employed by the federal banking supervisory agencies in their forward-looking capital assessment of large U.S. bank holding companies.  The white paper is thin on new details, but does provide a base for understanding the stress tests being undertaken of 19 bank holding companies with total assets in excess of $100 billion.

Purpose and Effect of the Stress Tests

The stress tests are designed as the first part of the Capital Assistance Program to demonstrate which institutions the government believes will need to raise additional capital.  If a stress test demonstrates that an institution requires additional capital, the institution will be required to enter an agreement to issue convertible preferred securities to the U.S. Treasury in an amount sufficient to meet the capital shortfall under the TARP Capital Assistance Program.  Each such institution will then be permitted up to six months to raise private capital in public markets to meet their capital needs, and would be able to cancel the obligation to the government without penalty.  Participants would also be given the opportunity to convert their existing TARP Capital Purchase Program preferred stock into the convertible preferred stock to be issued under the TARP Capital Assistance Program (such a conversion would not affect the institution’s Tier 1 capital, but could affect the institution’s tangible common equity and their dividend obligations).

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News Roundup – 3rd Week of April

By Stan Santos - Friday, April 24, 2009

Some news that may be of interest in the past week include the following stories:

Congressional Hearings and Committees

Two markup sessions with respect to proposed credit card-related legislation were held this week. First, the House Financial Services Committee had a markup of H.R. 627 aka “The Credit Cardholders’ Bill of Rights Act of 2009″ on April 22, 2009. Second, the Committee held a hearing entitled “HR 1728: Mortgage Reform and Anti-Predatory Lending Act” on April 23, 2009.

On April 21, the Joint Economic Committee held a hearing in relation to the recent spate of bank failures in the last few months. Entitled “Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial Institutions,” economists including Joseph Stiglitz, Thomas Hoenig and Simon Johnson focused on new policy responses to failures at large financial institutions. The hearing examined what criteria policymakers and regulators should use to determine when institutions pose systemic risk — at what point financial firms become “too big to fail” and how regulators should deal with them when they are insolvent. You can view Rep. Maloney’s opening statement and statements from presenting witnesses, as well as watch a recorded feed of the hearing here.

Mr. Stiglitz is a widely published author, economist, Columbia professor and a prominent critic of the Obama administration’s handling of the banking system. Mr. Johnson is the Ronald Kurtz Professor of Entrepreneurship at the Massachusetts Institute of Technology’s School of Management as well as the co-founder of Baseline Scenario, a blog dedicated to explaining some of the key issues in the global economy and developing concrete policy proposals. Mr. Hoenig is the chief executive of the 10th District Federal Reserve Bank in Kansas City. He is also a voting member of the Federal Open Market Committee.

In related news, Treasury Secretary Timothy Geithner testified before the Congressional Oversight Panel on April 21, 2009. The Panel is empowered to hold hearings, review official data, and write reports on actions taken by the Department of Treasury and financial institutions and their effect on the economy of the United States. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation reports and guarantee that Treasury’s actions are in the best interest of the American people. Lastly, Congress has instructed COP to produce a special report on regulatory reform that will analyze “the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.”

View Secretary Geithner’s testimony here. Panelists are Rep. Jeb Hensarling (R-Tex.), Richard Neiman, Damon Silvers, former U.S. Senator John Sununu and Elizabeth Warren. Mr. Neiman is the Superintendent of Banks for the State of New York. Mr. Silvers is the associate general counsel of the AFL-CIO. Ms. Warren is the Leo Gottlieb Professor of Law at Harvard Law School and is a noted expert on bankruptcy and credit card issues.

Upcoming Supreme Court Cases

On April 17, 2009, the Court released the schedule of attorneys arguing in the session beginning on April 20. You can view the hearing list here. Of note is Cuomo v. Clearing House Association, L.L.C. et al. (No. 08-453), to be argued on April 28, 2009.

Cuomo is shaping up to be one of the more important bank regulation Supreme Court cases this term. On January 16, 2009, the Court granted certiorari in relation to this petition from the state of New York. Cuomo involves a Second Circuit Court ruling that bars state officials from investigating claims that banks holding national charters are engaging in racial or ethnic bias in the home mortgage market. The case technically turns on a part of the National Bank Act of 1864 that controls “visitorial powers” toward national banks. All of the other 49 states joined New York in urging the Court to hear that state’s petition, saying the U.S. Comptroller of the Currency has intruded deeply on state sovereignty by writing a regulation that scuttles traditional police powers of the states.

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New Feature: News Roundup

By Rob Klingler - Friday, April 24, 2009

We are introducing a new feature on BankBryanCave.com, a weekly News Roundup.  While this site will continue its current focus on government programs related to the financial crisis, such as the TARP Capital Purchase Program and the FDIC Temporary Liquidity Guarantee Program, we are very aware that the banking industry is more than this financial crisis.  As the banking industry is facing massive regulatory changes, we too are keeping up with other areas of banking.

We have always tracked these events internally, focusing our attention on the best third party resources that we could find.  By adding a weekly News Roundup to BankBryanCave.com, we now hope to share these resources with you.  Our overviews will offer a quick review of some of the major areas of law affecting our clients, but we recognize that every story won’t be of interest to every reader.  As a result, we’re also highlighting the topics so that readers can quickly skim them.

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Estimating the TARP Capital Purchase Program Value

By Rob Klingler - Friday, April 24, 2009

The Wall Street Journal Economics Blog has an excellent post by Jon Faust, the director of the Center for Financial Economics at Johns Hopkins University, criticizing Elizabeth Warren’s claim that the Treasury is only getting 66 cents in value for every TARP dollar spent.

Overall, the 66 cent myth is based on the assumption that markets were functioning normally, that the Treasury would pursue a panic sale, and that banks required no compensation due to risk of Congressional meddling.

These arguments are not revelations. Before Warren’s panel commissioned the market-value report, the Panel asked Treasury to perform this valuation. According to testimony, Treasury replied that the market valuation was not relevant. Indeed, Treasury agreed that the assets would be below par if valued at prevailing market prices but argued that the investments would be “at or near par” on a more reasonable basis.

Finally, Treasury reminded the panel that part of the value to the taxpayer was to come in “ensuring the stability of the financial system,” a factor that plays no role in market valuations.

Rather than evaluating these arguments, Warren complained that Treasury didn’t explain itself sufficiently well. Perhaps Treasury could have been clearer, but the basic ideas sketched above are not subtle. If Warren’s panel had insufficient expertise to understand these arguments, the investment bank it hired could easily have explained them.

In addition to these criticisms, as we’ve previously noted, Warren’s analysis uses a one-size-fits-all investment analysis, despite criticizing the Treasury for doing the same thing.  The 66 cent figure is based on the value received by the Treasury under the TARP Capital Purchase Program exclusively for its investment in the first eight recipients of TARP Capital Purchase Program funds.  While these entities have received the bulk of the TARP Capital Purchase Program funds, there have been over 500 additional recipients of these funds, many of which look virtually nothing like the original eight recipients, and about half of which have received TARP Capital Purchase funds under the private term sheet, resulting in a different investment vehicle.

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Round 23 of TARP Capital Infusions – TARP Map and List of Recipients Updated

By Dustin Hall - Friday, April 24, 2009

On April 21, 2009, the Treasury announced the completion of the twenty-third round of TARP Capital infusions.  The Treasury purchased a total of approximately $40.9 million in securities from 6 financial institutions on Friday, April 17, 2009, and has now invested in 554 institutions, totaling approximately $198.9 billion.

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SIGTARP Reports to Congress

By Rob Klingler - Wednesday, April 22, 2009

On April 21, 2009, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, released his quarterly report to Congress.

Survey Results

As we’ve previously discussed, Barofsky has issued letters to many TARP Capital Purchase Program recipients requesting information on how the institutions have used the TARP funds and how the institution was addressing the executive compensation limits.   As clarified in the report to Congress, SIGTARP sent letters to all recipients of TARP funds through January 30, 2009, a total of 364 recipients.  There is no indication that SIGTARP will be sending any letters to subsequent recipients.  SIGTARP received responses from all 364 recipients, a 100% response rate.  (It’s amazing how much more likely one is to respond to a survey when threatened with government action if one doesn’t respond.)

In testimony before the Senate Finance Committee on March 31, 2009, Barofsky had indicated that while his analysis was ongoing, he had concluded that one thing “was apparent from the responses – complaints that it was impracticable or impossible for banks to detail how they used TARP funds were unfounded.”  Barofsky does not repeat this conclusion in the report to Congress, but rather notes that the responses “provided a broad range of answers to the two sets of questions.”  While some banks identified detailed and specific uses of the funds, others provided more general responses.

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TARP CPP Term Sheets for Mutuals

By Rob Klingler - Tuesday, April 21, 2009

On April 7, 2009, the Treasury published three term sheets for participation in the TARP Capital Purchase Program by mutual organizations with various holding company structures, and, on April 14, 2009, the Treasury published a separate term sheet for mutual depository institutions that do not have a holding company.  The term sheets generally are as follows:

The deadline for mutual holding companies to apply is 5:00 p.m., Eastern Time, May 7, 2009.  The deadline for mutual banks without holding companies to apply is 5:00 p.m., Eastern Time, May 14, 2009.  The application forms and process are unchanged from those previously provided, and no new application needs to be submitted if the entities applied before the term sheets were available.

The provided term sheets are generally comparable to the terms sheets previously provided to non mutual organizations, with one striking variation.  The Treasury has not provided an opportunity for private or Sub S institutions to reduce the number of shares covered by the warrant in half by completing a qualified equity offering during 2009.  Only publicly traded companies have the opportunity to cut the number of shares of common stock covered by the TARP warrant in half by completing a qualified equity offering during 2009.  (This reduction is separate and distinct from the previous requirement to complete a qualified equity offering in order to redeem the TARP investment within three years.  That requirement was eliminated by Congress when it passed the American Recovery and Reinvestment Act of 2009, and participants can now seek to redeem the TARP investment at any time.)  The corresponding mutual term sheets, however, include a 50% reduction in warrants for private mutual organization.  This variation may, however, merely be an oversight by Treasury, as it is not clear how the warrant would be reduced after it had already been exercised at the time of closing.

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Round 22 of TARP Capital Infusions – TARP Map and List of Recipients Updated

By Dustin Hall - Monday, April 20, 2009

On April 14, 2009, the Treasury announced the completion of the twenty-second round of TARP Capital infusions.  The Treasury purchased a total of approximately $22.8 million in securities from 5 financial institutions on Friday, April 10, 2009, and has now invested in 548 institutions, totaling approximately $198.8 billion.

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TARP CPP Documents Posted for Sub S Institutions

By Rob Klingler - Monday, April 20, 2009

On April 13, 2009, the Treasury Department published the standard agreements for Subchapter S institutions to participate in the TARP Capital Purchase Program.  As previously discussed, the TARP Capital Purchase Program for Sub S institutions consists of a subordinated debt instrument paying interest at a rate of 7.7% per annum until the fifth anniversary, and then at 13.8% per annum, plus an immediately exercised warrant for additional subordinated debt equal to 5% of the investment, paying interest at a rate of 13.8% per annum.  The investment has a 30 year term, and, like trust preferred securities, interest can be deferred for up to 20 consecutive quarterly periods.

Like the documents for public and private participants, the standard documents consist primarily of a letter agreement that incorporates the standard terms contained in a securities purchase agreement, as well as documents defining the investment instruments.

For some reason, the Securities Purchase Agreement defines the subordinated debt instrument to be the “Senior Notes,” presumably to be comparable to the “Senior Preferred” issued under the TARP Capital Purchase Program for public and private institutions.  However, these “Senior Notes” are subordinated to virtually all other indebtedness, whether outstanding at the time of the investment or subsequently incurred.  The TARP subordinated debt instruments are senior to any subordinated debt issued in connection with trust preferred securities.

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Pictorial Perspective of Atlanta Real Estate Market

By Rob Klingler - Thursday, April 16, 2009

SunTrust Robinson Humphrey has created a depressing slideshow of Atlanta’s residential and CRE properties in development (or in lack of development).  From the SunTrust Robinson Humphrey report:

While the city’s residential real estate lot inventory woes are well known to the investment community, we believe the extent of inventory in CRE property types like office and retail centers is not fully appreciated.  We took some photos of residential and CRE properties around Atlanta, which is admittedly a small sample.  Based on our observations and the statistics, we believe there are significant and growing vacancies around the city, particularly in the outer suburban areas like Alpharetta and Cumming (North of Atlanta).  We witnessed particularly high vacancy rates in numerous outer suburb strip and neighborhood retail centers.  Atlanta’s retail vacancy rate was 9.9% at the end of 1Q09, compared to the national average rate of 7.2% and Atlanta’s 4Q08 level of 9.0%.  This is the sixth highest level of retail vacancy among the 63 major U.S. retail markets.  Moreover, Atlanta led all major U.S. markets in aggregate retail space delivered during 1Q09, with 1.7 million square feet hitting the market.

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