SIGTARP Survey Results

July 23, 2009

Authored by: Robert Klingler

On July 20, 2009, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) published the results of the SIGTARP Survey of Initial TARP Capital Purchase Program Recipients.  Despite the report’s flaws, some of which are discussed below, the results should be read by all TARP recipients.  The report does a good job summarizing how banks use capital (see in particular Appendix B) and exploring the myriad of ways in which TARP funds have been used.

Report Conclusions

Titled “SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP Funds,” the report recommends that Treasury require TARP Capital recipients to submit periodic reports to Treasury on the uses of TARP funds, including what actions they were able to take that they would not have taken otherwise.

The actual results of the survey, however, would seem equally to support a conclusion that, because TARP funds are capital, the specific uses of TARP funds cannot be specifically identified.  Instead, the TARP Capital Purchase Program has provided additional capital to banks to allow them to continue to engage in all of the activities in which they engage in, including lending.

Disclosure of Individual Responses

The SIGTARP report aggregates the responses of the 360 bank recipients of TARP funds through January 31, 2009.  (SIGTARP has not given any indication that it intends to survey subsequent recipients of TARP funds.)  Although individual responses are not included in this report, SIGTARP indicates that it intends to post all responses, redacted as necessary, on its website within 30 days.

Uses of TARP Funds

The responses do indicate the sheer breadth of uses to which institutions have put their TARP Capital funds, as well as a willingness to publicly state the breadth of uses.  83% of institutions made statements to the effect that the funds were used for lending (albeit, it appears, frequently in very general terms).  One respondent noted that “it is difficult to state categorically what specific funds are actually be being used for, except to say … that they are being used for and in support of lending.”  43% have used the funds to maintain capital cushions.  31% answered that they had used the funds to purchase investments, and 14% had repaid outstanding debt.  Finally 15 institutions, representing 4% of respondents, stated that they had used the funds to complete acquisitions (apparently mostly in FDIC receiverships).

I suspect that if you re-surveyed the respondents, 100% of the respondents would state that they have used the TARP funds to support lending and to provide a capital cushion.  As Tier 1 capital, the TARP Capital Purchase Program funds provide both of these services virtually regardless of the final use of the funds received.  Nonetheless, SIGTARP concludes that these results provide “meaningful information” despite the fact that most of the responses did not quantify the amount of lending or the incremental difference in lending resulting from the TARP investment.

Segregation of TARP Funds

SIGTARP emphasizes that 44 respondents reported that they had segregated TARP funds from other bank funds, apparently using this to argue that such segregation is (a) possible and (b) somehow useful.  However, digging further into SIGTARP’s own analysis, this argument seems to break down.  First, SIGTARP appears to be including approximately 22 respondents that stated that they had recorded the investments on the balance sheet as a discrete component of capital.  Not only did every institution likely record it as a discrete component of capital, because it was a unique class of preferred stock, but recording the funds as a discrete component of capital does nothing to segregate the use of the funds elsewhere on the balance sheet.  Second, of the remaining 22 or so respondents that said they had segregated funds, “more than half” noted that the segregation was only a temporary measure pending future deployment of the funds.  In other words, it appears that 97% of the SIGTARP respondents effectively did not attempt to separately track the use of funds.

Treasury Department’s Response

The Treasury’s response (included as Appendix H to the SIGTARP report) should give some comfort to TARP CPP participants that further burdensome reporting requirements are unlikely.  The Treasury’s response notes the impracticality of saying that TARP funds resulted in particular loans, investments, or other activities by the recipient.

This is a function of basic accounting principles.  Banks double-entry bookkeeping systems do not trace the paths from creating liabilities (receiving capital) to investing in assets (such as making loans).  … “[O]nce received, the cash associated with the TARP funding became indistinguishable from any other cash sources ….” In addition, money is fungible, and paying an expense from one source frees up cash to be used for other purposes.  Even if TARP investments could be traded to particular uses, those uses cannot be said to be attributable to the TARP investment if the same expenditures would have been made from other sources even in the absence of TARP funding.

Treasury wants to see the investments it has made translate as quickly as possible into additional lending to creditworthy borrowers and increases in other services and benefits to consumers and businesses.  We recognize that banks must rebuild their capital in light of losses they have experienced and may yet experience.  They must also maintain appropriate standards for lending and other activities.  Treasury does not intend to tell banks how to run their businesses, but we will seek to collect and provide useful information that can help determine if we are making progress toward restoring financial stability. [emphasis added]

The Treasury notes that it is the Treasury’s responsibility to determine what types of reporting by TARP recipients are most useful in making that assessment, and focuses on the Monthly Lending and Intermediation Survey and Snapshot (for the largest banks) and the monthly CPP Lending Report (for all TARP recipients).