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FDIC Guidance on Use and Monitoring of TARP Capital

The FDIC has apparently decided not to wait to see if Congressman Frank’s TARP Reform and Accountability Act becomes law, and has published a one page Financial Institution Letter on January 12, 2009 calling for state nonmember banks to monitor their use of capital injections, liquidity support and/or financing guarantees obtained through the recent government financial stability programs.

The FDIC notes that in exchange for government funds, capital and guarantees being used to support banking institutions, “banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers,” and reference the Interagency Statement on Responsible Lending.  (As a reminder, the Interagency Statement applies to all financial institutions, and not just those that have participated in the government financial stability programs.)  The FDIC expects that state nonmember banks will deploy any funding received from these programs to “prudently support credit needs in their market and strengthen bank capital.”

Potentially in response to the political and public criticism of whether the government financial stability programs are working, the FDIC calls for state nonmember banks to: (a) implement a process to document how these funds were used; and (b)  to describe their utilization during bank examinations.  Moreover, banks are encouraged to summarize such information in published annual reports and financial statements in order to  “provide important information for shareholder and public evaluation of participation in these programs.”

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Frank Introduces TARP Reform and Accountability Act of 2009

On January 9, 2009, Barney Frank introduced H.R. 384, the TARP Reform and Accountability Act, to amend the TARP provisions of the Emergency Economic Stabilization Act of 2008.

As introduced, the Reform Act would: require quarterly reporting on the use of TARP funds, limit the ability to use TARP funds to acquire healthy institutions, require additional compensation limitations, and require Treasury to make TARP Capital available to smaller depository institutions, including Subchapter S corporations and mutuals.

It is important to remember that this is the initial legislation as proposed by Congressman Frank, and it may never become the law, or undergo significant revisions before it becomes the law.  At this point, the proposed legislation raises as many questions as it does propose changes.

A brief summary of the provisions of TARP Reform and Accountability Act follows.  Note: Some of the provisions contained in the Reform Act would apply to all institutions that have received assistance under TARP, while others are structured to only apply to those receiving assistance following the effectiveness of the Reform Act.  We have attempted to distinguish between these provisions below.  We believe it is also important to distinguish between modifications that are requirements versus merely where the Reform Act provides for additional authority for Treasury to act.  Finally, Section 105, as noted below, may effectively permit the TARP Capital program to be largely unchanged for all institutions.

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Treasury Updates TARP Status

Treasury Updates TARP Status

January 6, 2009

Authored by: Robert Klingler

Informed sources tell us that Treasury officials met with the federal banking agencies on January 5, 2009 and re-confirmed that:

  • there are sufficient TARP Capital funds available to fulfill the needs of all eligible public, private and Subchapter S institutions; and
  • Treasury is fully committed to completing the TARP Capital program for all eligible public, private, and Subchapter S institutions.

While no term sheet has been released for Subchapter S institutions, we continue to receive assurances that S Corp TARP Capital funding is on the way.

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Round 8 of TARP Capital Infusions

Round 8 of TARP Capital Infusions

January 5, 2009

Authored by: Bryan Cave

On January 5, 2009, the Treasury announced the completion of the eighth round of TARP Capital infusions.  The Treasury purchased a total of approximately $15.1 billion in securities from 7 financial institutions on Wednesday, December 31, 2008, and has now invested in 215 institutions, totaling $187.5 billion. 

Unlike all other rounds, except round 1, this round 8 saw a very small number of institutions receive very large amounts of capital — about $2.1 billion to each institution.  The largest infusion went to PNC Financial Services Group, $7.6 billion, which PNC subsequently used to complete its acquisition of National City Corp.

Interestingly, SunTrust Banks went back to the TARP table for a second helping.  SunTrust initially applied for and received(at round 2) a $3.5 billion infusion, equal to approximately 2% of its risk-weighted assets.  Before the application deadline passed, SunTrust re-applied, seeking an additional infusion of $1.4 billion, equal to approximately 1% of its risk-weighted assets.

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Treasury Announces Targeted Investment Program

On January 2, 2009, the Treasury released the program description for the Targeted Investment Program, under which the Citigroup investment that was made on November 23, 2008 was made.  Like the Systemically Significant Failing Institutions Program, eligibility and form, terms and conditions of any investment will be determined on a case-by-case basis, and there is no deadline for participation in the program.

Unlike the Systemically Significant Failing Institutions Program, the threshold for participation does not include that the institution is “at substantial risk of failure.”  Otherwise, the programs are virtually identical.  The Treasury has identified five factors that may be considered in determining whether an institution is eligible for participation.

  1. The extent to which destabilization of the institution could threaten the viability of creditors and counterparties exposed to the institution, whether directly or indirectly;  [The SSFI Program is based on the “extent to which failure of the institution could threaten….”]
  2. The extent to which an institution is at risk of a loss of confidence and the degree to which that stress is caused by a distressed or illiquid portfolio of assets;  [This consideration is not included in the SSFI Program.]
  3. The number and size of financial institutions that are similarly situated, or that would be likely to be affected by destabilization of the institution being considered for the program;
  4. Whether the institution is sufficiently important to the nation’s financial and economic system that a loss of confidence in the firm’s financial position could potentially cause major disruptions to credit markets or payments and settlement systems, destabilize asset prices, significantly increase uncertainty, or lead to similar losses of confidence or financial market stability that could materially weaken overall economic performance; and
  5. The extent to which the institution has access to alternative sources of capital and liquidity, whether from the private sector or from other sources of government funds.
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Treasury Announces Asset Guarantee Program

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.”

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Treasury Responds to Congressional Oversight Questions

On December 30, 2008, the Treasury responded to the ten questions raised by the Congressional Oversight Panel.  The Treasury has provided a measured and reasoned response to the questions raised, but has not provided any significant new information, but rather has done a good job assembling existing information for the Congressional Oversight Panel.

We have highlighted the Treasury’s response to three questions:  Why Capital Investments?  Has it Worked?  and What is the Application Process?  You can review all of the Treasury’s answers in its formal response.

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Updated TARP Capital Securities Purchase Agreement

On December 23, 2008, the Treasury “upgraded” the Securities Purchase Agreement for publicly traded companies under the TARP Capital program.  The Securities Purchase Agreement on the Treasury’s website is now identified as version 12 rather than version 11 in the footer of the document.

The Treasury added Sections 4.11 (Bank and Thrift Holding Company Status) and 4.12 (Predominantly Financial) to the Securities Purchase Agreement for publicly traded companies.  The private company documents already contained these provisions, so the modifications merely conform the terms for private and public participants.  The new provisions add two  ongoing obligations for TARP Capital recipients: (a) retaining bank holding company or savings and loan holding company status while the Treasury owns any investments; and (b) remaining predominantly engaged in financial activities.  For traditional community banks, we do not foresee any issues in complying with the provisions of 4.11 and 4.12.

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