On December 19, 2012, the recipient of smallest TARP CPP Investment repaid Treasury in full. Freeport State Bank got $301,000 under the TARP Capital Purchase Program, and repaid in full, including $61,900 in dividends and ’s main bank rescue–the tiniest sum among the 707 institutions that signed up back in 2008 and 2009. Speaking to the Wall Street Journal, the bank’s chairman and CEO, Leon Drouhard, explained the critical role TARP played in stabilizing the economy during the worst financial crisis since the Great Depression.
“[TARP] has been a very important thing and it has been a beneficial thing . . . It’s always referred to as a bailout but it was actually an investment in the financial system of the country as far as I’m concerned–and that investment turned out to be a good investment for the Treasury, and the country and the banks involved.”
If all bailouts were as profitable as the TARP CPP program, much less as necessary to stabilize the entire financial system, perhaps the term “bailout” wouldn’t have a negative connotation.
On January 26, 2012, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released its latest Quarterly Report to Congress. At 302 pages, I can’t say that it’s recommended reading for anyone, but there are portions of it that may be of significant interest to those in the industry.
One of the central themes of the SIGTARP report is that TARP will continue to exist for years. In addition to programs designed to support the housing market and certain securities markets that are scheduled to last until as late as 2017, 371 banks remain in the TARP Capital Purchase Program. While I disagree with some of SIGTARP’s conclusions and framework for the issues, I agree that a clear and workable exit plan for community banks is crucial to financial stability.” SIGTARP has recommended that Treasury develop a clear TARP exit path for community banks, especially in light of a steep rise in the TARP dividend rate from 5% to 9% starting as soon as late 2013. “Treasury must develop a workable plan in consultation with the regulators and begin executing that plan to remove uncertainty related to these banks.”
Despite its negative public perception, the overall Capital Purchase Program is universally thought to have earned a positive return for the government. While estimates for the total TARP program continue to show a significant cost, these costs are primarily tied to the housing support programs (which were never intended to be profitable) and relief provided to AIG and the automotive industry. Estimates on the CPP program, on the other hand, range from a gain of between $7 billion and $17 billion. Specifically, the Office of Management and Budget estimated on November 18, 2011 (using data as June 30, 2011) that the CPP would result in a $7 billion gain; the Congressional Budget Office estimated on December 16, 2011 (using data as of November 15, 2011) that the CPP would result in a $17 billion gain; and the Treasury estimated on November 10, 2011 (using data as of September 30, 2011) that the CPP would result in a $13 billion gain. While Treasury may incur losses on some of the remaining investments, the program as a whole (even without considering how bad the economy may have performed in the event the Treasury had not invested in banks under the CPP), will be profitable. Investing is a risk/reward analysis, and any investment strategy, especially when considering investments in over 700 financial institutions, should be viewed at the portfolio level. To that extent, TARP generally, and the CPP specifically, should be viewed as a success.
Under the CPP, Treasury invested a total of $204.9 billion of TARP funds in 707 financial institutions. Through December 31, 2011, 279 banks – including the 10 largest recipients of funds and 137 that exited TARP by refinancing the investment under the Small Business Lending Fund (SBLF) program – had fully repaid CPP or the Treasury had sold the institution’s stock. In addition, 28 banks converted their CPP investments into CDCI investments and 13 banks have partially repaid. On the other hand, 12 CPP investments have been sold for less than their par value and 14 are in various stages of bankruptcy or receivership.
As of December 31, 2011, $185.5 billion of the principal (or 90.5%) had been repaid, leaving approximately $19.5 billion outstanding. Of the repaid amount, $355.6 million was converted into CDCI investments (which is part of TARP), and $2.2 billion was converted into SBLF investments (which is not part of TARP). In addition, Treasury has received approximately $11.4 billion in interest and dividends and $7.7 billion from the sale of common stock warrants that were obtained in connection with the CPP financings.
On September 14, 2011, Treasury announced additional disbursements under the Small Business Lending Fund (SBLF). Total funding through the date of this release totals $2.38 billion to 191 institutions. This is not even 10% of the $30 billion authorized under the program. Treasury has stated in a whitepaper that 932 institutions ultimately applied for $11.8 billion in SBLF funding and that, as of September 1, it had issued preliminary approvals to all eligible and qualified applicants, 382 institutions in all for a total of $4.3 billion. Best case, then, Treasury expects to utilize only about 14% of the total SBLF pot but one-third of the funds requested.
The figures in Treasury’s whitepaper suggest that there will be a rash of SBLF closings in the next ten days. Under its enabling legislation, all SBLF disbursement must be made by September 27. The number of disbursements to date (191) is exactly half of the number of outstanding preliminary approvals (382). This will continue in dramatic fashion the exponential increase in the number of closings since the first wave (June (4), July (39), August (87), and September to date (61)).
The program remains a boon for Pennsylvania, home to the greatest number of SBLF recipients (16 institutions taking in an average of $10.4 million, eight of which used SBLF investment to redeem TARP funds). California, Illinois, and Texas each host 13 recipient institutions. By dollar amount, Illinois entities have enjoyed the most SBLF investment ($173 million, including the largest single investment under the program, $72.664 million to TARP-participant First Busey Corporation, parent to Busey Bank, Champaign, IL). Forty-one institutions in the Southeast have received funding so far (Alabama – 3, Arkansas – 3, Florida – 9, Georgia – 3, Louisiana – 5, Mississippi – 1, North Carolina – 3, South Carolina – 3, and Tennessee – 11).
The top twenty-five SBLF recipients have received $800 million through the program. Twenty-one of these (84%) used SBLF investment to redeem TARP funds and received an average injection of $38 million. While in all, 89 of the 191 SBLF recipients thus far (47%) have used this capital to redeem TARP funds, these recipients have received 63% of the dollars disbursed under the program.
OCC Criticizes Durbin Amendment
Last Friday, John Walsh, the Acting Comptroller of the U.S. Currency who oversees regulation of the nation’s largest banks, sent a letter to the Federal Reserve criticizing the Fed’s proposed rule to implement the Wall Street Reform Act’s “Durbin debit card swipe fee” amendment. In the letter, Walsh said the Durbin amendment “takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business. This has long term safety and soundness consequences – for banks of all sizes – that are not compelled by the statute.”
Locke to Leave Commerce for China
On Thursday, President Obama announced that he had chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. Ambassador to China. While the President has yet to announce Locke’s replacement, speculation has centered on the former Mayor of Dallas and current U.S. Trade Representative Ron Kirk.
Attorneys General Mortgage Settlement Stalled
The proposed settlement by state attorneys general with the five biggest U.S. mortgage servicers leaked out this week. The proposal, which calls for a dramatic increase in loan modifications, is intended as the basis for settling allegations of widespread wrongdoing by the big loan servicers in handling millions of foreclosures. The settlement would be with Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and GMAC/Ally Financial Inc. In a press conference earlier this week, Iowa Attorney General Tom Miller, who led an investigation on behalf of the 50 states’ attorneys general, predicted that a broad settlement could be reached within about two months. Miller said the agreement was worked out jointly with federal agencies including the Federal Deposit Insurance Corp, the newly created Consumer Financial Protection Bureau and Justice Department. On Tuesday, Brian Moynihan, chief executive of Bank of America, the largest U.S. servicer, said at a meeting with analysts and investors that he opposes widespread principal reductions for homeowners in default. On Thursday, Rep. Spencer Bachus (R-AL) and Sen. Richard Shelby (R-AL), the top Republicans on the House and Senate banking committees, also criticized the proposed settlement as a “regulatory shakedown.”
Warren Interviews AGs for Consumer Protection Agency
Reports this week indicate that Elizabeth Warren, who is interim head of the U.S. Consumer Financial Protection Bureau, has interviewed four Democratic state attorneys general to be her permanent successor. The four AGs reportedly in the running are Tom Miller of Iowa, Lisa Madigan of Illinois, Roy Cooper of North Carolina and Martha Coakley of Massachusetts. The bureau is scheduled to officially start work on July 21. Under the Dodd-Frank Wall Street Reform Act, which President Obama signed in July, the bureau must have a Senate-confirmed director to perform certain functions such as the supervision and regulation of non-bank financial firms.
House Republicans Release Top Line Budget Numbers
With President Obama set to release his FY 2012 budget on February 14, House Republican leaders on Thursday announced they would seek $32 billion in spending cuts from the resolution currently funding the government. Republicans framed their proposal as cutting $74 billion from President Obama’s 2011 budget request. However, because Obama’s budget was never approved by the last Congress, the cuts would actually be made against a continuing resolution now funding the government. That resolution is to expire on March 4, and if lawmakers do not agree on another short-term measure or one funding the government for the rest of the year, they risk a government shutdown. The spending ceiling announced by House Budget Committee Chairman Paul Ryan (R-WI) represents a $58 billion cut in non-security discretionary funding. While details of the specific department cuts were not announced on Thursday, the House Appropriations Committee next week will release its bill detailing the specific department budgets based on the spending ceiling. Reports indicate that the Democratic majority in the Senate is opposed to the House Republican budget cuts.
TARP Program Breaks Even with Fifth Third Bank Repayment
On Thursday, the Treasury Department announced that Fifth Third Bank has now fully repaid its $3.4 billion in TARP loans and that total repayments and other income from programs within TARP (approximately $243 billion) have nearly surpassed total disbursements under those programs (approximately $245 billion). The Treasury Department also announced that current estimates indicate that bank programs within TARP will ultimately provide a profit of nearly $20 billion to taxpayers.
Immelt Appointed Chairman of Council on Jobs and Competitiveness; Volcker Resigns
On Friday, President Obama announced that General Electric CEO Jeff Immelt will serve as Chairman of the newly created “Council on Jobs and Competitiveness.” The Council will advise the President on job creation policies and on the establishment of a long-term growth strategy. Immelt previously served on the board of the President’s Economic Recovery Advisory Board (PERAB). On Thursday, the President also announced the resignation of PERAB Chairman Paul Volcker and dissolution of the PERAB.
SEC Issues New Rules on Asset Backed Securities
On Thursday, the Securities and Exchange Commission (SEC) approved new regulations regarding asset-backed securities. Among a series of new rules which will take effect in 2012, one requires that financial firms that issue asset-backed securities assess and disclose the quality of the underlying assets, including mortgages, credit card debt and student loans. The rule, which the SEC first proposed in October, passed in a 3-2 vote. The agency’s two Republican commissioners, Kathleen Casey and Troy Paredes, opposed the changes. Another new rule requires that banks and other issuers disclose the number of requests they have received to buy back troubled assets. Starting in February 2012, the issuers will have to report how many loans they have repurchased, dating back three years.
Geithner Declines First House Republican TARP Hearing
On Wednesday, House Oversight and Government Reform Committee Chairman Darrell Issa invited Treasury Secretary Timothy Geithner to testify next week before the Committee regarding the Troubled Asset Relief Program (TARP). Geithner declined Issa’s invitation but offered to send in his place Tim Massad, an acting Assistant Treasury Secretary. While Issa could have issued Geithner a subpoena, he instead accepted the offer of Massad’s testimony for next week’s hearing.
Consumer Products Safety Commission Announces Complaints Database
On Monday, the Consumer Products Safety Commission (CPSC) announced that for the first time the Agency will make public thousands of complaints it receives each year about safety problems with consumer products. The database, which was authorized in 2008 consumer product safety legislation, will be launched online in March. Until now, the only way for consumers to access safety complaints has been to file a public records request with the CPSC. The agency was then required by law to consult with the manufacturer before releasing information about their products, and the company could protest or sue to stop disclosure. The database, which is scheduled to be launched March 11, will be available at www.saferproducts.gov.
TARP Inspector General Criticizes Citi Bailout
On Thursday, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, issued a report saying that Citigroup is still too big to be allowed to fail and could make future bailouts of big banks a necessity. The Treasury Department disputed part of the report’s conclusion in comments included in the report, saying that the Dodd-Frank law “provides the federal government with important tools that it did not have in the fall of 2008, which will be critical in addressing future crises.” The report now goes to the Treasury Department and Federal Reserve, however no specific action is required.
Bernanke Predicts 3% to 4% Economic Expansion
On Thursday, Federal Reserve Chairman Ben Bernanke said that the U.S. economy should expand at a rate of 3% to 4% in 2011. The Fed’s most recent forecast, released in November, was that the U.S. economy would grow between 3.0% and 3.6% in 2011 after expanding by 2.5% in 2010. Bernanke remarks, which occurred before a small business forum sponsored by the Federal Deposit Insurance Corporation, also included his prediction that the credit crunch is easing and small business should see greater access to capital in 2010. Bernanke appeared along with Federal Deposit Insurance Corp. Chairman Sheila Bair, Sen. Mark Warner, (D-VA) and House Financial Services Committee Chairman Spencer Bachus (R-AL).
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Cuomo Announces Settlement with Rattner
On Thursday, New York Attorney General Andrew Cuomo announced that Quadrangle Group principal Steven Rattner has agreed to pay $10 million and refrain from doing business with any New York pension funds for five years, however the settlement does not require Rattner to admit any wrongdoing. The settlement was in response to Cuomo’s investigation of Rattner’s alleged role in a scandal involving the state’s public employees’ pension fund. Rattner already agreed to pay $6.2 million to settle a separate Securities and Exchange Commission case related to its pay-to-play investigation. The SEC settlement also prevents Mr. Rattner from associating with any investment adviser or broker dealer for two years.
Treasury Announces Six More Banks Repaid TARP Loans
On Wednesday, the Treasury Department announced that six more banks had repaid the government loans received through the Troubled Assets Relief Program, or TARP. The Treasury also said that out of $389 billion disbursed through TARP, the government had received repayments of $235 billion plus dividends and other payments totaling $35 billion, for a grand total of $270 billion. Banks repaying the government on Wednesday included East West Bancorp of Pasadena, CA; Webster Financial of Waterbury, CT; 1st Source Corporation of South Bend, ID; Surrey Bancorp of Mount Airy, NC; Nationwide Bankshares of West Point, NE; Haviland Bancshares of Haviland, KS.
Christmas Week Jobless Claims Drop
On Thursday, the Labor Department announced that jobless claims for the week of Christmas dropped to a level that has not been seen since July 2008. The number of people filing for unemployment fell by 34,000 to a seasonally adjusted 388,000 the week ending December 25. The four-week moving average decreased by 12,500 to 414,000 from 426,500. New filings have been hovering below 450,000 a week since the beginning of November. The Labor Department reports next Friday on the number of jobs added and the unemployment rate in December which is based on a survey taken in mid-December.
Election Day Implications
With Republicans expected to make large gains in today’s elections, speculation has started to focus on what the election’s impact will be on recently passed major legislation including the healthcare and financial services reform bills. While the most likely outcome will be two years of legislative gridlock, if Republicans are able to take back the majority in the House of Representatives, the House will be expected to pass bills that defund key parts of the healthcare and financial services reform bills. However, the question will be whether such bills will be able to pass the Senate. The possible new Republican House majority will likely increase oversight of the key agencies implementing the bills, thereby frustrating the agencies’ abilities to implement and to enforce the new regulations.
Third Quarter GDP Figures Released
On Friday, the U.S. Department of Commerce released its report for third quarter GDP showing that the domestic economy grew by 2% in the third quarter, which is up from the last quarter but still below expectations. The GDP breakdown showed that spending by Americans, accounting for about 70% of demand in the U.S. economy, rose at a rate of 2.6%. The price index for personal consumption expenditures excluding volatile food and energy items, rose by an annualized 0.8% in the third quarter, slowing down from the second quarter’s 1.0% increase. Friday’s report also showed that federal government spending and investment rose by 8.8%, following a 9.1% increase in the second quarter.
TARP Inspector General Releases Third Quarter Report
Last Tuesday, nearly two years after the TARP bill’s passage, TARP Inspector General Neil Barofsky released his quarterly report to Congress which suggested that the Treasury Department engaged in a politically motivated attempt to hide losses at bankrupt insurance giant AIG with “manipulated” data. The report cited Treasury’s failure to disclose that it had changed its valuation methodology and should have published a side-by-side comparison of its new numbers with what the projected losses would be under the auditor-approved methodology. The report also criticized the Treasury for its claims that the Home Affordable Modification Program (HAMP) has helped 1.3 million homeowners by reducing their monthly payments. Barofsky’s report claims that only 467,000 HAMP modifications have been permanent, and the remaining modifications have been only temporary changes that may ultimately fail to keep families in their homes and may do additional harm by depleting troubled homeowners’ savings, increasing outstanding principle on loans, and further damaging borrowers’ credit scores.
Kaufman To Replace Warren At TARP
On Thursday, Senator Harry Reid (D-NV) announced that Senator Ted Kaufman (D-DE) was appointed to replace Elizabeth Warren as chair of the Congressional Oversight Panel for the Troubled Assets Relief Program (TARP). Kaufman was appointed to fill then-Senator Joe Biden’s remaining two years of his Senate term after being elected Vice President. Kaufman will serve until a new Senator from Delaware is sworn in on November 15
Dodd-Frank Implementation Delayed
On Wednesday, Congress passed a spending bill to fund government operations through early December and then recessed until after the November election. However, requested budget increases for financial regulators were not included in the spending bill, which will likely result in the delay in implementation of the Dodd-Frank Wall Street Reform Act until 2011. The funding shortage would be particularly impactful on the Commodity Futures Trading Commission and Securities and Exchange Commission, which will be responsible for oversight of the over-the-counter derivatives market. Republicans, who overwhelmingly voted against the Dodd-Frank law, are poised for significant gains in the elections. If Republicans win a majority in either chamber, they have promised to block the requested funding increases for the SEC and CFTC in order to hamper the law’s implementation.
On Thursday, Federal Reserve Chairman Ben Bernanke, Deputy Treasury Secretary Neal Wolin, Securities and Exchange Commission Chairman Mary Shapiro, Commodity Futures Trading Commission Chairman Gary Gensler, and FDIC Chairman Sheila Behr indicated to the Senate Banking Committee that their agencies will work together to ensure the Dodd-Frank Wall Street Reform Act is implemented effectively. However, Republicans questioned whether the regulators had too much power to design and implement the new regulatory structure. Behr testified that the FDIC delayed a vote on its first major rulemaking for the law this week, and Gensler testified that a list of rules his agency must pass for derivatives markets will not be ready for statute-imposed deadlines. Overall, the bill requires the regulators to write more than 500 rules, conduct 81 studies, and submit 93 reports in coming years.