Adding to the acronyms involved, on February 5, 2009, the Office of the Special Inspector General for the Troubled Asset Releief Program (SIGTARP) released its initial report to Congress.  The report clocks in at 108 pages plus 77 pages of appendices, but appears to do an excellent job summarizing the Emergency Economic Stabilization Act, the overall TARP program, as well as the specific investments made under TARP.

Highlights include tables on page 47 and 48 that outline the basic terms of all of the TARP equity and debt investments and a complete list, as of January 23, 2009, of the warrants held by the Treasury under TARP, including the strike and market price, in Appendix D.  (Most of the warrants held are very “out of the money.”)

TARP Capital Evaluation Process

The report includes a relatively useful summary of the evaluation process being used under the TARP Capital Purchase program.  According to the report, all applicants are classified by their federal banking examiner into one of three categories:

  • Category One
    • CAMELS Composite 1
    • CAMELS Composite 2 and for which the most recent examination rating is not more than 6 months old
    • CAMELS Composite 2 or 3 and “acceptable performance ratios”
  • Category Two
    • CAMELS Composite 2 and for which the most recent rating is more than 6 months old
    • CAMELS Composite 2 or 3 and “overall unacceptable performance ratios”
  • Category Three
    • CAMELS Composite 4 or 5

The report does not describe what the performance ratios are, or what would be deemed acceptable or unacceptable.  (See our thoughts on what those performance metrics might be.)

Category One applications are forwarded directly to the TARP Investment Committee comprised of senior Treasury officials.  The Committee can grant preliminary approval or refer the application to the CPP Council.

Category Two applications are forwarded to the CPP Council, which is chaired by the OCC and includes representatives of each of the four federal banking regulators.  By majority vote, the CPP Council can recommend approval to the Committee, request more information, or recommend withdrawal.

Category Three applications are asked to send more information or withdraw their applications.

Recommendations relevant to TARP Capital Program

The report also makes a number of recommendations with regard to whether and how the Treasury holds the portfolio of securities that it has purchased under the TARP Capital Program.

Specifically, the report identifies three aspects of asset management that needs to be addressed by the Treasury:

  • Recommends that the Treasury determine a going-forward valuation method rather than valuing the preferred shares and warrants at cost.
  • Recommends that the Treasury develop a framework for its overall investment strategy.  How long should the securities be held, and when, and under what circumstances, should they be sold into the market?
  • Recommends that the Treasury determine whether it has any intention to exercise warrants in order to hold the common stock, noting that Treasury has not set aside any TARP money to fund the exercise of warrants.  (Since the TARP Capital warrants have a cashless exercise feature, this seems like an odd recommendation.)