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10 Years of Troubled Asset Relief Program

10 Years ago today, on October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, creating the Troubled Asset Relief Program (TARP) and authorizing the expenditure of up to $700 billion.  Pursuant to its obligations under TARP, the Treasury still publishes regular reports on its investments and activities thereunder.  The Treasury has also published a TARP Tracker that provides an interactive and chronological history of TARP.

The various components of TARP were not developed (and then further streamlined) over the next year or so, but the 10-year anniversary of the overall program seems like an appropriate time to look at the overall results of the program.  (In fact, the very thought that TARP would become primarily a program of investments in banks 10 years ago would probably have been laughed at… everyone felt it was going to focus on purchasing toxic assets.)  Over the next several months, we’ll periodically look back on the developments (with the benefit of hindsight), including looking at the launch of this blog.

While $700 billion was initially authorized, the authorization was subsequently reduced to $450 billion.  Based on the latest Monthly Update published by Treasury, just over $440 billion was disbursed and only $70 million remains outstanding today.  Overall, the U.S. Treasury has received just over $443 billion in cash back as a result of its expenditures under TARP.

While overall TARP was actually profitable for the U.S. Treasury, when you break down TARP into categories of programs, one can see that the bank investment component (which is generally thought to be the most controversial aspect) was actually the most profitable.

Looking specifically at the various bank investment programs, the government invested a total of $245.1 billion.  Of that investment, it did recognize write-offs and realized losses of over $5.2 billion.  However, it also recognized over $35.7 billion in income (primarily dividends and profits on sold investments), resulting in a total cash return of $275.5 billion on its $245.1 billion investment.

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Trapped by TARP – An Update on the Capital Purchase Program

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.

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The Buying and Selling of Distressed Notes

(Click here for a print version of this client alert.)

Loan Sale Tips

The volume of purchase and sale of performing and non-performing real estate loans has picked up dramatically over the past year as banks seek to shrink their balance sheets as their capital base falls and other banks and investors seek to take advantage of the sale of assets from failing banks. What are the typical features of such agreements and what are the interests of buyers and sellers in such transactions?


The bank which is selling a loan, whether it is performing or non-performing, seeks to cut itself off from the borrower and the collateral just as if it had never made the loan to begin with. To evidence such a transaction, the seller would essentially like to enter into the equivalent of a quit claim or limited warranty deed containing very few warranties and representations. The structure of such an agreement would typically provide for the following items:

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Delay in Legacy Loans Program

On June 3, 2009, the FDIC announced a postponement of the Legacy Loans Program component of the Public Private Investment Partnership for open banks to sell loans.  Formally, development of the Legacy Loans Program will continue, but the previously planned pilot sale of assets by open banks will be postponed.  Accordingly, the government is once again exploring whether the purchase of troubled assets should be part of the Troubled Asset Relief Program.  The federal government appears to have now completed a 540 degree rotation under the Troubled Asset Relief Program. Observers are keen to determine whether the government will land an unprecedented 720, possibly earning an X Games gold medal in the process.

Chairman Bair explained, “Banks have been able to raise capital without having to sell bad assets through the Legacy Loans Program, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector.”

As a next step, the FDIC will test the funding mechanism contemplated by the Legacy Loans Program in a sale of receivership assets this summer.  This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July.

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Enhanced Deposit Insurance Extended Through 2013

On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896).  Among other things, the Act:

  • extended the $250,000 deposit insurance limit through December 31, 2013;
  • extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
  • increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
  • increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
  • removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments.  The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.

This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee.  The Transaction  Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.

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Pictorial Perspective of Atlanta Real Estate Market

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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FDIC Conference Call on Legacy Loans Program

On Thursday, April 9, 2009, the FDIC held its second telephone conference call to discuss the PPIP Legacy Loans Program.  The first such call was primarily for bankers, while today’s call was primarily for investors.

Investors wishing to participate in the Legacy Loans Program should complete the preliminary application.  The Legacy Loans Program Summary, Fact Sheet, and FAQ are also available.

At the outset, the FDIC repeatedly advised that this call was for information and discussion purposes only and specifically “not for attribution” to the FDIC.

The FDIC Chairman, Sheila Bair, presented very brief opening remarks, and gave certain background information.   She reminded callers that on March 23, 2009, Mr. Geitner announced the Legacy Loans Program, to be administered by the FDIC.   The Term Sheet provides the FDIC’s 17 initial questions.   Ms. Bair confirmed that the Legacy Loans Program is intended for all banks, large and small and that today’s call focuses on the investor perspective.

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Summary of Public-Private Investment Program

On March 23, 2009, the U.S. Treasury Department (“Treasury”) announced the details of the Public-Private Investment Program (“PPIP”).  The program is designed to purchase mortgage backed securities and certain troubled loans from U.S. banks.  PPIP is part of the broader “Financial Stability Plan” introduced by President Obama.  The goal of PPIP is to cleanse the balance sheets of U.S. banks of troubled assets as part of the Troubled Asset Relief Program (“TARP”) and to create access to liquidity for banks and other financial institutions in order to cause the extension of new credit.  PPIP is broken up into two key components – the Legacy Loans Program and the Legacy Securities Program.

Legacy Loans Program

The Legacy Loans Program will be launched by Treasury and the Federal Deposit Insurance Corporation (“FDIC”).  The intent of this joint program is to combine (i) private capital, (ii) equity co-investment from Treasury and (iii) FDIC debt guarantees in order to assist market priced sales of distressed assets and improve the private demand for distressed assets.  The FDIC will supervise the formation, funding and operation of a series of Public-Private Investment Funds (“PPIFs”) which will purchase assets from U.S. banks.  Each PPIF will be comprised of a joint venture between private investors and the Treasury.  Treasury will manage its investment in the PPIF to ensure that the interest of the public is protected and preserved.  However, private investors will retain control of the asset management subject to “rigorous supervision” of the FDIC.

Private investors in the Legacy Loans Program are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, hedge funds and other long-term real estate investors.  U.S. banks of all sizes will be eligible to participate in the program.  U.S. banks participating in the program will consult with the FDIC, banking regulators and Treasury to identify assets that they propose to sell.  Eligible assets are required to be predominately situated in the United States.  The FDIC will hire third party valuation consultants to analyze the assets and determine the level of debt that the FDIC will be willing to guarantee on such properties.  The debt guaranteed by the FDIC will not exceed a 6 to 1 debt-to-equity ratio.  The FDIC will receive an annual fee for providing the guaranty and such guaranty will be collateralized by the pool of assets purchased.

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Imitation is the Sincerest Form of Flattery

On March 31, 2009, the Treasury Department unveiled a completely updated site for the Financial Stability Plan programs (FinancialStability.gov).  Besides requiring visitors to learn an entirely new navigation system to find documents on the site, the new site contains a number of new features that may be of interest to BankBryanCave.com readers:

  • a map showing the local impact of the TARP Capital Purchase Program (larger view).  Like BankBryanCave.com, the Treasury also provides a Google Map of TARP Recipients.  Unfortunately, the Treasury’s Google Map suffers from a “feature” of Google Maps that limits the number of pins shown on the map; as a result, only the first 100 or so recipients (alphabetically) are included on the map.  The BankBryanCave.com Map of TARP Capital Infusions shows all TARP Capital Purchase Program recipients, and also differentiates between recipients based on when the TARP Capital funds were received.  (For comparison purposes, the Treasury’s map was created on March 11, 2009 and, as of March 31, 2009, has been viewed 265 times.  Our map was created on November 25, 2008 and has been viewed over 11,294 times.)
  • simplified economic data, which may help citizens (and bank customers) understand and monitor the need and impact of TARP.
  • a secret decoder ring* to help translate the various terms and acronyms used under TARP.  ABS, AGP, CAP, CPP, EESA, MBS, SSFI, TIP and TARP are all included.

*It’s not actually a decoder ring, but is called the “Decoder.”

The website appears to still be actively being developed and revised, as links to various documents from the previous website have appeared while this post was being edited.

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TALF Summary Issues

TALF Summary Issues

March 16, 2009

Authored by: Robert Klingler

Since the collapse of Wall Street in October, 2008, and the immediate and severe deleveraging of available capital, the life-blood of the US economy has contracted from a torrent to a trickle.  The so-called “shadow market” that funded the crippled investment banks are no longer able to leverage their assets at a 40:1 ratio. Many of the very large national banks are reeling, seeing their share prices drop from 50% to 90% in the last six months.  We have often heard questions from those outside of the banking industry asking us “what do the bankers want?”  The answer is simple.  Banks want borrowers that can repay loans.  It’s that simple and that difficult.  If only there was an influx of credit-worthy borrowers.   If only there were purchasers of the consumer loans.  These exact issues were raised during Chairman Bernake’s 60 Minutes appearance on Sunday, March 15, 2009.

In stepped the Federal Reserve.  As opportunity funds and hedge funds across the country and across the world begin to digest the parameters, requirements, and restrictions relating to the Fed’s $1 Trillion lending initiative known as TALF (Term Asset-Backed Securities Loan Facility) attempting to revitalize the stagnant credit markets, several issues have begun to emerge.

The most important criterion for many of our clients is eligibility.  TALF was announced in November as an attempt to create a market for small business loans.  It has been enlarged to include equipment financing, auto paper, and other consumer credit.

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