Ten years ago, on October 13, 2008, the U.S. Treasury Secretary Henry Paulson effectively locked the CEO’s of the nine largest banks in the United States in a conference room and demanded that they accept an investment from the U.S. Government. Although we had front row seats for much of the activity over the ensuing years, reading the New York Times summary of that meeting from the following day still provides a sense of just how shocking all of this was.

While the U.S. Treasury simultaneously announced its intention to also provide the possibility of investments in other banks, it was a long wait for details, particularly for privately held and Subchapter S Banks.  Ultimately, over the course of the next 15 months, the U.S. Treasury invested $199 billion in 707 financial institutions across 48 states.  As of October 1, 2018, the Treasury has received over $226 billion back in dividends, repayments, auction proceeds, and warrant repurchases.

Of the $199 billion in investments in 707 institutions, as of October 1, 2018, only three investments, reflecting $24 million in original investments, remain in Treasury’s portfolio.  264 institutions repaid in full and another 165 refinanced into other government programs.  (The SBLF and CDFI funds were similar to the TARP CPP program, but were ultimately done under different congressional mandates.  While not necessarily representative of an ultimate cash return on the Treasury’s investment, each of these funds has also provided a strong return to the Treasury.)

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.

Out of the original investment of $204.9 billion in 707 institutions under the TARP CPP program, the U.S. Treasury currently only holds its original investment in 44 financial institutions representing a total outstanding investment of $422 million. In other words, the Treasury still holds its investment in about 6% of the financial institutions invested in through the CPP program, but those institutions represent only 0.2% of the amount invested. As the U.S. has already collected $225.9 billion in total TARP CPP proceeds, the ultimate disposition of the remaining 44 financial institutions will have no material impact on the $20 billion gain recognized by the U.S. Treasury through the TARP CPP program.

The 44 remaining TARP CPP investments range from $1 million to just over $50 million, with an average original investment of $9.6 million.  35 of the 44 remaining institutions have missed dividend/interest payments, with a total of $72 million in missed dividend payments (which includes $20 million in missed non-cumulative dividends that the institutions have no obligation to repay).  Overall, the remaining portfolio investments have missed 11.5 quarterly dividend payments, but if you exclude the 9 institutions that remain current, the average investment has missed 14.5 quarterly dividend payments.

Out of the original investment of $204.9 billion in 707 institutions under the TARP CPP program, the U.S. Treasury currently only holds its original investment in 67 financial institutions representing a total outstanding investment of $641 million. In other words, the Treasury still holds its investment in about 10% of the financial institutions invested in through the CPP program, but those institutions represent less than 0.4% of the amount invested. As the U.S. has already collected $225.0 billion in total TARP CPP proceeds, the ultimate disposition of the remaining 67 financial institutions will have no material impact on the $20 billion gain recognized by the U.S. Treasury through the TARP CPP program.

The 67 remaining TARP CPP investments range from $470 thousand to just over $50 million, with an average original investment of $9.6 million.  53 of the 67 remaining institutions have missed dividend/interest payments, with a total of $106 million in missed dividend payments (which includes $20 million in missed non-cumulative dividends in which the institutions have no obligation to repay).

In addition to the 67 institutions where Treasury continues to hold the original CPP investment, the Treasury also holds common stock in four institutions in which Treasury originally invested approximately $386 million and trust preferred securities in one institution in which the Treasury originally invested $935 million.  The average remaining institution received $9.6 million in TARP CPP funds, has missed 10 quarterly dividend payments, and currently owes an additional $1.6 million in missed dividend payments.

As of April 30, 2013, there were 154 institutions remaining in the TARP CPP program.  Courtesy of the April 2013 Monthly Report to Congress, here are the current regional breakdowns of the remaining TARP CPP institutions.

As of May 3, 2013, the U.S. Treasury has completed auctions for TARP CPP investments in 126 financial institutions, representing an original principal investment of $2.7 billion.  The Treasury continues to hold TARP CPP investments in 159 financial institutions, representing an original principal investment of $4.9 billion.  (Note, the Treasury has already received over $17 billion more in repayments then it originally invested as part of the TARP CPP program; even if Treasury receives zero return on the remaining investments, it will still be a profitable investment for the Treasury.)

Out of the 53 investments that Treasury identified in December 2012 as having opted out of a pooled auction process, 17 remain in the possession of Treasury.  The Treasury provided another opportunity for participating institutions to opt-out of a pooled auction process through April 30, 2013.  While that deadline has passed, we do not sense any urgency to move forward with a pooled auction, particularly so long as the individual auctions continue to deliver good results for the Treasury.

In April, the U.S. Treasury completed its sixteenth round of individual auctions of TARP CPP securities.  By my calculations, Treasury has now completed auctions of its investments in 126 financial institutions, with auction sales totaling approximately $2.4 billion at an aggregate discount of approximately 15%.

The 126 institutions originally represented $2.75 billion in investments in U.S. depository institutions, ranging from investments as small as $430,000 to as large as $267 million.  When you combine the dividends that have been paid to the U.S. Treasury by these institutions, the Treasury has received a gross profit of approximately $110 million.  The fact that Treasury has recovered, in the aggregate, a profit on these investments is fairly remarkable, considering that 27 of the auctioned institutions had each missed four or more quarterly dividend payments.

As shown in the chart below (click on the chart for a larger version), the volatility of the discounts has increased significantly in the later auction rounds.

One item to keep in mind when looking at auctions results is the amount, if any, of outstanding unpaid dividends or interest.  While the intitial TARP CPP auctions included institutions that were current in their payment of dividends/interest (and purchasers were obligated to pay Treasury 100% of any accrued but unpaid dividends/interest at the time of purchase), subsequent auctions have included 27 institutions in which the institution has missed at least four quarterly dividend or interest payments.  In these instances, Treasury has not required the purchaser to pay to Treasury any amount for these unpaid dividends and interest payments, and purchasers will be entitled to retain any payments subsequently made.  Accordingly, in measuring the discount on these auctions, it is important to factor the unpaid dividends into the equation, either by adding the unpaid dividends/interest to the denominator (reflecting additional amounts owed to the holder) or subtracting the unpaid dividends from the numerator (assuming repayment in full of any unpaid dividends/interest).  Although Treasury has frequently insisted on 100% payment of unpaid dividends in the restructuring context, we believe adding the amount of unpaid dividends to the numerator more appropriately measures the potential returns to purchasers.

A collection of new banking resources from around the internet:

• Treasury Announces Next Round of TARP Auctions – The latest round of Treasury auctions includes the first TARP recipients that are currently in deferral on their TARP CPP investments, which could provide significant guidance on the value of a significant portion of the remaining pool of TARP investments.  In contrast to earlier statements regarding the intent to allow “all-or-none” bids, the Treasury elected not to permit the submission of such bids.
• Winding Down TARP: A Progress Report – Overall, to date, Treasury has recovered nearly 93 percent ($387 billion) of the funds disbursed for TARP ($418 billion); and TARP’s five bank investment programs have earned a significant profit for taxpayers. To date, Treasury has recovered $268 billion through repayments and other income, which represents a positive return of more than $23 billion compared to the amount ($245 billion) initially invested.
• Economic Indicators Dashboard Updated – Russell Investments updated its Economic Indicators Dashboard, which attempts to provide statistical evidence to establish the state of the economy.
• American Bankers Association Publishes “Business of Banking” – “The Business of Banking: What Every Policy Maker Needs to Know” reviews the basics of banking and provides a foundation for understanding how banking policy decisions affect communities and constituents.
• Dallas Fed Publishes “Financial Stability: Traditional Banks Pave the Way” – Dallas Fed concludes America’s numerous community banks, small and traditionally oriented, demonstrated stability during the crisis and its aftermath.
• Atlanta Fed Analyzes Southeastern Housing Market – Southeastern housing contacts ended on a positive note in 2012.
• The Fed iPad App – An official app of the United States Federal Reserve System is now available for your iPad! According to the Federal Reserve Bank of Chicago, “This app is a must-have for anyone interested in the work of the nation’s central bank.”
• 75 Facts About Secretary Geithner – Fact Number 76.  You really have to stretch to come up with 75 interesting facts about Secretary Geithner.

For banking-related content from around the web on a real-time basis, follow @RobertKlingler on Twitter.

A collection of new banking resources from around the internet:

• Doreen Eberley Appointed Director of Division of Risk Management Supervision – Former Acting Regional Director in Atlanta, Ms. Eberley will now be in charge of all risk management supervision for the FDIC.
• December 2012 TARP Monthly Report to Congress – Treasury reports that the bank investment programs under TARP have already generated $23 billion in positive returns to US taxpayers.
• Treasury Announces Another Delay to Pooled TARP Auctions – In light of “strong market receptivity” to the earlier auction rounds, Treasury is providing remaining smaller TARP entities another 90 days to opt-out of the pooled auctions.  This presumably indicates that Treasury has no plans to conduct pooled auctions until May at the earliest.
• Hilarious bad lip reading of NFL players – Worth it just to hear Peyton Manning extoll the benefits of potions to make his wide receivers run faster.  Rise up, Atlanta!
• Harvard Blog Post on Optimal Bank Capital Regulation – New paper concludes that BASEL III is a move in the “right direction” with regard to establishing better capital requirements in this review of the procyclical effects of bank capital.
• CFPB Publishes Revised RESPA and Truth in Lending Act Regulations – Further analysis forthcoming on BankBryanCave and a free webinar through BAI featuring Bryan Cave attorneys John ReVeal and Barry Hester on Tuesday, January 22, 2012.
• FSOC Extends Comment Period on Money Market Fund Reforms – The Financial Stability Oversight Council is providing another month for comments on for money market mutual fund reforms.
• Agencies Issue Final Rule on Appraisals for Higher-priced Mortgage Loans – The requirement for higher-priced home-purchase mortgage loans is intended to address fraudulent property flipping by seeking to ensure that the value of the property legitimately increased.

For banking-related content from around the web on a real-time basis, follow @RobertKlingler on Twitter.

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.