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Paulson Comments on Interagency Statement and TARP Capital

On November 12, 2008, Secretary Paulson made remarks on the financial rescue package.  We have highlighted certain passages below, with emphasis added.

Today banking regulators issued a statement emphasizing that the extraordinary government actions taken by the Fed, Treasury and FDIC to stabilize and strengthen the banking system are not merely one-sided; all banks – not just those participating in the Capital Purchase Program – have benefited, so they all also have responsibilities in the areas of lending, dividend and compensation policies, and foreclosure mitigation.  I commend this action and I am particularly focused on the importance of prudent bank lending to restore our economic growth.

Secretary Paulson appears to read the Interagency Statement as we have; TARP Capital was designed to benefit the entire industry, and the entire industry will bear the costs of future regulation.

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Interagency Statement on Meeting the Needs of Creditworthy Borrowers

On November 12, 2008, the FDIC, Federal Reserve, OTS, and OCC jointly issued an Interagency Statement on Meeting the Needs of Creditworthy Borrowers.  This new release is a broad statement that covers both lending practices and restructuring mortgages and addresses dividend policies and executive compensation.  We encourage every bank CEO to carefully review this Interagency Statement as an initial glimpse into the direction that the federal banking regulators appear to be headed.

As we’ve previously noted in our commentary, we believe that any future regulations will be placed on the industry as a whole and not merely on those that participate in the TARP Capital program.  We believe this Interagency Statement lends credence to our position.  While the Interagency Statement initially notes the Treasury’s program to make new capital widely available, the Interagency Statement provides that “it is imperative that all banking organizations and their regulators work together to ensure the needs of creditworthy borrowers are met,” and that “each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention and reassess the incentive implications of its compensation policies.”

For bankers already planning to participate in the TARP Capital program, this Interagency Statement may provide some guidance (and comfort) as to what the regulators will expect regarding expansion of the flow of credit and modification of residential mortgages.

For bankers who were not planning to participate in the TARP Capital program, this Interagency Statement may lead to a reconsideration of the relative risks of participating versus not participating.

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"In" vs. "Out" – TARP Recipients So Far

In its Research & Trading Thoughts for Wednesday, November 12, 2008, FIG Partners analyzes the banks that publicly announced approval for TARP Capital funds.

TARP Recipients So Far – You Might Be Surprised: The subject of TARP capital and which banks are “In” versus who is “Out” is unavoidable today. It has become the overwhelming consideration for many investors, and fear of who could be on the “Out” list has led trading to virtually freeze within the sector for some stocks. We must reiterate that TARP is not just for the top performing or largest banks.  This can be seen in the attached list ( CLICK HERE) of performance metrics for the Treasury approved TARP recipients to-date which currently stands at 45, and as shown are far from a perfect bunch. Even with this limited list, banks who have received approval run the gamut with poor credit quality, lack of profitability and weak capital included in the mix.  Examples of each of these include BANR-Banner Corporation with NPAs-to-Assets of 3.10% and Reserve Coverage of NPAs at only 41%.  As mentioned in prior comments, SAGN-Saigon National Bank is a small $55 million asset bank who has never recorded a profit yet was approved for $1.2 million. Lastly, the best example that everyone has a shot at TARP is MBHI-Midwest Banc Holdings who as of 9-30-08 reported a Total Risk-based Capital Ratio that was barely above “adequately-capitalized” status at 8.04% yet was approved for $85.5 million in TARP capital equal to 3% of its risk-weighted assets. We clearly do not feel that inclusion in TARP should be the ultimate investment consideration these days, but since more often than not it is investors need to realistically consider what the true risk of being declined is.

While caution certainly needs to be taken to extrapolate too much from the 45 banks that have announced approval, the approvals do seem to indicate that: (a) banks of all sizes will be approved by the Treasury, and (b) asset quality does not have to be pristine.

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Treasury Updates FAQ; Provides More Guidance on Application

The Treasury has again updated its TARP Capital FAQ.  The Treasury first repeats its recent announcements regarding the November 14th deadline.

The deadline for public companies is November 14, 2008.  The Department of Treasury will provide a separate deadline for private companies when the term sheet for private companies is made available.  Both the term sheet for private companies and the applicable deadline will be posted on the Department of Treasury’s website.

The Treasury then attempts to clarify what constitutes a “public” company for deadline purposes.

A “public” bank, savings association, bank holding company, or savings and loan holding company is a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10- K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or their primary federal bank regulator.  A company may be required to do so by virtue of having securities registered under Section 12 of the Securities Exchange Act (Exchange Act) which applies to all companies that are traded on an exchange or that have $10 million in assets and 500 shareholders or Section 15(d) of the Exchange Act which requires companies that have filed a Securities Act registration statement and have 300 or more shareholders to file reports required under Section 13 of the Exchange Act, e.g., periodic reports.

Unfortunately, this explanation does not clarify whether a “public” institution must satisfy both conditions or either condition.  The question remains whether a company that does not have securities traded on a national securities exchange but is required to file periodic reports is a “public” institution under the Treasury’s interpretation.  The plain language of Treasury’s explanation suggests that both conditions must be met, as the answer uses “and” to describe the two tests.  However, the second prong (as noted in the second sentence of the answer) will always be true if the first prong is satisfied.  As a result, if both prongs must be satisfied, then only the first prong matters, but if either prong is sufficient to constitute a “public” company, then only the second prong matters.

We will try to followup again with all federal agencies for further clarification.  Until and unless further clarification is made, our earlier advice on how to proceed remains applicable.

The updated FAQs also provide guidance on the following:

  • new bank holding companies (okay so long as completed before December 31, 2008);
  • new banks (okay only if the bank is in existence as of November 14, 2008);
  • making applications amendments permissible rather than mandatory if the investment agreements are modified subsequent to application submission; and
  • clarification that the warrant exercise price is calculated based on the average of the closing prices of the applicant’s common stock on the 20 trading days ending on the last trading day prior to the date the applicant’s application for participation in the Capital Purchase Program was preliminarily approved by the Department of the Treasury.
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What does the November 14th Deadline Mean?

When the Treasury announced the TARP Capital program on October 14, 2008, the program was available to those that “elect to participate before 5:00 pm (EDT) on November 14, 2008.”

On October 31, 2008, Treasury announced that the deadline was only for “publicly traded eligible institutions” and that Treasury would establish “a reasonable deadline for private institutions to apply.”

On November 10, 2008, Interim Assistant Secretary Neel Kashkari stated “The November 14 deadline will be extended for private banks so they have time to apply.”

So to whom does the deadline apply, and what does it mean?

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FDIC Updates FAQ on Temporary Liquidity Guarantee Program

On November 7, 2008, the FDIC updated its Frequently Asked Questions on the Temporary Liquidity Gurantee Program.  New questions are presented in bold type.  The FAQ provides additional guidance in connection with the interim rule implementing the Temporary Liquidity Guarantee Program.

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Assistant Secretary Kashkari Provides Update on TARP Capital

In comments today at the SIFMA Summit, Interim Assistant Secretary for Financial Stability, Neel Kashkari, gave an update on the Treasury Department’s implementation of the TARP Capital program.  As noted by Mr. Kashkari, the TARP Capital program was announced just days ago, and while much work remains to be done, incredible progress has been made in implementing the program so far.

Two Policy Objectives

Mr. Kashkari emphasized two policy objectives:

  1. The TARP Capital program is intended to strengthen our financial system by increasing the capital base of a broad array of institutions.
  2. The TARP Capital program aims to increase the flow of financing to businesses and consumers to support our economy.

Application Timing and Availability of Funds

Mr. Kashkari noted that Treasury believes there is sufficient capital allocated for all qualifying institutions and emphasized that the program is not being implemented on a first-come, first-served basis.  Mr. Kashkari also emphasized that the Treasury is working hard to finalize and publish the required legal documents so private banks can participate on the same economic terms as public banks.  He noted that the deadline will be extended for private banks.

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The Shifting Boundaries of the TARP Capital Purchase Program

On November 7, 2008, Katherine Koops presented The Shifting Boundaries of the TARP Capital Purchase Program at the Georgia Bankers Association’s Economic Stabilization Act and Bank Capital Workshop.  The presentation addresses the following questions:

  • Are we eligible?
  • What would we be issuing?
  • Should we participate?
  • How do we apply?
  • Are there any lead time issues?
  • How does this affect executive compensation?
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GBA Communications Guide for TARP Capital Program

November 9, 2008


The Georgia Bankers Association has published a Communications Guide on the Treasury’s Capital Purchase Program that provides useful talking points regarding a bank’s decision on participating in the TARP Capital program.

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TARP Jokes

November 6, 2008


TARP Jokes

November 6, 2008

Authored by: Bryan Cave

Q. What did Treasury use to put the Capital Purchase Program together?
A. Duct TARP.

Q. What do you call a bank that’s been turned down by Treasury?
A. TARPooned!

Q. What is a banker’s favorite breakfast food?
A. PopTARPs.

Q. What do you use to remove a bad loan from your books?
A. TARPentine.

Q. Knock Knock
A. Who’s There?

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