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An Update on the Application Backlog

Even as five of the eight initial Capital Purchase Program recipients have redeemed their TARP investments with the Treasury, hundreds of applications are still being processed, as reported by the American Banker on June 26, 2009 (subscription required).

The Government Accountability Office said in a June 17 report that the Treasury had received more than 1,300 applications from federal regulators as of June 12, and that fewer than 100 were still awaiting a decision. The GAO also said bank regulators are reviewing another 220 applications that have not yet been forwarded to the Treasury.

Of the banking agencies, only the Office of Thrift Supervision details the Tarp application process. Of the roughly 800 companies it oversees, the OTS said 302 have applied for capital injections. Forty-nine have gotten the money and 140 have withdrawn their applications. Another 71 are in some state of review while 42 have yet to be considered.

The Treasury may emphasize that “fewer than 100 are still awaiting a decision,” but that excludes over 200 applications that are haven’t even made it to the Treasury yet.  All told, there are probably 300 applicants that haven’t been told whether they are eligible to receive a TARP investment.

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SIGTARP's Initial Report to Congress

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
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Several TARP Updates

Several TARP Updates

December 9, 2008

Authored by: Robert Klingler

Last week, the federal government provided several updates on the status of the Troubled Asset Relief Program: the Third Tranche Report to Congress (December 2nd); a speech by SEC Chairman Cox (December 4th); the first Section 105(a) Report to Congress (December 5th); and a speech by Treasury Interim Assistant Secretary Kashkari (December 5th).  We have highlighted the more important components of each update below.

Third Tranche Report to Congress

The Third Tranche Report to Congress provides the basic factors that the Treasury will use in analyzing whether an institution should be supported under the Systemically Significant Failing Institutions (SSFI) Program.  It was under the SSFI Program that Treasury closed a $40 billion transaction with AIG on November 26, 2008.  Participation in the SSFI Program will continue to be on a case-by-case basis, based on these and other factors:

  1. The extent to which the failure of an institution could threaten the viability of its creditors and counterparties because of their direct exposure to the institution.
  2. The number and size of financial institutions that are seen by investors or counterparties as similarly situated to the failing institution, or that could otherwise be likely to experience indirect contagion effects from the failure of the institution.
  3. Whether the institution is sufficiently important to the nation’s financial and economic system that a disorderly failure would, with a high probability, cause major disruptions to credit markets or payments and settlement systems, seriously destabilize key asset prices, significantly increase uncertainty or losses of confidence thereby materially weakening overall economic performance.
  4. The extent and probability of the institution’s ability to access alternative sources of capital and liquidity, whether from the private sector or other sources of government funds.

It seems unlikely that the Treasury will include any financial institutions other than the largest ones in the SSFI Program, unless an institution can make a strong case that its stability is critical to the overall stability of the nation’s financial and economic system.

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Who Applied for TARP Capital?

Who Applied for TARP Capital?

November 15, 2008

Authored by: Robert Klingler

There is no complete answer, and that’s exactly how the Treasury and banking regulators want it.

Lists of Applicants

There are several lists of applicants: the Wall Street Journal has a list, FIG Partners has a list, and SNL Financial (account required) keeps a running tally of public announcements of applications, completions and decliners.  However, all of these lists are necessarily unofficial and incomplete, as they only include companies that have made voluntary public announcements.

There are no requirements that companies announce whether they have applied for TARP Capital.  The Treasury and federal banking regulators have made very clear that they will not publicly disclose the names of who applied for TARP Capital, or the names, if any, of companies that are ultimately turned down for TARP Capital.  (As noted by Assistant Treasury Secretary Kashkari on Monday, several opportunities will be made to allow applicants to withdraw their applications rather than facing a formal denial of applications.)  This confidentiality helps protect the overall stability of the banking system.

List of TARP Capital Recipients

Section 114(a) of Emergency Economic Stabilization Act of 2008 requires public disclosure of the completion of TARP purchases within two business days of the actual purchase.  (This is also confirmed in the Treasury’s FAQ, which provides “Treasury will provide electronic reports detailing any completed transactions, as required by the Emergency Economic Stabilization Act of 2008, within 48 hours.”)

The Treasury’s list of completed transactions is available here, and this is the only official list.  There is, however, a significant lag time between preliminary approval and completion of any given capital infusion.  The first TARP Capital infusions were not consummated until October 28th.  No further TARP Capital purchases were completed until November 14th (and the number and volume of the infusions that occurred on November 14th are not clear as of the time of this post).

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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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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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Federal Reserve TARP Capital Review for Public Member Banks

We are beginning to receive some indication of how the Federal Reserve will be reviewing TARP Capital Applications for public member banks.  As institutions begin to file applications in greater numbers, we believe the review process is starting to gel from a methodological standpoint (although the regulators still say they receive new guidance daily).  We have not yet had any indication as to how consistent this review methodology may be between regulatory agencies.

We understand that the review will generally consist of a 3-part process:

  • First, the regional director of applications risk will serve as an initial point-of-contact person who will review the application and any follow-up materials that may be requested.  The plan is for this initial review period to take approximately 3 days, although this time period could be extended, depending on the circumstances of a particular application and the volume of applications being processed.
  • Second, the application will be passed along to a 5-member panel.  This panel will review the application and make the decision as to whether an “invest” recommendation should be made to Treasury.
  • Finally, Treasury will make its ultimate investment decision, based in large part on the recommendation of the regulators.

The review process, from the filing of an application to an ultimate decision by Treasury to fund, may be completed in as little as 5-7 days, although this process could be drawn out considerably, based on the circumstances.

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Updated TARP Application Timing Information

Based on a number of sources, we understand that banks that submit their applications to the FDIC are getting a request for the ratios right after they submit the information and are hearing within a couple of days whether they will, or are expected to be, eligible.  If they are not eligible, banks are being given the opportunity to withdraw the applications to avoid reputational issues.

We have also been advised by the regulators that particularly high capital ratios will not be a basis for the FDIC to find a bank ineligible.  From the regulator’s perspective, you cannot have too much capital.

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Should You File an Application Early?

(See Update on Later Regulatory Guidance.)

No topic has been discussed more around our offices today then whether an institution interested in receiving TARP Capital should go ahead and file an application now.  For banks that fit squarely within the parameters of the proposed program (i.e., exchange-listed, publicly traded institutions), it’s best to apply now.  For a smaller public, private, or S corp institution with “structural”  difficulties with the program as currently designed, it may also be in the bank’s best interest to go ahead and submit an application now–especially if its regulator has encouraged it to do so.   If it does, however, the bank needs to keep in mind that it will need to identify the participation difficulties now (see TARP Capital Issues) and supplement/amend the application later, with the extent of the required amendment being currently unknown.

If it applies now, even with several “structural” compliance issues noted in its application, the bank might get formal regulatory feedback more quickly, which would help with capital planning.  In other words, “First come, first served” is not the same as “first come, first look.”  For example, a bank may be able to meet its capital needs solely with TARP and prefer to do that, but if it receives definitive word that TARP is not available, it’ll need to move forward with alternative financing and plan accordingly.

In a best case scenario, an amendment to the application would just involve reviewing the investment documents when they’re available and certifying that the bank has no issues with them that haven’t been previously noted in its application. On the other hand, the entire program for private/S corp/smaller public companies could change significantly (for example, from equity to debt), and the bank could need to revise projections, review other potential issues presented (i.e., third party or regulatory restrictions on debt issuance) under the new program and submit a significant amendment to its application.  If we knew that a new program would be unveiled this week, it would make sense to hold off on the application, but if it won’t be developed until a later date (or at all), it’s best to apply for the program in its current form and note any difficulties that the bank will experience in complying with its terms.

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