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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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More than 2,000 TARP Applications in Banking Regulators' Hands

On January 30, 2009, the Government Accounting Office (GAO) released its second report on the Troubled Asset Relief Program (TARP).

The report indicates that “thousands of applications are under review.”  As of January 16, 2009, the Treasury was in the process of reviewing approval recommendations from fewer than 150 financial institutions; however, the bank regulators reported that they are reviewing applications “from more than 2,000 institutions that have not yet been forwarded to Treasury.”  Furthermore, there is a backlog of closings due to the need for some institutions to require shareholder approval and/or to finalize closing documents.

The report follows up on the nine recommendations from its prior report, finding that Treasury has yet to fully address eight of the recommendations, and includes further recommendations on how to monitor TARP funds and more clearly articulate and communicate a strategic vision for the program.

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Approaching Clarity on TARP "Viability" Standards?

Through multiple conversations with bankers and regulators, we’re starting to see some clarity in the standards currently being used by regional regulators to establish “viability” for TARP recommendations, subject to variances between markets and regulators, as well as continuing evolution of the standards under the new administration.

If a bank lacks in one or more criteria, it may need to emphasize the actions that it is taking to correct over time and the bank’s strengths in other criteria.

Well Capitalized: A bank needs to be well capitalized “for its condition.”  This may require higher capital levels than the regulatory requirement to be considered well capitalized.  The calculation can be following the TARP Capital infusion, and may also require additional private capital to be raised.

CAMELS Rating: A 3 or better is likely required.  Some regulators have indicated that a 4 might also qualify, but only if conditions have subsequently changed to make it look more like a 3.  Conditions that could have changed include the bank’s capital, its business plan and/or its management (see below).

Classified Assets:  Classified assets must be below 100% of capital, following the TARP Capital infusion.  Regulators prefer less than 75%.

Nonperforming Assets: Nonperforming assets must be below 100% of capital, following the TARP Capital infusion.  Regulators prefer less than 75%.

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The End of Political Interference?

The End of Political Interference?

January 28, 2009

Authored by: Robert Klingler

On January 27, 2009, new Treasury Secretary Tim Geithner announced new rules intended to bolster transparency and limit lobbyist influence in federal investment decisions under the TARP program.  While the actual rule has not been published, the action appears intended to react to the recent Wall Street Journal article questioning whether political interference is affecting the selection of TARP Capital recipients.

The impact of the new rules may be as much symbolic as practical.  However, we do expect that, to the extent that politicians were previously willing to assist local institutions with  word of support, these new rules will cause the politicians to reconsider how to provide such support.

The press release announcing the new rules identify four key components:

1. Combating lobbyist influence in the Emergency Economic Stabilization Act process.

The press release indicates that the Treasury will implement “safeguards to prevent lobbyist influence over the program, including restricting contacts with lobbyists in connection with applications for, or disbursements of,” TARP funds.  Because of First Amendment concerns, the rules likely bar Treasury officials from talking about specific matters with lobbyists, but do not attempt to forbid people from attempting to lobby for action.

2. Keeping politics out of funding decisions.

The Treasury will, using the existing protections that limit political influence over tax matters as a model, “ensure that political influence does not interfere” with TARP decisions.  The tax model would prevent executive branch officials (but not members of Congress) from intervening in particular decisions about which banks would get funds.

However, the Treasury has also indicated that it will make a public log of all contacts by public officials and bank officials regarding specific financial institutions, posting such information to the department’s web site on at least a weekly basis.  This openness may reduce the willingness of politicians to lobby on behalf of specific institutions.

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Treasury Updates TARP Status

Treasury Updates TARP Status

January 6, 2009

Authored by: Robert Klingler

Informed sources tell us that Treasury officials met with the federal banking agencies on January 5, 2009 and re-confirmed that:

  • there are sufficient TARP Capital funds available to fulfill the needs of all eligible public, private and Subchapter S institutions; and
  • Treasury is fully committed to completing the TARP Capital program for all eligible public, private, and Subchapter S institutions.

While no term sheet has been released for Subchapter S institutions, we continue to receive assurances that S Corp TARP Capital funding is on the way.

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How Much TARP Capital Money is Left?

How Much TARP Capital Money is Left?

November 23, 2008

Authored by: Robert Klingler

When the Treasury announced the TARP Capital program on October 14, 2008, the Treasury indicated that it had set aside $250 billion of the $700 billion authorized for the overall Troubled Asset Relief Program.  The $250 billion TARP Capital program was for the purchase of senior preferred stock, with $125 billion designated for the initial participants and $125 billion for the remainder of the banking industry.

As of November 20, 2008, the Wall Street Journal’s list of participants in the TARP Capital program identifies a total of $232.9 billion that has been completed, applied for, or publicly announced as pending.  However, the Wall Street Journal’s list includes the $40 billion in senior preferred stock to be purchased from the American International Group (AIG), as announced by the Treasury on November 10, 2008.

AIG’s $40 billion investment is part of the overall TARP Program, but is not part of the $250 billion set aside for the TARP Capital program.  As a result, the Wall Street Journal’s number should be reduced to $192.9 billion, indicating that there is approximately $57.1 billion remaining under the TARP Capital program (assuming all of the applicants on the WSJ’s list are ultimately approved).

The application by several large insurance companies to become bank holding companies in light of recent thrift acquisitions increases the industry’s total risk weighted assets, and may make TARP Capital more scarce.  However, the Treasury still has an additional $60 billion that it can invest without further Congressional approval.  With the Treasury’s announcement that it is unlikely to purchase assets directly, the Treasury may elect to expand the $250 billion TARP Capital program if there is sufficient demand from eligible institutions.

Update 11/24/08 – The U.S. Government’s additional support of Citigroup is similarly not part of the $250 billion set aside for TARP Capital, although portions of the assessment are out of the overall TARP program.  Specifically, $5 billion of the asset guarantee and the $20 billion preferred stock investment are covered by TARP.  As a result, the Treasury now has $35 billion that it can invest or otherwise use without further Congressional approval.

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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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"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 Announcements of TARP Recipients/Applicants

While the Treasury Department has emphasized that it is allowing institutions to individually announce pre-approval of TARP Capital, Section 114(a) of EESA requires public disclosure of the completion of such 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 Department has now begun publicly announcing completed transactions.  As of October 29, 2008, the Treasury Report on Transactions listed only the original “Big 9.”

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