As part of their continuing efforts to promote financial stability and restore the health of the economy, the United States Treasury has continued to develop new applications for the funds allocated to the Troubled Asset Relief Program (TARP), established in October 2008 by the Emergency Economic Stabilization Act of 2008 (EESA). In mid- October 2008, the Treasury announced it would forgo its initial plan to buy troubled assets from financial institutions and would instead use TARP funds to inject capital directly into banks. To date, $195.3 billion has been invested directly into qualifying financial institutions, both publicly traded and non-public, under the Treasury's Capital Purchase Program (CPP). To date, CPP funds have been invested in 359 financial institutions in 45 U.S. states and Puerto Rico.
On February 10, 2009, the Treasury unveiled its new "Financial Stability Plan" for promoting economic recovery. The Financial Stability Plan includes a plan to purchase troubled assets from financial institutions, as originally contemplated by the EESA. The plan also further develops the Term Asset-Backed Securities Loan Facility, which has not yet been implemented.
The new Financial Stability Plan also introduces new programs under TARP. Although the Treasury outlined certain high-level elements of the Financial Stability Plan, many of the details of the programs that will comprise the Financial Stability Plan have yet to be announced.
This memorandum summarizes TARP developments since our prior publications on this topic - our November 21, 2008 memorandum entitled Capital Purchase Program – Publicly Traded Financial Institutions,1 and our December 4, 2008 memorandum entitled Capital Purchase Program – Non-Public Financial Institutions.2 We suggest you refer to those publications in conjunction with this update.
Recent TARP Developments
TARP Expenditures to Date
As of February 6, 2009, the Treasury has spent $301.1 billion of the $700 billion allocated to TARP. This includes $195.3 billion out of $250 billion allocated to the CPP for capital investments in financial institutions. The total TARP expenditures to date also include the Treasury's separate targeted investments in and loans to AIG Capital for $40 billion, Citigroup for $20 billion, the automotive industry for $20.9 billion and Bank of America for $20 billion.
On January 15, 2009, Congress cleared the way for release of the second $350 billion in funds allocable under the EESA. A total of $398.8 billion in TARP funds remains available to be spent by the Treasury.
Term Asset-Backed Securities Loan Facility
On November 25, 2008, the Treasury unveiled the Term Asset-Backed Securities Loan Facility (TALF) program under TARP. TALF was originally intended to be launched in February 2009. To date, the Treasury has not provided an update with respect to the implementation time frame.
Under TALF, the Federal Reserve Bank of New York (New York Fed) would lend to investors the funds to purchase eligible asset-backed securities. TALF was designed to finance only certain newly issued, highly rated asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. TARP funds of up to $20 billion were to be used to purchase subordinated debt in a special purpose entity created by the New York Fed to purchase and manage any assets received by the New York Fed in connection with any TALF loans. The purpose of TALF was to provide incentives for investors to resume purchase of loans on the secondary market so as to free up the flow of credit to consumers.
As part of the Financial Stability Plan announced by Treasury Secretary Geithner on February 10, 2009, TALF has been dramatically expanded to increase the investment by the Treasury and to encompass commercial mortgagebacked securities, as set forth in more detail below under the heading "Financial Stability Plan." For additional detail relating to TALF, please refer to our memorandum entitled "Term Asset-Backed Loan Facility" which will be posted here: http://www.financialinstitutionlawblog.com.
CPP Term Sheet for Subchapter 'S' Corporations
On January 14, 2009, the Treasury unveiled terms for participation in the CPP by Subchapter 'S' corporations, which corporations had previously been excluded from the CPP due to tax regulations which make them unable to issue preferred equity securities. Subchapter ‘S’ corporations will issue notes to the Treasury on terms comparable with the preferred securities issued by publicly traded and non-public qualified financial institutions under the CPP. The deadline for 'S' Corporations to apply for CPP funds is February 13, 2009.
Executive Compensation Requirements
Financial institutions receiving TARP funds are required to modify existing executive compensation arrangements to comply with the mandated restrictions imposed by Section 111(b) of the EESA, including agreements to:
- ensure that compensation does not encourage excessive risk taking;
- impose a clawback on compensation paid based on financial results or performance metrics later proved to be materially inaccurate;
- limit severance benefits to not more than three times the executive’s average taxable compensation for the prior five years; and
- not deduct annual compensation to any senior executive in excess of $500,000.
On February 4, 2009, the Treasury adopted further executive compensation restrictions for institutions receiving TARP funds under future programs. The additional restrictions will not apply retroactively to institutions that have already received TARP funds or that will receive TARP funds under programs that existed prior to February 4, 2009.
The Treasury guidelines on executive pay distinguish between financial institutions participating in generally available capital access programs (e.g., CPP and Capital Assistance Program) and financial institutions needing more assistance than is allowed under a generally available capital access program (i.e., "exceptional assistance"). Banks falling under the "exceptional assistance" standard have bank-specific negotiated agreements with Treasury (e.g., AIG, Bank of America and Citi).
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