Yesterday, November 10, 2008, Interim Assistant Secretary for Financial Stability, Neel Kashkari, provided a comprehensive update on the Treasury Department’s implementation of the Troubled Asset Relief Program (TARP). In addition to describing recent actions taken under Treasury’s Capital Purchase Program (CPP), Mr. Kashkari addressed yesterday’s joint action taken by Treasury and the Federal Reserve with respect to AIG under the TARP. Mr. Kashkari also reiterated that the deadline for financial institutions interested in providing asset management services for Treasury’s portfolio of equity securities, debt obligations, and warrants acquired under the CPP and future TARP initiatives to submit proposals to Treasury is 5:00 p.m. (EST) on Thursday, November 13, 2008.
With respect to TARP generally, Mr. Kashkari primarily focused on five areas, including:
- The implementation of the CPP;
- The steps Treasury has taken to date in procuring the essential services required for the programs;
- The leadership teams created for Treasury’s Office of Financial Stability;
- Treasury’s actions with respect to compliance and transparency; and
- The next steps Treasury plans to take.
Implementation of the CPP. Treasury has implemented the CPP to meet two policy objectives (i) stabilize the financial system by increasing the capital of participating financial institutions; and (ii) to increase the flow of financing to businesses and consumers. Mr. Kashkari stated that the stronger capital base, especially for healthy financial institutions, provided by participation in the CPP provides financial institutions with additional capacity to lend to new or existing customers, as well as the customers of banks unable to engage in lending due to insufficient capital. Finally, Mr. Kashkari suggests that the market itself will require financial institutions receiving proceeds under the CPP to open up lending, as shareholders “demand that the bank put the capital to the best use possible or watch their returns suffer.” He also noted that, as required by EESA, Treasury’s documentation for financial institutions interested in participating in the CPP contains, among other things, restrictions on dividends and executive compensation.
He also described Treasury’s process for evaluating financial institutions filing an application under the CPP. Each financial institution desiring to participate in the CPP must first apply to its primary federal regulator—the FDIC, Federal Reserve, OTS, or OCC. The appropriate agency will review the application and take one of three actions. First, the regulator could determine that it will not recommend the application to Treasury and encourage the institution to withdraw the application. Second, for applications the regulator strongly believes should be included in the program, the regulator sends the application directly to the TARP Investment Committee at Treasury with the positive recommendation. Third, for those applications in the middle ground, the regulator will forward the application to a Regulatory Council made up of representatives of the four federal regulatory agencies for joint review and recommendation. The TARP Investment Committee will review all recommendations and make the final decision and Treasury will inform the financial institutions. If approved, “financial institutions have 30 days to complete the required documents before [Treasury] fund[s] the transaction. All completed transactions will be publicly announced within two business days of execution, as required by the law.”
Procurement. Mr. Kashkari noted that Treasury has hired several firms to assist in the execution of the programs. The services included (i) accounting; (ii) accounting internal control support; (iii) legal; and (iv) human resources support.
Recruitment. Kashkari also identified various interim leaders for key positions in the Office of Financial Stability, including those responsible for setting up the office, hiring permanent staff, “operationalizing” the programs, and identifying permanent successors. The focus for Treasury and the Office of Financial Stability going forward will be on the expansion of the office to ensure the “high quality execution” of Treasury’s programs.
Compliance. Kashkari emphasized that Treasury is committed to transparency and oversight in all aspects of the programs initiated under EESA and to ensure compliance “with the letter and the spirit of the requirements established by the Congress.” The Financial Stability Oversight Board and continued coordination with the Government Accountability Office and the Treasury’s Inspector General are intended to demonstrate Treasury’s commitment “to an open and transparent program with appropriate oversight.” Also, on November 4, 2008, Treasury submitted its first Tranche Report, with Appendices, to Congress, as required under EESA. The report covered the first $125 billion committed to nine financial institutions under the CPP.