Yesterday, the Office of the Special Inspector General for the Troubled Assets Relief Program (SIGTARP) released a report entitled, “Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System.” The report examines the basis for Treasury’s selection of nine initial institutions to receive funding under the Capital Purchase Program (CPP). It addresses three key findings: (i) the significant economic events of September 2008 that led Treasury to inject capital into the financial system through the CPP; (ii) the process used by Treasury to select the nine institutions receiving the first CPP funds compared to the process used to select all other financial institutions receiving CPP funds; and (iii) “the basis for the decision by Treasury and federal regulators to provide Bank of America with additional assistance following the acquisition of Merrill Lynch, and federal efforts to forestall Bank of America from terminating the planned acquisition.” Although the report did not make any recommendations, it noted that an important lesson learned was that “federal officials should take more care in publicly characterizing the nature and objectives of their initiatives, since accuracy and transparency will enhance the credibility of Government Programs like TARP.”
The report begins with a summary of the events that led Treasury and the Federal Reserve to conclude that extraordinary measures were necessary to prevent a collapse of the financial markets. These events included, among others, the conservatorship of Fannie Mae and Freddie Mac, the failure of Lehman Brothers and the federal bailout of AIG. Given the speed with which Treasury and the Federal Reserve needed to act, a decision was made to create the CPP to provide capital to financial institutions, rather than to use the funds authorized by the Emergency Economic Stabilization Act of 2008 to purchase troubled assets from these institutions.
Next, the report discusses the selection process for the first nine financial institutions to receive CPP funds. These institutions “were selected because they represented a cross-section of the U.S. financial activities, but their systemic importance to the financial system and economy was a more significant consideration.” Given Treasury’s statements that the CPP was to be used to provide capital to “healthy” institutions, the report indicates that there were “serious concerns about the health of some of the first nine institutions” by senior officials at Treasury and the Federal Reserve. The selection of these nine institutions and the urgings of federal regulators that these institutions accept the $125 billion in funds are then compared to the selection process used by Treasury in selecting the remaining institutions receiving CPP funds. These latter firms were required to make application with their primary federal regulator and provide satisfactory information regarding their financial condition prior to being approved for funding.
Finally, the report reviewed the circumstances surrounding Bank of America’s acquisition of Merrill Lynch and the roles played by Federal Reserve Chairman Bernanke and then-Treasury Secretary Paulson to persuade Bank of America not to terminate the proposed merger. The report “ultimately concludes that federal officials acted based on their concerns for the financial markets as a whole and provided additional government assistance to ensure that Bank of America remained a viable financial institution after the acquisition.” The report states that, based on the information SIGTARP received during its examination, it “found nothing to indicated that Treasury and Federal Reserve officials instructed Bank of America executives to withhold the public disclosure” of the losses being realized by Merrill Lynch.