Earlier today, Treasury Secretary Tim Geithner presented the Obama Administration's plans for disbursement of the remaining $350 billion in Troubled Assets Relief Program (TARP) funds authorized by Congress earlier this year. In addition to announcing the creation and modification of programs within TARP, President Obama's economic team laid out its comprehensive blueprint for addressing the housing and credit crises. With today's Senate passage of the American Recovery and Reinvestment Act by a 61-37 margin, the Treasury's announcement is part of a coordinated effort by the Administration to jumpstart the nation's economy.
The Administration's proposal expands on several initiatives developed under former Treasury Secretary Paulson, providing additional tools with which the federal government can respond to disruptions in the housing and financial markets. Since implementation of the Emergency Economic Stabilization Act (EESA) and TARP program began in October 2008, the program has come under intense congressional scrutiny on a range of issues, including executive compensation, lack of increased consumer access to credit, lack of transparency, and limited oversight of use of TARP dollars. In response, numerous legislative efforts have been introduced in an effort to place additional requirements on the Treasury with respect to use of TARP funds. The new package of TARP programs attempts to address these concerns and implement a more comprehensive approach to the markets in response to Congressional oversight.
Implementation of the Administration's new Financial Stability Plan is more farreaching in its scope than prior efforts, and is based on extensive coordinated action by the Treasury, Federal Reserve, FDIC, and other government entities. Full implementation of the plan will likely require additional congressional authorization, particularly with respect to additional spending authority that may be required. As with other new initiatives announced by the Obama Administration, a centralized website to promote transparency has been established (www.financialstability.gov) to provide updates to the public on the implementation of the program.
Today's announcement did not address the specific structures or details of the new recovery program, but did provide an outline of the principles and elements of the Financial Stability Plan. Given early market reaction and the need for swift action, we anticipate further announcements as the parameters are more fully developed. The new program contains five central areas of focus:
- Creation of a public/private partnership to purchase non-performing , illiquid legacy assets from financial institutions;
- Creation of a forward-looking supervisory regime, including a financial "stress test" to assist institutions in managing their balance sheets and ensuring adequate capitalization;
- Creation of a comprehensive housing program to forestall foreclosures and stabilize the residential mortgage market;
- Expansion of the Term Asset-Backed Securities Lending Facility (TALF); and
- Creation of a small business and community lending initiative.
Public-Private Investment Fund
The Treasury, in concert with the FDIC and Federal Reserve, plans to create a capital partnership to assist in disposition of illiquid assets on institutions' balance sheets. Though little specific information was provided, the Investment Fund will seek to leverage private capital with public funds on an initial scale of $500 billion, with the potential to expand to $1 trillion. Private sector equity contributions will be expected to make large-scale asset purchases, allowing private sector buyers to determine the price for current troubled and previously illiquid assets
Supervisory Enhancement and Stress Test
Working with federal banking regulatory agencies, the Treasury will also develop a forward-looking financial transparency framework to assess institutional balance sheet and capitalization pressures to stem additional negative impact of exposure to illiquid assets. A key component of the plan will be a comprehensive "stress test" that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from market forces and continued economic recession. Institutions with assets in excess of $100 billion will be required to participate in the supervisory review and stress test process.
The Treasury will also establish a Financial Stability Trust from which institutions may draw funds to buffer themselves from addition downturns and ensure capital adequacy. Firms will receive a preferred security investment from the Treasury in convertible securities that they can convert into common equity if needed to maintain capital ratios to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend (as yet unspecified) and a conversion price set at a modest discount from the prevailing level of the institution's stock price as of Feb. 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the Treasury after a supervisory review.
Housing Stability Program
In conjunction with the FDIC, the GSEs, and the Federal Reserve, the Treasury will develop a comprehensive program to stabilize the housing market. Sec. Geithner provided little detail on the plan, noting its full scope would be announced at a later date. However, the Treasury has committed $50 billion in TARP for expansion of the FDIC's current loan modification program. Additionally, the Treasury announced continuation of its efforts to use $600 billion for purchasing of GSE mortgage-backed securities and GSE debt. Finally, the Treasury will development and implement a program that will require Financial Stability Plan participants to participate in mandatory mortgage modification programs.
The Treasury and Federal Reserve will increase the size and scope of the current TALF program. The Treasury has previously committed $20 billion on TARP dollars to implementation of the program to restart commercial lending securitization backed by auto, student, credit card, and Small Business Administration loans. The Financial Stability Plan will create a "Super TALF" program with up to $100 billion in funds available which may be leveraged to $1 trillion. Eligible collateral will be expanded to include commercial mortgage-backed securities (CMBS). In addition, the Treasury will continue to consult with the Federal Reserve regarding possible further expansion of the TALF program to include other asset classes, such as non-Agency residential mortgage-backed securities (RMBS) and assets collateralized by corporate debt.
Small Business and Community Lending Initiative
The Treasury and Small Business Administration (SBA) will develop a program to assist small businesses' credit access. In addition to inclusion in the TALF program, the federal guarantee on SBA loans will be increased to 90 percent and the approval process will be streamlined to inject capital into small businesses.
In addition to announcement of these new programs, Sec. Geithner laid out a plan for increased oversight and transparency for recipients of assistance under the new Treasury program. Of note, these new standards will not be retroactive to firms that have already received TARP funds. New requirements include:
- Adherence to executive compensation standards released last week (http://treas.gov/press/releases/tg15.htm);
- Requirements that recipients submit plans on how government funds will be used to spur additional lending;
- Requirements that firms submit monthly reports on their lending broken out by category, showing how many new loans they provided to businesses and consumers and how many asset-backed and mortgage-backed securities they purchased, accompanied by a description of the lending environment in the communities and markets they serve. These reports will also include a comparison to their most rigorous estimate of what their lending would have been in the absence of government support; and
- Limitations on dividends to firms receiving "exceptional assistance" to $0.01 per share quarterly; limitations on stock buybacks, and restrictions on cash acquisitions of healthy firms until government funds have been repaid.
Again, we expected significant additional details of the new aspects of the Treasury Financial Stability Plan to be released in the coming weeks as its various components are developed, and will provide additional information as events warrant.
A copy of a fact sheet on the Treasury plan is available at http://www.financialstability.gov/docs/fact-sheet.pdf.