“There is nothing so permanent as a temporary government program.” -Milton Friedman

In addition to the original nine large institution “volunteers,” a number of large regional bank holding companies have elected to augment capital through participation in the new TARP Capital Purchase Program (the “CPP”).

With the application deadline of November 14 rapidly approaching, smaller institutions too are reviewing whether it makes sense for them to apply to participate and what participation may mean to them. From start to finish, the process is filled with “unknowns” that present significant potential issues for institutions. Not that all of them are “bad” issues, it’s just that the answers are unclear or may be subject to change. The “good news” is that the CPP provides ready access to Tier one capital for qualifying institutions at a reasonable face cost. The “unknown” part is that there remains significant uncertainty with regard to the purpose of the CPP, how the CPP will actually impact participating institutions in the long run, the “true” cost of participation in the CPP and the impact of the CPP on shareholder value. Hopefully further official clarification will be forthcoming soon.

While certainly well-intended and appropriate for certain institutions, participation in the CPP may or may not be appropriate for other institutions depending on a number of factors including the long-term plans of the institution. Each institution must review and analyze potential participation on the basis of the facts as they apply to that institution and its constituencies, including the uncertainty that accompanies participation at the present time. As with most issues there is no “one size fits all,” and the uncertainties are compounded by the well-publicized involvement by federal and state politicians in the process, questioning use of proceeds and looking for other potential “issues,” the potential for ongoing “activist” (shareholder, community, etc) concern and involvement with participating institutions as a result of participation, and the significant uncertainty of the policies and approach of a new administration. In addition, the underlying intent of Congress and the underlying intent of Treasury and the regulatory agencies in creating the CPP and issues regarding its implementation seem, at times, inconsistent.  

In all instances, institutions considering par ticipation should be in immediate discussions with their regulators concerning the CPP and its impact, including detailed discussions and as much “pre-clearance” agency commitment as possible with regard to anticipated use of the funds by the institution. While again not a negative observation, the fact of the matter is that participation in the CPP, and having the Federal government (or its transferee) as a “stakeholder” in the capacity anticipated by the CPP, constitutes sailing in new and uncharted waters, particularly with a changing administration. Bankers will remember what happened to the treatment of “goodwill” in the thrift crisis in the 1980s as policies appeared to change significantly in a new administration.

It may go exceedingly well, or there may be unintended and unanticipated consequences that will make seeking capital or additional liquidity through other means seem very easy and inexpensive in retrospect. The CCP and the entire TARP process represent significant new and untested participation by the federal government in the banking industry and came about rapidly and in a stressed and highly-politicized environment. It is difficult, at best, to accurately gage the long-term consequences on individual participants and the industry as a whole.

Only time will tell, and it may be that participation at the stated cost under the CPP is a relatively inexpensive source of capital in a worsening economic environment when future credit quality issues may increase the need for capital, costs may rise and supply may be further limited. Or it may be that the true cost, combined with the negatives and the “unknowns,” combine to make other alternatives more viable and appropriate.

The following is a non-exclusive outline referencing a variety of things that institutions may wish to consider in their deliberations regarding whether to apply, and then whether to participate. Certainly more issues will continue to arise as further facts emerge with regard to the CPP and its impact. The outline is not intended to infer that institutions not participate but rather is intended to identify some preliminary issues that should be taken into consideration in deliberations.

1. Review of Basic Terms

  • Senior preferred non-voting stock with warrants for common
  • Counts as Tier One capital
  • One percent to three percent of risk-weighted assets, up to $25B
  • Five percent for five years, nine percent thereafter
  • Redeem at par for three years with qualified equity issuance. No limits after three years.
  • Fully and freely transferable by Treasury at any time
  • Warrants for purchase of common stock: aggregate value of 15 percent of preferred investment

2. True Direct and Indirect “Cost” of Participation

Five percent rate should be viewed in light of additional professional fees, administrative time, the prospective cost of issuance of qualifying take out equity and the potential “cost” of the uncertainties surrounding the CPP

  • Tier One capital eligibility is good
  • Ohio institutions may be subject to 13bp net worth tax on new capital
  • Compare to cost (and availability) of securing private equity, subordinated debt, public equity, deposit funding costs, etc.

3. Impact on Existing Shareholders

  • Consider whether participation requires existing shareholder, debtholder or lender approval
  • Look at impact on dividends and distributions (including equity distributions) to existing shareholders
  • Look at potential dilution issues
  • Look at “exit strategy” through subsequent qualified equity issuance
  • Consider the fact that the Treasury equity is freely transferable. Query who will be the holder?
  • Consider impact on estate planning and transferability of shares for existing shareholders

4. Regulatory Considerations

  • Consider whether regulatory agencies will allow use of funds as anticipated by the institution (including in the event of prospective changes in the institution, in the economy and/or in administration or agency policy)
  • Consider whether failure to secure additional capital will reflect negatively on the institution if other “peer” institutions participate, i.e. will it create a new competitive “peer” capital ratio for regulatory comparison purposes?
  • Will the new administration implement new policy directives as to the CPP and use of proceeds?  

5. Executive Recruitment and Retention

  • Consider the impact of the restrictions on executive compensation, existing executive compensation plans and contracts as well as executive retention and recruitment by the institution in general

6. Political Risk

  • State and federal public officials and activists may seek, and potentially obtain, restrictions on use of funds which may not be presently anticipated as well as additional public disclosure requirements for participating institutions
  • State and federal public officials and activists may seek, and potentially obtain, further comprehensive restrictions on compensation, far-reaching compensation and other cost disclosures and other presently unknown “strings” as a result of participation
  • Significant uncertainty with a new administration

7. Reputation Risk

  • Will seeking the funds imply institutional weakness? Will approval of the funds imply institutional strength? How will the media treat the process? What will be the stigma of participation or nonparticipation?
  • Will participation cause heightened media scrutiny of the institution as a result of being on the “list?”


Whether participation in the CPP is appropriate is an issue for each institution to analyze and consider on an independent basis, based upon its own unique current and prospective needs, plans and circumstances. Issues pertaining to true direct and indirect cost, on and off-balance sheet risk, impact on executive retention and recruitment and the general “unknown” are all factors to be considered. On its face, the CPP provides ready access to relatively inexpensive Tier one capital for qualifying institutions which may seem very inexpensive in retrospect depending on what happens to the economy going forward. However, for some the attached “strings” and the “unknown” may mitigate in favor of other sources of capital. For some there may be “no harm, no foul” in proceeding to apply and then further considering whether to actually participate. Application materials are relatively simple and straightforward.

Each institution must look at the opportunity on the basis of its own current and anticipated needs and future plans.