On Thursday, the Office of the Special Inspector General for the Troubled Assets Relief Program (SIGTARP) released a report on its audit of the impact external influences may have had on Treasury’s investment decisions under the Capital Purchase Program (CPP). The audit performed by SIGTARP focused on two issues: (i) the extent to which Treasury and the federal banking agencies have internal controls in place to prevent external influences from impacting CPP investment decisions; and (ii) evidence suggesting whether any external party unduly influenced any CPP decision-making.

The report states that more than 2,700 financial institutions applied to their primary federal regulator for CPP funding and, as of July 30, 2009, Treasury had completed investments in 660 of these institutions. The audit “identified 56 financial institutions that had an external inquiry related or that appeared to be related to an actual or potential CPP application (excluding process-related queries from the applicant).” Of these 56 institutions, 16 received funding, 12 have applications still pending, 26 were not funded either because the application was withdrawn (voluntarily or at the recommendation of the Treasury or primary federal regulator) or the institution failed or was acquired, and two did not submit an application for CPP funding.

In reviewing the 16 funded applications, the report notes that 13 “clearly met all of the criteria established by Treasury” for approval. Of the remaining three applications receiving funding, two were approved on conditions that were similar to conditions imposed on other financial institutions – one was required to raise additional capital and the other adopted a plan to address an established ratio threshold that had been missed by a de minimis amount. The remaining financial institution receiving funding was approved on a “mitigating factor” unique to that institution. “With respect to that institution, SIGTARP’s analysis indicated that discretion afforded this applicant in its approval was greater than that accorded other applications, but still consistent with applicable statutory requirements.”

In an effort to increase transparency, SIGTARP made two recommendations to enhance the controls for the CPP decision making process:

  • The committee vote on investment decisions should be recorded by Treasury; and
  • Treasury and the federal banking agencies should improve documentation of external oral communications related to applicants for TARP funding.