TARP Capital Purchase Program Update
By: Daniel F.C. Crowley, Karishma Shah Page
The U.S. Department of Treasury (“Treasury”) continues to implement the Emergency Economic Stabilization Act of 2008 (“EESA,” H.R. 1424, P.L. 110-343, click GPO’s PDF Display for EESA text). Among other things, EESA authorized the Secretary of the Treasury to establish a Troubled Asset Relief Program (“TARP”) to purchase troubled assets from financial institutions. Under this authority, Treasury continues to develop the Capital Purchase Program (“CPP”) to make equity investments in banking institutions. However, Treasury has recently indicated that it no longer intends to purchase troubled assets as described below.
On October 31, Treasury released additional CPP documents for publicly traded financial institution applicants, including a Securities Purchase Agreement, Form of Letter Agreement, Certificate of Designations, Form of Warrant, Term Sheet, and SEC/FASB Letter on Warrant Accounting. The documents contain terms and conditions and make representations and warranties, to which a CPP applicant must agree. As noted in the previous issue, applications must be submitted by 5 p.m. (EST), November 14, 2008.
In the same notice, Treasury stated it will be posting a CPP application form and term sheet for private and mutual banks in the future. In his testimony before the Senate Committee on Banking on October 23, Interim Assistant Secretary for Financial Stability Neel Kashkari noted that Treasury is also developing a mortgage-backed securities program, whole loan purchase program, and insurance program for troubled assets. On November 10, following a speech in New York City, Mr. Kashkari indicated that U.S. Treasury Secretary Henry M. Paulson, Jr., will determine whether and when to roll out these additional programs.
On November 10, the government announced changes to the AIG bailout totaling $152.5 billion. Using its EESA authority, Treasury will purchase $40 billion in senior preferred stock from AIG. The Federal Reserve will provide AIG with a $60 billion bridge loan, purchase $22.5 billion of its mortgage-backed securities and supply $30 billion to backstop the insurer’s credit default swap agreements. Mr. Kashkari indicated that the AIG deal was a “one-off” arrangement rather than a broadening of the CPP beyond banking institutions.
Treasury has also started to build its CPP implementation group. The Department has named James H. Lambright, former head of the Export-Import Bank, to serve as the interim Chief Investment Officer. Treasury has also posted a solicitation for financial agents to provide asset management services for CPP. Application guidelines are available at http://www.treas.gov/press/releases/hp1260.htm; the deadline for submission was 5 p.m. (EST), November 13, 2008.
Of the $700 billion in funds authorized by EESA, Treasury has thus far committed $250 billion to banks. The President must certify the use of an additional $100 billion and, for use of the remaining $350 billion, submit a notice to Congress, which has the ability to disapprove. On November 4, 2008, the Treasury submitted its “First Tranche Report” to Congress on the implementation of the EESA. The report noted that “it is premature to assess the impact of the CPP.” Preliminarily, Treasury is “encouraged by recent signs of improvement in the markets and in the confidence in our financial institutions,” but Treasury also reported that restoring liquidity to the long-term credit markets remains a challenge.
On November 12, Secretary Paulson provided an update on the implementation of EESA and indicated that the Department has changed its strategy. Secretary Paulson stated that the Department has abandoned efforts to purchase bad assets under TARP, because the indirect purchase would delay bank recapitalization. Instead, CPP equity purchases would continue to be the central feature of Treasury’s bailout efforts. Secretary Paulson noted that the Department also will pursue two additional strategies: strengthening the asset-backed securitization market in order to support consumer finance and expanding foreclosure mitigation. (Treasury Secretary Outlines Revised TARP Strategy.)
Strategic shifts in the efforts to ameliorate the credit crisis will presumably continue with the incoming administration. Moreover, with the continued instability of the financial markets, we believe that we are in the beginning stages of what will ultimately prove to be a massive shift of leverage from private balance sheets to the public debt as new programs are implemented.
The K&L Gates Public Policy & Law group consists of senior, bipartisan policy professionals who are closely monitoring these developments in order to provide insights to and effective advocacy on behalf of firm clients. http://www.klgates.com/newsstand/Detail.aspx?publication=5052
