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UNDER THE "TARP"
THE TROUBLED ASSET RELIEF
PROGRAM
-- Where is it
headed?
Secretary Hank
Paulsen described the intent of TARP on October 3, 2008:
"The broad authorities in this legislation, when combined with
existing regulatory authorities and resources, gives us the ability
to protect and recapitalize our financial system as we work through
the stresses in our credit markets."
The Capital Purchase Program ("CPP") was intended to
provide capital injections to restore liquidity and stability to the
financial system by shoring up financial institutions. The
intent of CPP was to free up the markets and allow banks to do what
banks do - lend money to their customers. Much debate about CPP
has arisen since PNC Financial's
acquisition of National City and PNC's possible use of CPP
funds for this acquisition.
This
concern is real because some unnamed bank executives have stated they
would consider the use of these funds to acquire other
institutions. Unfortunately, the Treasury has encouraged such
consolidation as evidenced by the recent PNC/National City transaction.
In addition, insiders have stated certain banks received CPP funds
with the implicit understanding they would seek a merger partner.
Wayne Abernathy, executive vice president of regulatory affairs at
the American Bankers Association ("ABA"), met on October
28, 2008 with Treasury officials to raise his organization's concerns
about CPP. These concerns are: 1) How and when is the Treasury
going to make CPP available to privately held banks, including those
that are prohibited from issuing preferred stock by certain states'
governing law, and 2) will the nationally chartered banks use these
funds to further consolidate the market and even attempt to acquire
privately owned banks.
Although Federal Reserve Chairman Ben Bernanke
has urged all small and regional banks to contact their respective
regulators to access their portion of the $250 billion set aside to
recapitalize lenders, the Treasury still has not established
guidelines for privately held banks. Bob Davis of ABA stated
the ABA's objective is to permit equal access and participation so
there is no bias toward any part of the banking industry. In
addition, the ABA has lobbied to extend the application deadline
beyond November 14, 2008 to allow privately-held banks equal
access to CPP once the guidelines are promulgated.
RESPONSE TO CONCERNS
In its latest
release regarding CPP (see more below), Treasury announced on Friday,
October 31, that it will post an application form and term sheet for
privately-held financial institutions "at a later date and
establish a reasonable deadline for private institutions to
apply." It therefore appears that the CPP deadline which
will apply to private banks will indeed be later than November 14th.
With respect
to the use of CPP funds for bank acquisitions, Federal lawmakers have
threatened to amend, alter or otherwise place restrictions on TARP
and CPP if financial institutions fail to use the funds to shore up
their capital and ease their lending restrictions to allow capital to
flow back into the marketplace. Some of the threats have been
to tighten the already restrictive limits on executive compensation
(subject of another news alert this week) and modeling a federal
statute after a New York law that would allow the Treasury to reclaim
the funds if not used for the intended purpose of CPP and TARP.
This pressure will come to full debate shortly, since a series of
hearings are being scheduled in the next week or so to put pressure
on the Treasury and the financial institutions to ensure TARP and CPP
achieve Congressional intent. The charge is headed by House
Financial Services Committee Chairman Barney Frank.
LATEST TREASURY RELEASE
Last Friday, Treasury released
additional documentation for publicly traded financial institutions
applying for CPP. These documents include a Securities Purchase Agreement, a Form of Letter Agreement, a Certificate of Designations, a Form of Warrant (Stockholder
Approval Not Required), a Form of Warrant (Stockholder
Approval Required), a Revised Public Term Sheet, which
clarifies the definition of a "Qualifying Financial
Institution," and a SEC/FASB Letter on Warrant
Accounting.
After a financial institution is granted preliminary CPP approval, it
must complete and submit the securities purchase agreement, letter agreement,
certificate of designations and warrant. Upon preliminary
approval, Treasury will deliver to an approved financial institution
instructions regarding the filing of these documents and the
completion of the CPP process.
Clark Hill will strive to keep you consistently updated and informed
about the Troubled Asset Relief Program and the government's evolving
response to the turmoil in our capital markets. Please click
here to view our previously distributed "Under
the TARP" newsletter.
Please contact one of our Clark Hill banking and financial
institutions team members should you have any questions about TARP or
CPP.
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