Track the Stimulus

The Financial Stability Plan

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On February 10, 2009, the Treasury Department introduced the "Financial Stability Plan" - the next generation of the $700 billion Troubled Asset Relief Program (TARP). The plan is designed to address the credit crisis by taking a multi-pronged approach that provides capital injections to banks that need it, creates a mechanism to purchase "toxic securities" through a public-private fund, supports business lending through the purchase of business loans in the secondary markets, and aids homeowners impacted by the steep decreases in home prices. 
By all accounts, the TARP has accomplished its main goal of providing stability to the financial markets - as measured by the credit spreads, which have returned to levels in-line with a recessionary economy and far below the credit-crunch days seen in the last quarter of 2008, and in the first quarter of 2009.

By mid-October, the TARP had disbursed over $364 billion, with another $99 billion committed but not yet disbursed, and a maximum commitment for all the programs of $697 billion.  Starting in June many of the larger financial institutions starting repurchasing their preferred shares bought by the government under the Capital Purchase Program (aka Capital Assistance Program) - to date over $70.7 billion have been repurchased and another $14.5 billion have been earned by the government as interest on the loans and preferred shares purchased and on the sale of the warrants received under the program (see table below).  We'll expand on the details below and in the linked pages.

Troubled Assets Relief Program Funds Status (10/09/09)
	Maximum Funds Committed ($ billion)	Funds Obligated ($ billion)	Funds       Disbursed  ($ billion)
Capital Purchase Program (CPP)	250.0	204.6	204.6
CPP Repurchases		-70.7	-70.7
Systematically Significant Failing Institutions	70.0	69.8	43.2
Targeted Investment Program	40.0	40.0	40.0
Automotive Industry Financing Program	81.3	81.3	77.8
Citigroup Asset Guarantee	5.0	5.0	0.0
Homeowner Affordability & Stability Plan	50.0	27.2	0.0
Term Asset-Backed Securities Loan Facility (TALF)	100.0	20.0	0.1
Public Private Investment Program	100.0	16.7	0.0
Interest, Loan Repayments & Warrants		-14.5	-14.5
Capital Assistance Program	TBD	TBD	0.0
TOTAL	$696.3	$379.5	$280.5
Source: GAO, Treasury OFS

The Capital Purchase Program (CPP)
It targets the credit crunch by providing assistance to financial institutions.  In effect it continues the process started with the TARP during the last administration and provides a mechanism for the Treasury to inject capital in the banking system (the tables presented later in this page provide a listing of who the largest recipients of the more than $314 billion that have already been disbursed through the CPP and it sister programs to help financial institutions).  Unlike the first half of the TARP, where capital was disbursed to institutions in a rather ad-hoc fashion (in large part because the liquidity crisis that ensued after the collapse of Lehman Brothers did not provide much time for careful analysis and deliberations), the Capital Purchase Program details the process through which banks will access the government's capital.  The program calls for:

• Banks to undergo "stress tests" that will determine whether the banks are viable and whether they need additional capital. 
  
• If they do need capital, bank institutions will be given time to raise the needed capital in the private markets.
• If they are unable to raise capital in the private markets, the government will provide capital in the form of equity-like debt securities (convertible preferreds);
• Banks will have 7 years to repay the capital, or will have to convert the securities giving the government part ownership of the institution.

Some of the largest banks have already repurchased the shares sold to the Treasury; as their financial condition has improved, and as the cost of doing business under the watch of the Treasury officials (and Congress) has increased, they moved rapidly to repay the funds - among those institutions are Goldman Sachs, Morgan Stanley and JP Morgan Chase.

By in large the program appears to have met the goal of providing a cushion for financial institutions to remain solvent and continue providing credit to individuals and businesses (though at greatly reduced levels when compared to pre-credit crunch levels).

The CPP page provides further details on the program.

The Public-Private Investment Partnership (PPIP)
In October the Treasury department announced the closing of the first few Public-Private Investment Partnership funds.  Treasury has chosen a number of large investors such as Blackrock, AllianceBernstein, Wellington Management, Invesco to raise and manage the funds.  Their  mission is to acquire the legacy assets - loans and securities  (i.e. toxic assets) that the banks now hold.  Treasury will use $75-100 billion to provide matching equity capital for the funds.  These funds are expected to purchase securities worth up-to a trillion dollars, with an initial goal of $500 billion.  The Treasury expects private market participants to provide half of the capital, and thus by sharing in the risk/reward be better able to provide a fair valuation for the toxic assets.  Of course, valuation has been the crux of all the problems with "legacy assets" - the private markets have so far been unable to do this efficiently as banks believe they are worth more than potential buyers are willing to pay which in some cases is zero.  The new plan hopes to solve the problem by providing incentives to market participants to participate by providing the liquidity they need.

The plan calls for the government and private inspectors to co-invest in the purchase of $500 billion of legacy assets that can grow to $1 trillion.  Several public-private funds will be set-up where the Treasury will participate with 50% of the equity ($1 invested for every $1 invested by the private investor) - up to $100 billion will be used for this purpose by the Treasury through the TARP.  The government will also provide loan guarantees, and non-recourse loans through the FDIC and the Fed's TALF program. 

The Public-Private Investment Partnership (PPIP) page, contains further details on the program.

Capital Assistance to Businesses
The Treasury, financed by one of the Fed Initiatives, the Term Asset-Backed Security Loan Facility (TALF), will support a Consumer and Business Lending Initiative with up to $1 trillion.  This initiative will allow the government to purchase small business loans, student loans, consumer and auto financing securities and commercial mortgages in the secondary market.  The purpose is to provide liquidity in the market and to lower the interest rates charged to the end users.  For small businesses, the Small Business Administration will increase and expedite loans through its network of community and large banks.  This part of the new TARP seems modeled after the successful effort by the Fed and the government to lower mortgage rates by buying consumer mortgages in the secondary market through Fannie Mae and Freddie Mac. Investors, including mutual funds, hedge funds, and others will have access to these facilities at very low rates.  While this is probably the riskier of all the facilities that the Fed is implementing, its reach is the largest as it will try to revitalize the consumer market directly by providing liquidity to those facilities most associated with consumer spending.  The importance of these markets is very large; the Fed estimates that securitized markets provided approximately 25% of all the lending for many of these consumer and small business loans.  The Treasury has made available an interesting white paper on the TALF that is worth a read.

The Homeowner Affordability and Stability Plan
The HASP provides assistance to homeowners by providing lower rates to individuals that can not refinance their homes because of the reduction in home prices; help for homeowners facing foreclosure and capital injections to Fannie Mae and Freddie Mac to keep mortgage rates low.

 

The Treasury has set-up a site http://financialstability.gov/ to provide the public with information on the evolution and success of the plan, including providing online access to all the contracts with recipients of aid.

A look at what has already been done: the TARP (it's already a year, and fortunately the environment is quite different now...)
The by now famous (or infamous depending on your point of view) TARP came into existence on October 3, 2008. The plan was first introduced by the then Treasury Secretary John Paulson as a mechanism to assist struggling financial institutions re-capitalize themselves and re-start lending by purchasing their toxic assets, so that they could take them off their balance sheets.  The TARP was the Treasury's and Fed's response to the havoc that broke through the market in the aftermath of Lehman Brothers' bankruptcy and the "bailout" of the insurance giant AIG, which received a gigantic $85 billion loan in exchange for an 80% ownership stake in the company.  A few days after these events, the credit markets which had been under severe strain, seized with the announcement that a money market fund heavily invested in Lehman's debt could not return 100% of the assets to its investors.  This caused a run on money market funds and inter-bank lending went to a standstill. By the evening of Thursday September 18, Paulson and Federal Reserve Chairman Ben Bernanke announced plans to put together a facility to buy the troubled assets of financial institutions so that they could stop the string of continuous losses in their portfolios caused by bad mortgage and derivative bets and thus have a hope of recapitalizing themselves and start lending.

All in all 681 institutions in all states have received TARP funds.  Citigroup with $50, where the government will own 36% of the shares, Bank of America received $45 billion.  The largest recipient is AIG; Treasury's close to $70 billion invested in the TARP represent close to an 80% ownership stake.  The smallest recipient received $300,000.

In exchange for the capital provided by the TARP, Congress and the Executive branch are demanding that in addition to the interest, and ownership option, banks adjust their compensation schemes placing significant restrictions on executive pay.  For the largest recipients, this limits the size of bonuses to employees earning more than $250,000 per year.  In addition, there has been very strong pressure to curb non-essential spending at those institutions.  These moves have prompted those institutions that can return the capital to do so.  At October 9, over $70.7 million have been returned to the government by 41 banks including Goldman Sachs, Bank of New York Mellon, Morgan Stanley  and JP Morgan Chase.

 

The distribution of banks by state receiving funds non-surprisingly sees New York on top as home of most of the investment banks and many a commercial bank.  North Carolina, home of Bank of America comes a distant second.  California, one of the epicenters of the mortgage crisis, comes in first with the "distinction" of having the most banks receiving funds from the TARP; North Carolina and New York are second and third.  The following table provides a snapshot of the states whose banks have received the most aid.  The full list is available here.

 

	Total TARP Funds Disbursed ($ million)	Number of Institutions Receiving Funds
New York	175,026	23
Michigan	82,061	12
North Carolina	48,636	32
California	27,640	72
Pennsylvania	9,832	29
Ohio	7,840	17
Minnesota	7,084	16
Georgia	6,277	27
Illinois	4561	44
Virginia	4,174	26

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