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TARP Turns Five

By: Kari English

It was five years ago that the Treasury created the Troubled Asset Relief Program and the Capital Purchase Program to provide funding to banks in an effort to stabilize the economy. For those institutions still in the TARP CPP, however, the occasion probably does not offer much to celebrate.

If you remember, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. In exchange, the Treasury received shares (usually senior preferred) that would pay dividends at a rate of 5 percent annually for the first five years and 9 percent annually thereafter — a provision the Treasury thought would incentivize institutions to pay off their TARP obligations within five years. It was a nice idea, but, as with most things, it did not quite work out as hoped.

A total of 707 institutions decided to participate in the TARP CCP between October 2008 and December 2009, and the Treasury invested almost $205 billion in those institutions. The Treasury still holds stakes in 108 of those institutions, it stated in its September monthly report to Congress.

Nevertheless, as of Sept. 30, the Treasury claimed to have recovered almost $225 billion from CPP through repayments, dividends, interest and other income — more than the initial amount invested.
A significant amount of money is still owed to taxpayers, however, according to the Office of the Special Inspector General for the Troubled Asset Relief Program. In its most recent quarterly report to Congress, as of June 30 a total of $8.9 billion in CPP funds was still owed. According to SIGTARP, as of June 30 missed dividend and interest payments by 188 institutions totaled about $494.9 million. More than two-thirds, or 96 of the 142 banks that had remaining CPP principal investments as of June 30, were not current on their dividend and interest payments to the Treasury, SIGTARP stated in its report. The 96 banks were behind by as many as 18 payments and in total were overdue in payments to the Treasury of $256.3 million. Ninety-two of the banks with remaining principal investments were overdue by at least three payments, including 85 banks that were overdue by at least six payments.

The majority of the institutions left in the CPP are community banks. Of the 142 institutions remaining in the program, 53 of them have assets between $10 million to $100 million and 82 of them have assets less than $10 million. There are concerns that as the dividend rate increases more institutions will not be able to make their payments to the Treasury. Will these banks be able to repay the Treasury’s investment plus dividends in a timely manner? Or will I be writing another column in five years with the title, “TARP Turns 10?” Tweet your opinion to @BankNews_Media with the hashtag #TARP5. And for more details on the winding down of the TARP CPP, click the link below.

Happy Fifth Birthday TARP

Kari English is senior editor of BankNews.

Copyright (c) November 2013 by BankNews Media