Financial Reform Watch

Treasury Department officials confirmed overnight their plan to allocate the first $250 billion of the $700 billion financial rescue package not for the purchase of troubled assets, as originally contemplated, but to inject capital into nine of the nation's largest banks in exchange for preferred shares. Calling it the TARP Capital Purchase Program, President Bush is expected to certify today that the next $100 million of the plan is required for release per the provisions of the Emergency Economic Stabilization Act of 2008.

Here is how the funds will be distributed:

Citigroup $25 billion
JP Morgan Chase $25 billion
Bank of America $25 billion (including $5 billion for its Merrill Lynch acquisition)
Wells Fargo $25 billion (including $5 billion for its Wachovia acquisition)
Goldman Sachs $10 billion
Morgan Stanley $10 billion
Bank of New York $2-3 billion
Mellon Bank $2-3 billion
State Street Bank $2-3 billion
TOTAL $126 - 129 billion.

This leaves $221-224 billion unallocated from the funds available after the president's certification to release the next $100 million. While several reports indicate that smaller banks will soon be among those receiving funds from the program, there is no confirmation yet of how and when that would happen. The Treasury-issued summary of the senior preferred stocks and warrants program says the department will “determine eligibility and allocation for QFIs (qualified financial institutions) after consultation with the appropriate federal banking agency.” We anticipate the Office of Thrift Supervision and perhaps State Bank Supervisors may have roles in qualifying and running the program for smaller institutions, and we will continue to monitor for further developments related to "Main Street" banks.

The TARP Capital Purchase Program completes a pivot by the Bush Administration over the past four days in which they adopted an approach they had previously rejected. Perhaps predictably, congressional Democrats reacted with some concern last night because no information was available on whether Treasury had exacted the price for equity investment that some Democrats have wanted. Among the concessions they had suggested Treasury should obtain for such investments were limits on executive pay, a cessation of dividend payments, and a commitment that recipient banks would not use "exotic" investment instruments. The program details released thus far do include executive compensation restrictions, dividend restrictions, and numerous other terms and restrictions.

Also announced late Monday were two important actions by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s Temporary Liquidity Guarantee Program will insure loans between banks for a three-year period and will lift limitations on the amount of insurance in non-interest bearing accounts many companies use to manage their short-term operations. Not to be left out, the Federal Reserve announced it will begin its Commercial Paper Funding Facility Program (CPFF) on October 27, 2008. The CPFF will “provide a liquidity backstop to U.S. issuers of commercial paper” by purchasing eligible, three-month, unsecured and asset-backed commercial paper “from eligible issuers” using financing from the Federal Reserve Bank of New York.

More details of the CPFF and the TARP Capital Purchase Program can be downloaded here.