Treasury Announces TARP Funds to Assist Non-Bank Financial Institutions
Treasury Secretary Hank Paulson today announced the Treasury Department will assist nonbank financial institutions with Troubled Asset Relief Program (TARP) funds and that the department will not use any funds for the original stated purpose of the program—the purchase of troubled assets from banks. The announcement of his intention to provide assistance to nonbank institutions represents a new step for Paulson. In making the announcement, the Secretary acknowledged that Treasury has not worked through the issue of funding organizations that are not federally regulated, however they are “designing further strategies for building capital in financial institutions,” and he said, “We will also consider capital needs of non-bank financial institutions not eligible for the current Capital Purchase Program.” He focused his remarks on the importance of shoring up the asset-backed securitization market by working with the Federal Reserve to develop a liquidity facility for AAA securities. Paulson acknowledged the need to “get lending going again,” and said, “While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.”
The accompanying announcement that Treasury does not intend to use TARP funds to purchase troubled assets as originally planned was a surprise to most observers. Paulson said he would seek to address the liquidity issues in the mortgage finance market by making additional capital available to banks if those funds were matched with private capital.
Congress originally authorized $700 billion for the TARP, and Treasury continues to modify the spending strategy around it. Thus far, the department has set aside $250 billion for the Capital Purchase Program (CPP), which will infuse banks with money in exchange for federal ownership shares. Treasury has committed another $40 billion to purchase shares of troubled insurance giant AIG. For the remaining $410 billion under the TARP, Paulson said the money would be used to accomplish three critical priorities:
- reinforce the stability of the financial system, which may include giving capital to nonbanks
- support consumer access to credit outside of the banking system, targeting credit cards, auto loans, and student loans
- reduce the risk of foreclosure.
(See the below chart to see how the TARP money has been allocated thus far.)
Paulson’s third priority was largely addressed yesterday in a joint announcement with the Federal Housing Finance Agency, the Federal Housing Authority, Fannie Mae, Freddie Mac, and the private sector alliance HOPE NOW, wherein they unveiled a new “streamlined loan modification program” (SMP). The program targets homeowners who have missed three or more mortgage payments on their primary residence; have not filed for bankruptcy; can show that financial hardship or changed circumstances have caused them to fall behind in payments; and have a current loan-to-value ratio of 90 percent or higher. The SMP allows loan servicers to reduce monthly mortgage payments by reducing the interest rate; extending the life of the loan (to 40 years); and/or deferring payment on the principal. The new, reduced monthly payment must not exceed 38 percent of a borrower’s gross monthly income. Fannie Mae and Freddie Mac will soon issue SMP guidance to mortgage servicers, who must agree to participate by December 15 and will receive $800 for every loan modified through this program.
When questioned specifically about the auto industry’s eligibility, the Secretary acknowledged the industry’s importance, but decisively maintained that TARP assistance is limited to the financial industry.
Use of TARP Funds as of 11/12/08:
|
Citigroup |
$25 billion |
|
JPMorgan |
$25 billion |
|
Wells Fargo |
$25 billion |
|
Bank of America |
$15 billion |
|
Merrill Lynch |
$10 billion |
|
Goldman Sachs |
$10 billion |
|
Morgan Stanley |
$10 billion |
|
PNC Financial Services |
$7.7 billion |
|
Capital One Financial |
$3.55 billion |
|
Regions Financial |
$3.5 billion |
|
SunTrust Banks |
$3.5 billion |
|
Fifth Third Bancorp |
$3.45 billion |
|
BB&T Corp |
$3.1 billion |
|
Bank of New York Mellon |
$3 billion |
|
KeyCorp |
$2.5 billion |
|
Comerica |
$2.25 billion |
|
State Street Corp |
$2 billion |
|
Marshall and Ilsley |
$1.7 billion |
|
Northern Trust Corp |
$1.5 billion |
|
Huntington Bancshares |
$1.4 billion |
|
Zions Bancorp |
$1.4 billion |
|
First Horizon National |
$866 million |
|
City National Corp |
$395 million |
|
Valley National Bancorp |
$330 million |
|
UCBH Holdings Inc |
$298 million |
|
Umpqua Holdings Corp |
$214 million |
|
Washington Federal |
$200 million |
|
First Niagara Financial |
$186 million |
|
HF Financial Corp |
$25 million |
|
Bank of Commerce |
$17 million |
|
Total: |
$160.1 billion |
