_I.....

REGISTERED LOBBYIST CONTACT DISCLOSURE FORM

This form is to be completed by Executive Branch employees who are contacted by registered lobbyists regarding

EESA. This report includes a written description of each contact, the date and time ofthe contact, and the names

ofthe registered lobbyist(s) and the employee(s) with whom the contact took place. Written materials prepared

by registered lobbyists should be attached to this form for posting on the website. The information on this form will

be available to the public on Treasury's website.

To be completed by the employee contacted

Name of the Brief description of the communication: Date and time of contact: Employee(s) Contacted

(Name and Title) (attach separate sheet if necessary)

Tuesday, September Lori Bettinger Forwarding of a letter sent to Sec. Geithner

22, 2009 10:00 AM Deputy Director. Equity encouraging Treasury to implement the Capital

Program Assistance Program in a way that helps community

banks

Ted Schaffner

Director. Equity Program

Name of the Employee(s) who prepared this form: Oate

Lori Bettinger 9/24/09

Registered Lobbyist Name: Tille: Firm or Organization:, if Client

applicable

Senior Vice President American Bankers

Mark Tenhundfeld Association
AMERICAN

BANKERS

ASSOCIATION ii'

IFor/d-Class Solutions,

Leadership & Advoca~y

Since 1875

Arthur C. Johnson

Chairman Elect, ABA &

Chairman and CI':O

United Bank of Michigan

Tel: 202-663-5017

Fax: 202-663-7533

ajohnson@aba.com

1120 Connecticut Avenue, NW

Washington, DC 20036

1-800-BANKERS

~'W.aba.com

September 21, 2009

The Honorable Timothy Geithner

Secretary of the Treasury

U.S. Department ofthe Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20220

Dear Secretary Geithner:

Earlier this year, the American Bankers Association formed a task force to focus on

community bank solutions to the financial crisis. We appreciate the opportunity our

bankers had to meet with several Treasury representatives, and we appreciate

Treasury's recognition ofthe vital role that community banks play in our fmancial

system. After those meetings as well as meetings with the bank regulators and

significant discussions internally, we have developed specific recommendations for

ways the existing Capital Assistance Program (CAP) could be modified to assist wellmanaged, viable community banks and therefore be more effective in achieving its

objectives. These recommendations may be summarized as follows:

• Invest up to $5 billion of Troubled Asset Relief Program (TARP) funds in

community banks that did not receive Capital Purchase Program (CPP)

funds;

• Limit the maximum CAP investment by Treasury in anyone bank to 5% of

the bank's risk-weighted assets;

• Require participating banks to issue Treasury senior preferred securities;

• Require participants to show that they have commitments from private

equity to match Treasury's investment dollar for dollar; and

• Allow any bank with total assets of $5 billion or less to apply but condition

approval upon the submission of an acceptable capital restoration plan.

Background and discussion. Strong capital is essential to helping community

banks work through the problems caused by declines in asset values. While

conditions have improved over the past year in the economy overall, many

community banks are finding that the lagging impacts of job losses and declines in

property values are negatively affecting these banks, causing declines in their capital

at a time when new capital often is hard to find.

This problem is compounded by the unintended consequences of policies that have

the effect ofsteering private investors to failed banks. For instance, the FDIC

announced in June that, while the Legacy Loans Program remained a viable program,

the agency intended to scale the program back at least initially to a pilot involving

failed banks. The FDIC announced last week that it had selected a winning bidder in

a sale of receivership assets and that the bidder would receive FDIC-guaranteed

financing. This, coupled with loss-sharing agreements used to entice buyers of failed
banks and failed bank assets, is creating incentives for investors to wait until a bank has failed before

investing.

Furthermore, the banking agencies are requiring many banks to raise capital at a time when sources

of capital are scarce and at precisely the time when capital should be available to absorb losses. This

can put these banks in an untenable position, precipitating the failure of a viable bank that has a

good franchise and could survive if capital was made available.'

The ABA recommends that Treasury modify the criteria for its CAP to assist viable community

banks that need help working through their current issues. \Ve propose that Treasury offer

assistance to those banks that did not qualify for CPP funds but that nevertheless can demonstrate

the ability to operate safely and soundly and survive if given the chance to obtain necessary capital.

This ability would be demonstrated in three ways.

• First, a bank would have to present evidence that private investors are contractually committed

to match Treasury's investment dollar for dollar.

• Second, the private investors would have to agree to receive securities that are subordinate to

Treasury's interests.

• Third, the bank would have to submit a capital restoration plan to its primary regulator that,

when factoring in the proposed investments by Treasury and private equity, satisfies the

requirements of the "Prompt Corrective Action" rules.' As part of that plan, the bank also

would have to show that it has adequate management to address its problems.

The suggested aggregate investment by Treasury of$5 billion is based on the amount of funds,

when matched by private equity on a dollar-for-dollar basis, needed to bring all insured depository

institutions with assets under $5 billion to capital levels equal to a Tier 1 risk-based capital ratio of

8% and a total risk-based capital ratio of 12% assuming the stressed scenarios used by the

banking regulators in the SCAP. These capital levels significantly exceed the thresholds

established by the banking regulators for a bank to be deemed "well capitalized'" under the Prompt

Correct Action rules and would provide a cushion that could enable participating banks to continue

meeting the credit needs of their communities without having to shrink to comply with minimum

regulatory capital requirements. A $5 billion commitment by Treasury is well below half ofthe

dividends and warrant repurchases received by Treasury from CPP participants' and less than 4% of

1 Further information about the role of community banks and the adverse impact that recent gove~mental actions have

had on these banks is discussed in Attachment A.

2 See 12 C.F.R. § 6.5 (Office of the Comptroller of the Currency); 12 C.F.R. § 208.44 (Board of Governors of the Federal

Reserve System); 12 C.F.R. § 325.104 (Federal Deposit Insurance Corporation); and 12 C.F.R. § 565.5 (Office of Thrift

Supervision).

3 For a bank to be "well capitalized" under the Prompt Corrective Action rules, it must have total risk~based capital of at

least 10%; Tier 1 risk-based capital of at least 6%; a leverage ratio of at least 5%; and not be subject to a written

requirement to meet a specific capital level.

4 'The dividends paid on those [CPP] investments and the repurchases ofwarrants we received for those investments

nOw total about $12 billion. For the 23 banks that have fully repaid, Treasury has earned an annualized average return of

roughly 17 percent!' Secretary of the Treasury Timothy F. Gcithner, Written Testimony before the Congressional

Oversight Panel, September 10, 2009 (available at hun:! !\\'\\-"\v.ustreas.gov/press/releases/tg283.htm).

2
the total of CPP funds invested to date.' Our projections show that an estimated 2,000 community

banks would be potentially eligible (see Attachment B), although it is highly unlikely that all 2,000

would choose to, or be approved to, participate.

As noted above, this program would involve matching investments by private equity investors. It is

important that private equity qualify regardless ofwhether it comes from existing shareholders or

new investors. Either way, the bank is receiving a strong vote of confidence in its viability from

stakeholders who stand to lose their investments. Moreover, current investors and management

often are in the best position to judge the prospects of a bank and to determine the advisability of

investing in that bank.

We believe that, as a general matter, Treasury could adopt as many ofthe terms used in the CPP as

would be relevant. Thus, for instance, Treasury would receive the same sort of securities, subject to

the same conditions, as it has received through the CPP. To make this workable for community

banks, we propose two exceptions to this general approach, however. First, given that these funds

are intended for viable yet struggling community banks, we believe it would be appropriate for

Treasury to agree that any approved banks would not be expected to pay dividends in the first four

quarters following Treasury's investment. Second, we renew our request, first raised in the context

ofthe CPP,' that investments in S corporations and mutual institutions that do not have holding

companies be treated as Tier 1 capital. It is our understanding that these banks' interest in the CPP

was significandy diminished by the treatment of CPP investments as Tier 2 capital.

We very much appreciate your consideration ofthese recommendations. Community banks are the

backbone of our economy and are critical to the overall improvement of our economy. For a

nominal investment, Treasury can preserve viable community banks, which in turn would preserve

jobs and communities. As the former Comptroller Eugene Lud\vig wrote in an op-ed on Friday,

September 18, 2009 in the American Banker, "Now is the time for regulators to work with the wellmanaged community banks wherever possible to raise capital and dispose oftroubled assets.

Regulators must look for ways to help these institutions rather than find reasons to close them."

We would be happy to provide any further information or assistance that you would find helpful.

Sincerely,

ArthurJohnson

cc: The Hon. Sheila Bair, Chairman, Federal Deposit Insurance Corporation

The Hon. Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System

Mr. John Bowman, Acting Director, Office ofThrift Supervision

The Hon. John Dugan, Comptroller ofthe Currency

5 As reported on the Transactions Report for the period ending September 4, 2009, Treasury has invested slightly over

$134 billion through the CPP. See htlV:/ /w'W'\\'.financiaJstabilitv.gov/docs/transaction-reports/transactiailS

report 09092009.pdf.

(, See Letter f.rom Diane Casey-Landry to the Hon. Timothy F. Geithner, dated April 16, 2009.

3
- -Detroit (-45%)

Attachment A

Community banks are central to the economic well-being ofthe towns and communities they serve

across America, providing capital to consumers, small farms, and other small businesses that is

crucial for economic development. These banks have been in their communities for decades and

intend to be there for many decades to come. In fact, there are over 2,500 banks - representing

over 30 percent of the banking industry - that have been in business for more than a century; 62

percent (over 5,000) have been in existence for more than half a century. These numbers tell a

dramatic story about the staying power of community banks and their commitment to the

communities they serve.

The failure of a community bank can be devastating to its community. Not only do the bank's

employees often lose their jobs and the bank's shareholders lose their investments, the town's

businesses lose a vital source of credit and a vicious cycle begins. As credit constricts, businesses

that depend on financing are unable to expand or, in many instances, even operate. More jobs are

lost, causing more people to default on loans with other banks in the community. Property values

plummet as residential and commercial properties that served as collateral for the loans are dumped

on the market. Surviving banks then are forced to write down the value of the collateral on

performing loans, the banks' conditions worsen, and the spiral continues downward.

The precipitous declines in real estate values across the country underlie many community banks'

problems. In some ofthe harder hit areas such as Phoenix, Miami, Detroit, and San Francisco the

drops have been devastating to community banks. As the following chart shows, homes in these

cities have lost between 43% and 54% oftheir value in the past few years.

Dramatic Drop in Metro Housing Prices

Percent Decline from Price Peak in Metro Market

..... Phoenix (-54%) --·Miami (-48%)

-San Francisco (-43%) -National (-30%J

0%

----- '~; 12006 "'OO7··••.~" 2008 2009

-10%1 - , _ :':::~<,."

20% ! ...,~~\~

- 1

1

"t'~, .~,~-

-30% .....~~~:~:~~, "

........."''- " 40% j ••••".,;;;,~, " 'I .'....~~ " ". ,.-~~

-50% II ~~~.~.~:

-60%

Source: S&PjCase-Shiller Home Price Index! June 2009

Unfortunately there are many other cities experiencing similar declines in home prices, and banks in

these communities face unprecedented pressures on asset quality and collateral values.
The sudden and dramatic declines in property values caught policymakers and bankers alike off

guard. Typical of the perceptions at the onset of what became a crisis were the views expressed by

Federal Reserve Board Chairman Bernanke, who stated in a speech in May 2007 -

[Gjiven the fundamental factors in place that should support the demand for housing, we

believe the effect of the troubles in the subprime sector on the broader housing market will

likely be limited, and we do not expect significant spillovers from the subprime market to the

rest ofthe economy or to the financial system.'

It is no surprise that many institutions continued to provide loans to consumers and businesses.

While we have heard from many banks about their efforts to uphold underwriting standards in the

face ofmarket pressures to fund ever more projects, none have been immune to the extraordinary -

and extraordinarily swift - decline in asset values.

Governmental actions in addition to the ones noted in the accompanying letter bave exacerbated

community banks' problems and in so doing have made it harder for them to raise capital. For

instance:

• The decision to place Fannie Mae and Freddie Mac into receivership caused a sudden and

unexpected loss of billions of dollars to the banks that held shares of Fannie's and Freddie's

stock.2

• The serial implementation ofthe Capital Purchase Program (CPP) meant that the

applications of many non-public financial institutions were not considered until further into

the recession.' As a result, banks that perhaps would have qualified for CPP funds early in

the process were denied the opportunity to participate once a deteriorating economy started

to adversely affect the banks' condition.

• The government's investment of billions of dollars in the largest financial institutions has

improved the competitive position ofthese institutions, making it easier for them to raise

capital and issue debt. However, the relative condition of many of the community banks

that did not receive CPP funds has looked worse as a result.

• The government's treatment of "reciprocal deposits"4 as brokered significantly impedes

many community banks' ability to compete with larger banks for deposits. As explained in a

1 Chairman Ben S. Bemanke, at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and

Competition, Chicago, Illinois, ~'fay 17, 2007.

2 We notc that the banking agencies proposed, but have not yet finalized, a lowering ofthe risk weight of claims on, or

guaranteed by, Fannie Mae and Freddie Mac. 73 Fed. Reg. 63656 (Oct. 27, 2008). Lowering the risk weights for all

Government Sponsored Enterprise debt and guarantees would provide significant relief to affected banks.

3 The term sheets were issued on the following dates: 10/14/08 for publicly traded institutions~ 11/17/08 for 000-

publicly traded institutions (excluding S corporations and mutual institutions); 1/14/09 for S corporations; 4/7/09 for

mutual holding companies; and 4/17/09 for stand-alone mutual depository institutions.

4 These deposits are available to customers of banks that are members of a group ofinsured depository institutions,

where each member ofthe group sets the interest rate to be paid on the entire amount of funds it places with other
letter from the ABA to the FDIC regarding reciprocal deposits offered by Promontory

Interfinancial Network, these deposits exhibit the characteristics of "core" funding.'

Notwithstanding these characteristics, the current statute governing brokered deposits, as

implemented by the FDIC, creates instabiliry in an othetwise very stable source of funding.

• Many of the programs to date have not helped struggling community banks. In addition to

the issues noted above with the CPP and to the issues with the Legacy Loans Program

discussed in the letter accompanying this attachment, we note the following:

o The Legacy Secutities Program has yet to result in a single transaction.

o The Capital Assistance Program (CAP) has not been used to fund any institution.

o The stress test conducted as part of the CAP served to bolster confidence in the

largest 19 banks but had the unintended consequence of causing questions to be

raised about the stability ofsmalIer banks.

o The CPP treatment ofinvestments in stand-alone S corporations and mutual

institutions as Tier 2 capital made that capital of considerably less value to those

banks.

o Some community banks that sought to participate in the Term Auction Facility have

been denied the opportunity.

There are discrete aetions the government ean take to assist viable community banks to stop this

downward spiral. The success of many local economies - and, by extension, the success of the

broader national economy - depends in large part on the success of these banks. The accompanying

letter outlines one such approach.

group members and then swaps deposits with other group members. Such an arrangement enables a bank to offer its

customers a convenient way to obtain FDIC insurance on large deposits by working solely with the bank with whom the

customer has a relationship. As a result, the bank is able to attract and retain large deposits without having to post

collateral, which in tum makes more funds available to meet the credit needs of the bank's community.

'; Letter from Edward L. Yingling to the Hon. Sheila Bair, dated]uly 29, 2008.
Attachment B

Q2 2009 Capital Analysis for Bank under $5 Billion in Assets

$ in 0005

Capital Thresholds

Tl-8%

TRBC -12%

# of Banks Below Threshold*

232

2,017

Amount of Capital to Reach Threshold

$2,352,917

$10,970,676

* Eliminated 17 banks with negative capital ratios

Source: FDIC Call Report Data, Q2 2009