Troubled Asset Relief Program: Few Participants Remain as Treasury Continues to Wind Down Capital Purchase Program
Published: 2017-03-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: CPP was established as the primary means of restoring stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, Treasury invested almost $205 billion in 707 eligible financial institutions between October 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. The Emergency Economic Stabilization Act of 2008, as amended, includes a provision that GAO report at least annually on TARP activities and performance. This report examines (1) the status of CPP, including repayments, investments outstanding, and number of remaining institutions; and (2) the financial condition of institutions remaining in CPP.
To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO reviewed information from Treasury officials to identify the agency's current efforts to wind down the program. Finally, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP.
GAO provided a draft of this report to Treasury for its review and comment. Treasury provided technical comments that GAO incorporated as appropriate.
section_title: What GAO Found
paragraphs: The Department of the Treasury (Treasury) continues to make progress winding down the Capital Purchase Program (CPP). As of December 31, 2016, investments outstanding stood at almost $0.2 billion (see figure), which represents about 0.1 percent of the original amount disbursed. Treasury had received almost $200 billion in repayments, including about $25 million in 2016. Further, Treasury's returns for the program, including repayments and income, totaled about $227 billion, exceeding the amount originally disbursed by almost $22 billion. Of the 707 institutions that originally participated in CPP, 696 had exited the program, including 6 institutions in 2016.
Treasury officials expect that the majority of the remaining institutions will require a restructuring to exit the program. Restructurings allow institutions to negotiate terms for their CPP investments. With this option, Treasury requires institutions to raise new capital or merge with another institution and Treasury agrees to receive cash or other securities, typically at less than par value. Treasury officials expect to rely primarily on restructurings because the overall weaker financial condition of the remaining institutions makes full repayment unlikely.
The financial condition of the institutions remaining in CPP as of December 31, 2016, appears to have improved since the end of 2011, but some institutions show signs of financial weakness. For example, 5 institutions had negative returns on average assets (a common measure of profitability) for the third quarter of 2016.

section_title: Letter
paragraphs: From October 2008 through December 2009, the Department of the  Treasury (Treasury) invested almost $205 billion in 707 financial  institutions through its Capital Purchase Program (CPP). This was the  first and largest initiative under the Troubled Asset Relief Program  (TARP)—a federal effort to help stabilize U.S. financial markets. The  Emergency Economic Stabilization Act of 2008 (EESA) gave Treasury the  authority to buy or guarantee up to $700 billion, later reduced to $475  billion, of the “troubled assets” that were believed to be at the heart of the  financial crisis, including mortgages, mortgage-backed securities, and  certain other financial instruments. Under this authority, in October 2008  Treasury created CPP to provide capital to viable financial institutions by  purchasing preferred shares and subordinated debt. In return for its  investments, Treasury received dividend or interest payments and  warrants. The program was closed to new investments on December 31,  2009. Since then, Treasury has continued to oversee and divest its CPP  investments, collect dividend and interest payments, and sell warrants.
EESA, as amended, includes a provision that GAO report at least  annually on TARP activities and performance. We have been monitoring,  analyzing, and providing updates on TARP programs, including CPP, in  response to this provision. This report examines (1) the status of CPP,  including repayments, investments outstanding, and number of remaining  institutions; and (2) the financial condition of institutions remaining in  CPP.
To assess the status of CPP, we analyzed data from Treasury. In  particular, we used Treasury’s December 2016 Monthly Report to  Congress to determine the dollar amounts of outstanding CPP  investments and the number and geographical distribution of remaining  participants as of December 31, 2016. We used data from Treasury’s  December 2016 Cumulative Dividends, Interest, and Distributions report  to determine the number of institutions that had missed dividend  payments. We determined that the financial information used in these  reports is sufficiently reliable to assess the status of CPP based on the  results of our audits of fiscal years 2009 through 2016 financial  statements for TARP. As part of the financial statement audits, we tested  Treasury’s internal controls over financial reporting. To identify Treasury’s  current efforts to wind down CPP, we reviewed information from Treasury  officials knowledgeable about the agency’s efforts.
To assess the financial condition of the 11 institutions that remained in  CPP as of December 31, 2016, we analyzed financial and regulatory data  from SNL Financial, which provides comprehensive regulatory financial  data on financial institutions. For example, we compared various  indicators of financial health, such as return on average assets and  reserves to nonperforming loans. Previous GAO studies assessed the  reliability of these SNL data by testing required data elements, reviewing  information about the data and the system that produced them, and  interviewing SNL officials. We relied on these prior data reliability  assessments and determined that the financial information we used is  sufficiently reliable for this report. We also leveraged our past reporting on  TARP to inform our assessments of the financial institutions.
We conducted this performance audit from November 2016 to March  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Treasury created CPP to help stabilize the financial markets and banking  system by providing capital to qualifying regulated financial institutions  through the purchase of preferred shares and subordinated debt. Rather  than purchasing troubled mortgage-backed securities and whole loans, as  initially envisioned under TARP, Treasury used CPP investments to  strengthen the capital levels of financial institutions. Treasury determined  that strengthening capital levels was the more effective mechanism to  help stabilize financial markets, encourage interbank lending, and  increase confidence in the financial system. On October 14, 2008,  Treasury allocated $250 billion of the original $700 billion, later reduced to  $475 billion, in overall TARP funds for CPP. In March 2009, the CPP  allocation was reduced to $218 billion to reflect lower estimated funding  needs, as evidenced by actual participation rates. On December 31,  2009, the program was closed to new investments.
Institutions participating in CPP entered into securities purchase  agreements with Treasury. Under CPP, qualified financial institutions  were eligible to receive an investment of 1 percent to 3 percent of their  risk-weighted assets, up to $25 billion. In exchange for the investment,  Treasury generally received preferred shares that would pay dividends.  As of the end of 2014, all the institutions with outstanding preferred share  investments were required to pay dividends at a rate of 9 percent, rather  than the 5 percent rate that was in place for the first 5 years after the  purchase of the preferred shares. EESA requires that Treasury also  receive warrants to purchase shares of common or preferred stock or a  senior debt instrument to further protect taxpayers and help ensure  returns on the investments. Institutions are allowed to repay CPP  investments with the approval of their primary federal bank regulator, and  after repayment, institutions are permitted to repurchase warrants on  common stock from Treasury.
section_title: CPP Proceeds Surpass Original Investments and Almost All Institutions Have Exited Program
paragraphs: Treasury continues to make progress winding down CPP. As of  December 31, 2016, Treasury had received repayments and sales of  original CPP investments for more than 97 percent of its original  investment. For the life of the program, repayments and sales totaled  almost $200 billion (see fig.1). In 2016, institutions’ repayments totaled  about $25 million. Moreover, as of December 31, 2016, Treasury had  received about $227 billion in returns, including repayments and income,  from its CPP investments, which exceeds the amount originally disbursed  by almost $22 billion. Income from CPP totaled about $27 billion, and  included about $12 billion in dividend and interest payments, almost $7  billion in proceeds in excess of costs, and about $8 billion from the sale of  warrants. After accounting for write-offs and realized losses from sales  totaling about $5 billion, CPP had about $0.2 billion in outstanding  investments as of December 31, 2016. Investments outstanding  represent about 0.1 percent of the amount Treasury disbursed for CPP.
Treasury’s most recent estimate of lifetime income for CPP (as of Sept.  30, 2016) was about $16 billion.
As of December 31, 2016, 696 of the 707 institutions that originally  participated in CPP had exited the program (see fig. 2). A total of 6  institutions exited CPP in 2016. Among the institutions that had exited the  program, 262 repurchased their preferred shares or subordinated  debentures in full. Another 165 institutions refinanced their shares  through other federal programs. In addition, 190 institutions had their  investments sold through auction, 43 institutions had their investments  restructured through non-auction sales, and 32 institutions went into  bankruptcy or receivership. The remaining 4 merged with other CPP  institutions.
The method by which institutions have exited the program has varied over  time. From 2009 through 2011, a total of 336 institutions exited the  program. During this 3-year period, most institutions exited by fully  repaying the investment or by refinancing the investment through another  program. From 2012 through 2016, a total of 360 institutions exited the  program. During this 5-year period, most institutions exited by Treasury  selling the investment through an auction, repaying the investment to  Treasury, or restructuring the investment.
Repayments. Repayments allow financial institutions to redeem their  preferred shares in full. Institutions have the contractual right to  redeem their shares at any time provided that they receive the  approval of their primary regulator(s). Institutions must demonstrate  that they are financially strong enough to repay the CPP investments  to receive regulatory approval to proceed with a repayment exit. As of  December 31, 2016, 262 institutions had exited CPP through  repayments.
Restructurings. Restructurings allow troubled financial institutions to  negotiate new terms or discounted redemptions for their CPP  investment. Treasury requires institutions to raise new capital from  outside investors (or merge with another institution) as a prerequisite  for a restructuring. With this option, Treasury receives cash or other  securities that generally can be sold more easily than preferred stock,  but the restructured investments sometimes result in recoveries at  less than par value. According to Treasury officials, Treasury  facilitated restructurings as an exit from CPP in cases where new  capital investment and the redemption of the CPP investment by the  institutions otherwise was not possible. Treasury officials said that  they approved the restructurings only if the terms represented a fair  and equitable financial outcome for taxpayers. Treasury completed 43  such restructurings through December 31, 2016.
Auctions. Auctions allow Treasury to sell its preferred stock  investments in CPP participants. Treasury conducted the first auction  of CPP investments in March 2012, and has continued to use this  strategy to sell its investments. As of December 31, 2016, Treasury  had conducted a total of 28 auctions of stock from 190 CPP  institutions. Through these transactions, Treasury received over $3  billion in proceeds, which was about 80 percent of the investments’  face amount. As we have previously reported, thus far Treasury has  sold investments individually but noted that combining smaller  investments into pooled auctions remained an option. Whether  Treasury sells CPP investments individually or in pools, the outcome  of this option will depend largely on investor demand for these  securities and the quality of the underlying financial institutions.
As of December 31, 2016, 11 institutions remained in CPP (see fig. 3).  The largest outstanding investment, about $125 million, accounted for  almost two-thirds of the outstanding CPP investments. The investments  at the 10 other institutions ranged from about $1.5 million to $17 million.
As figure 4 illustrates, Treasury’s original CPP investments were  scattered across the country in 48 states and Puerto Rico and the amount  of investments varied. Almost 4 percent (25) of the investments were  greater than $1 billion and almost half (314) of the investments were less  than $10 million. The largest investment totaled $25 billion and the  smallest investment totaled about $300,000. The 11 institutions that  remained in CPP as of December 31, 2016 were in Arkansas, California  (2), Colorado, Florida, Kentucky, Maryland (2), Massachusetts, Missouri,  and Puerto Rico.
Treasury officials said that they expect the majority of the remaining  institutions will require a restructuring to exit the program in the future  because the overall weaker financial condition of the remaining  institutions makes full repayment unlikely. However, they added that  repayments, restructurings, and auctions all remain possible exit  strategies for the remaining CPP institutions.
Since we last reported in May 2016, Treasury continues to maintain its  position of not fully writing off any investments. Treasury officials  anticipate that the current strategy to restructure the remaining  investments will result in a better return for taxpayers. According to  officials, any savings achieved by writing off the remaining CPP assets  and eliminating administrative costs associated with maintaining CPP  would be limited, because much of the TARP infrastructure, such as staff  resources, will remain intact for several years to manage other TARP  programs. Treasury officials also noted that writing off the remaining  assets, thereby not requiring repayment from the remaining institutions,  would be unfair to the institutions that have already repaid their  investment and exited the program. Treasury officials told us that they  continue to have discussions with institutions about their plans to exit the  program.
section_title: Overall Financial Condition of Remaining CPP Institutions Has Improved but Some Show Signs of Financial Weakness
paragraphs: Overall, the financial condition of institutions remaining in CPP as of  December 31, 2016, appears to have improved since the end of 2011.  As shown in figure 5, the median of all six indicators of financial condition  that we analyzed improved from 2011 to September 30, 2016. However,  some institutions show signs of financial weakness.
As figure 5 illustrates, the median for the first three financial condition  indicators—Texas ratio, noncurrent loan percentage, and net chargeoffs  to average loans ratio—have decreased, which indicates stronger  financial health. The median for the remaining three financial condition  indicators—return on average assets, common equity Tier 1 ratio, and  reserves to nonperforming loans—have increased, which also indicates  stronger financial health.
However, some institutions show signs of financial weakness. For  example, 5 of the 11 institutions had negative return on average assets  for the third quarter of 2016. Six institutions had a lower return on average  assets for the third quarter of 2016, compared to the third quarter of 2011.  The remaining institutions also had varying levels of reserves for covering  losses, as measured by the ratio of reserves to nonperforming loans.  For example, 4 institutions had lower levels of reserves for covering  losses for the third quarter of 2016 compared to the third quarter of 2011.  For 1 institution, four of the financial indicators had weakened from the  third quarter of 2011 to the third quarter of 2016. Treasury officials stated  that the remaining CPP institutions generally had weaker capital levels  and poorer asset quality relative to institutions that had exited the  program. They noted that this situation was a function of the life cycle of  the program, because stronger institutions had greater access to new  capital and higher earnings and were able to exit, while the weaker  institutions had been unable to raise the capital or generate the earnings  needed to exit the program.
Of the remaining 11 CPP institutions as of December 31, 2016, 1 of the 9  required to pay dividends made the most recent scheduled dividend or  interest payment. The 8 institutions that are delinquent have missed an  average of 28 quarterly dividend payments, with 19 being the fewest missed payments and 32 being the most. Institutions can choose  whether to pay dividends and may choose not to pay for a variety of  reasons, including decisions they or their federal or state regulators make  to conserve cash and capital. However, investors may view an  institution’s ability to pay dividends as an indicator of its financial strength  and may see failure to pay as a sign of financial weakness.
Treasury officials told us that Treasury regularly monitors all institutions  remaining in the program. For example, Treasury’s financial agent has  provided quarterly valuations and credit reports for all of the institutions  remaining in the CPP portfolio. In addition, Treasury has requested to  attend the Board of Directors meetings at nine of the remaining  institutions and has observed meetings at eight institutions. One  institution has declined Treasury’s request. Treasury officials said that  the agency currently does not plan to take any other actions with respect  to its request to send a board observer to that institution but will continue  to monitor the institution’s financial condition. As discussed previously,  Treasury officials told us that they have continued to have discussions  with institutions remaining in the program.
section_title: Agency Comments
paragraphs: We provided Treasury with a draft of this report for review and comment.  Treasury provided technical comments that we have incorporated as  appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Treasury, and other interested parties.  In addition, this report will be available at no charge on the GAO website  at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report.
section_title: Appendix I: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Karen Tremba (Assistant  Director), Anne Akin (Analyst-in-Charge), William R. Chatlos, Lynda  Downing, Risto Laboski, John Mingus, Tovah Rom, Jena Sinkfield, and  Tyler Spunaugle have made significant contributions to this report.