Troubled Asset Relief Program: Capital Purchase Program Largely Has Wound Down
Published: 2016-05-06T00:00:00

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 includes a provision that GAO report at least every 60 days on TARP activities. This report examines (1) the status of CPP, (2) the financial condition of institutions remaining in the program, and (3) Treasury's strategy for winding down the program.
To assess the program's status, GAO reviewed Treasury reports on the status of CPP. In addition, GAO used financial and regulatory data to assess the financial condition of institutions remaining in CPP. Finally, GAO interviewed Treasury officials to examine the agency's exit strategy for the program.
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 Capital Purchase Program (CPP) largely has wound down and the Department of the Treasury's (Treasury) returns on CPP investments surpassed the original amount disbursed. As of February 29, 2016, Treasury had received $226.7 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by almost $22 billion. As of the same date, 16 of the 707 institutions remained in the program. Treasury's most recent estimate of lifetime income for CPP (as of Nov. 30, 2015) was about $16 billion.
Most of the remaining CPP institutions have continued to exhibit signs of financial weakness. Specifically, 9 of the 16 institutions had negative returns on average assets (a common measure of profitability) in 2015. Also, 6 institutions had a lower return on assets in 2015 than they did at the end of 2011. Treasury officials stated that the remaining CPP firms generally had weaker capital levels and worse asset quality than firms that had exited the program. Also, nearly all the firms that are required to pay dividends have continued to miss payments.
Treasury expects most remaining CPP institutions to exit through restructurings but has not set time frames for winding down the program. Over the past 6 years, repayment of Treasury's investment and Treasury's auction of CPP securities to interested investors were the primary means by which institutions exited CPP. Restructurings—the expected exit method for the remaining firms—allow institutions to negotiate terms for their investments and require institutions to raise new capital or merge with another institution. With this option, Treasury agrees to receive cash or other securities, typically at a discount. Treasury officials expect to rely primarily on restructurings because the overall financial condition of the remaining institutions makes full repayment unlikely.

section_title: Letter
paragraphs: From October 2008 through December 2009, the Department of the  Treasury (Treasury) invested almost $205 billion in 707 financial  institutions as part of federal efforts to help stabilize U.S. financial  markets. The investments were made through the Capital Purchase  Program (CPP), the first and largest initiative under the Troubled Asset  Relief Program (TARP). 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 includes a provision that GAO report at least every 60 days 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 and other proceeds, as well as investments outstanding; (2)  the financial condition of institutions remaining in CPP; and (3) Treasury’s  strategy for winding down the program.
To assess the status of CPP, we analyzed data from Treasury. In  particular, we used Treasury’s February 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 February 29, 2016. We used data from Treasury’s  February 2016 Cumulative Dividends, Interest and Distributions report to  determine the amount of dividends paid and the number of institutions  that had made full repayments. We determined that the financial  information used in this report is sufficiently reliable to assess the status  of CPP based on the results of our audits of the financial statements for  TARP (from fiscal years 2009 through 2015). As part of the financial  statement audits, we tested Treasury’s internal controls over financial  reporting. To assess the financial condition of the 16 institutions that  remained in CPP as of February 29, 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. We assessed the  reliability of SNL Financial data for previous studies by testing required  data elements, reviewing existing information about the data and the  system that produced them, and interviewing SNL officials. We  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. To determine Treasury’s  strategy to exit CPP, we interviewed Treasury officials knowledgeable  about the agency’s strategy.
We conducted this performance audit from January 2016 to May 2016 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: CPP was created 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 allocation  was reduced to reflect lower estimated funding needs, as evidenced by  actual participation rates. On December 31, 2009, the program was  closed to new investments.
Under CPP, qualified financial institutions were eligible to receive an  investment of 1–3 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 in  place for the previous 5 years. 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 Largely Has Wound Down and Program Income Surpassed Original Investments
paragraphs: Treasury largely has wound down its CPP investments, and as of  February 29, 2016, had received $226.7 billion in repayments and income  from its CPP investments, exceeding the amount originally disbursed by  almost $22 billion. The repayments and income amounts included almost  $200 billion in repayments and sales of original CPP investments, as well  as about $12 billion in dividends and interest, almost $7 billion in  proceeds in excess of costs, and about $8 billion from the sale of  warrants (see fig.1). After accounting for write-offs and realized losses  from sales totaling about $5 billion, CPP had almost $0.3 billion in  outstanding investments as of February 29, 2016. Treasury’s most  recent estimate of lifetime income for CPP (as of Nov. 30, 2015) was  about $16 billion.
As of February 29, 2016, 16 of the 707 institutions that originally  participated in CPP remained in the program (see fig. 2). Of the 691  institutions that had exited the program, 261 repurchased their preferred  shares or subordinated debentures in full. Another 165 institutions  refinanced their shares through other federal programs, 28 through the  Community Development Capital Initiative (CDCI) and 137 through the  Small Business Lending Fund (SBLF), another Treasury fund that was  separate from TARP. An additional 190 institutions had their  investments sold through auction, 39 institutions had their investments  restructured through non-auction sales, and 32 institutions went into  bankruptcy or receivership. The remaining 4 merged with other  institutions.
As shown in figure 3, as of February 29, 2016, the remaining $257.1  million in outstanding CPP investments was concentrated in half of the  remaining 16 institutions. The institutions with the eight highest amounts  of outstanding CPP investments accounted for 88 percent ($225.5 million)  of the outstanding investments, while one institution accounted for 49  percent ($124.97 million). The remaining $31.6 million (12 percent) was  spread among the other eight institutions.
section_title: Most of the Remaining CPP Institutions Continue to Exhibit Signs of Financial Weakness
paragraphs: Our analysis of financial condition metrics over the past 4 years indicates  that among the 16 institutions remaining in CPP as of February 29, 2016,  several have continued to face challenges. Although the median return  on average assets—a key indicator of a company’s profitability—was  higher in the fourth quarter of 2015 than in 2011, 9 of the 16 institutions  had negative returns in 2015. Furthermore, 6 of the 16 institutions had a  lower return on assets in 2015 than they did at the end 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, 6 of 15 institutions had lower levels of reserves for covering  losses in 2015 compared to 2011, while 9 institutions had higher levels.  Treasury officials stated that the remaining CPP institutions generally had  weaker capital levels and worse asset quality relative to institutions that  had exited the program. They noted that this situation was a function of  the lifecycle of the program, because stronger institutions had greater  access to new capital and were able to exit, while the weaker institutions  had been unable to raise the capital needed to exit the program.
Many of the remaining CPP institutions were on the “problem bank list” of  the Federal Deposit Insurance Corporation (FDIC) and most have been  delinquent on their dividend payments for several years. The problem  bank list contains banks with demonstrated financial, operational, or  managerial weaknesses that threaten their continued financial viability;  the number of problem banks is publicly reported on a quarterly basis.  Specifically, as of December 31, 2015, 11 of the then 17 remaining CPP  institutions (65 percent) were on FDIC’s problem bank list. The  percentage of remaining CPP institutions on the problem bank list is  higher than the number we reported for the previous 2 years: 47 of 83 (57  percent) in 2013 and 20 of 34 (59 percent) in 2014.
Of the 16 CPP institutions remaining as of February 29, 2016, 1 of the 14  required to pay dividends made the most recent scheduled dividend or  interest payment. The 13 institutions that are delinquent have missed an  average of 23 quarterly dividend payments, with the fewest missed  payments at 16 and the most missed payments at 29. Institutions can  elect 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 they regularly monitor and have direct and  substantive conversations with the remaining 16 institutions, including  discussions about their plans to exit the program.
section_title: Treasury Expects Most Remaining Institutions to Exit through Restructurings
paragraphs: Treasury officials expect most of the remaining CPP institutions to exit  through restructurings but do not have a specific end date for exiting all  their CPP investments and winding down the CPP program. EESA does  not require Treasury to set a specific date on which the program will  expire. Although Treasury has not changed its exit strategy, which  consists of repayments, restructurings, and auctions, the extent to which  each approach has been used has shifted over time.
Repayments. Repayments allow financial institutions, with the  approval of their regulators, to redeem their preferred shares in full.  Institutions have the contractual right to redeem their shares at any  time. As of February 29, 2016, 261 institutions had exited CPP  through repayments. Institutions must demonstrate that they are  financially strong enough to repay the CPP investments to receive  regulatory approval to proceed with a repayment exit.
Restructurings. Restructurings allow troubled financial institutions to  negotiate new terms or discounted redemptions for their investments.  Raising new capital from outside investors (or a merger) is 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 are sometimes sold  at a discount to par value. According to Treasury officials, Treasury  facilitated restructurings as an exit from CPP in those cases in which  new capital investment and 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 39  such restructurings through February 29, 2016.
Auctions. Treasury conducted the first auction of CPP investments in  March 2012, and has continued to use this strategy to sell its  investments. As of February 29, 2016, Treasury had conducted a total  of 28 auctions of stock from 190 CPP institutions. Through these  transactions, Treasury received about $3 billion in proceeds, which  was about 80 percent of the investment’s face amount. As we  previously reported, Treasury has sold investments individually to  date, but noted that combining smaller investments—into pooled  auctions—remained an option. Whether Treasury sells stock  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.
The method by which institutions have exited the program has varied over  time. As shown in figure 4, from 2009 through 2011, the majority of  institutions exiting CPP did so through repayment or refinancing their  shares through CDCI and SBLF. From 2012 to 2014, auctions were the  predominant exit strategy. During that same period, restructurings also  increased. For example, in 2012, 4 percent of exits (7 of 159) were  restructurings. In 2014, 15 percent (8 of 52) used restructuring as an exit  strategy. In 2015, restructurings remained a common strategy,  representing 35 percent (6 of 17) of exits, while auctions dropped from 44  percent (23 of 52) in 2014 to 29 percent (5 of 17) in 2015.
Treasury officials told us they expected restructurings to be the primary  exit strategy in the future, but as noted earlier, auctions remain a possible  exit strategy. Treasury expects to rely on restructurings and auctions  because the overall financial condition of the remaining institutions makes  full repayment unlikely. At this time, Treasury does not have any plans to  fully write off any investments. Treasury officials anticipate that the  current strategy to restructure or auction 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 costs  associated with maintaining CPP would be limited, because much of the  TARP infrastructure will remain intact for several years to manage other  TARP programs. Treasury officials also noted that writing off the  remaining assets could be seen as diminishing the equitable treatment of  institutions across the program. That is, writing off the remaining assets,  (and thereby not requiring repayment from the remaining institutions)  would be unfair to the institutions that already had repaid their investment  and exited the program.
section_title: Agency Comments
paragraphs: We provided Treasury with a draft copy 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. This report will be available at no charge on our 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 Acknowledgments
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), Bethany Benitez, William R.  Chatlos, Lynda Downing, Risto Laboski, Marc Molino, Barbara  Roesmann, Christopher Ross, and Max Sawicky have made significant  contributions to this report.