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

Letter

Background

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.

CPP Largely Has Wound Down and Program Income Surpassed Original Investments

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.

Most of the Remaining CPP Institutions Continue to Exhibit Signs of Financial Weakness

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.

Treasury Expects Most Remaining Institutions to Exit through Restructurings

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.

Agency Comments

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.

Appendix I: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.