Created in 2008, CPP was the primary initiative under TARP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of senior preferred shares and subordinated debt. Instead of purchasing troubled mortgage-backed securities and whole loans, as initially envisioned under TARP, Treasury used CPP investments to strengthen financial institutions’ capital levels. Treasury determined that strengthening capital levels was the more effective mechanism to help stabilize financial markets, encourage interbank lending, and increase confidence in lenders and investors. Treasury anticipated that strengthening the capital positions of the financial institutions would enhance confidence in the institutions themselves and the financial system overall and increase the institutions’ capacity to undertake new lending and support the economy. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion in overall TARP funds for CPP. The allocation was subsequently reduced in March 2009 to reflect lower estimated funding needs, as evidenced by actual participation rates. The program was closed to new investments on December 31, 2009. The Office of Financial Stability was established within Treasury to implement TARP in consultation with federal banking regulators. Under CPP, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. In exchange for the investment, Treasury generally received senior preferred shares that would pay dividends at a rate of 5 percent annually for the first 5 years and 9 percent annually thereafter. Treasury was also required to 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 afterward to redeem warrants. Nine major financial institutions were initially included in CPP because Treasury and the federal banking regulators considered them essential to the operation of the financial system.held about 55 percent of U.S. banking assets and provided a variety of services, including retail, wholesale, and investment banking and custodial and processing services. According to Treasury officials, the nine financial institutions agreed to participate in CPP in part to signal the program’s importance to the stability of the financial system. Initially, Treasury approved $125 billion in total capital purchases for these institutions and completed the transactions with eight of them on October 28, 2008, for a total of $115 billion. The remaining $10 billion was disbursed after the merger of Bank of America Corporation and Merrill Lynch & Co., Inc. was completed in January 2009. Treasury ultimately disbursed about $205 billion to 707 financial institutions through December 2009. Participating institutions began repaying their investments and exiting CPP in early 2009. At the time, these nine institutions In May 2012, Treasury announced a strategy to wind down its remaining investments. Treasury’s strategy includes three options that, according to Treasury officials, aim to protect taxpayer interests, promote financial stability, and preserve the strength of the nation’s community banks. Treasury’s options include (1) repayments, (2) restructurings, and (3) auctions. According to Treasury officials, Treasury conducts analyses to determine which option is most appropriate for a particular institution. Repayments allow financial institutions, with the approval of their regulators, to redeem their preferred shares in full. Treasury noted that institutions have the legal right to do this at any time. A majority of institutions have exited the program in this manner since 2009, and Treasury expected some financial institutions to continue to use it through late 2013. Under this option, Treasury’s ability to exit the program largely depends on the ability of institutions to repay their investments. In particular, institutions must demonstrate that they are financially strong enough to repay the CPP investments in order to receive regulatory approval to exit the program. Dividend rates will increase from 5 percent to 9 percent for remaining institutions beginning in late 2013, a development that may prompt institutions to repay their investments. If broader interest rates are low, especially approaching the dividend reset, the financial institutions could have further incentive to redeem their preferred shares. Treasury intends to continue using the repayment option for institutions that it believes are capable of redeeming all shares in full in the near future, but Treasury officials said that the number of such institutions was declining. Restructurings allow troubled financial institutions to restructure their investments, and all restructurings require new capital —for example, from a merger. With this option, Treasury receives cash or other securities that generally can be sold more easily than preferred stock, but Treasury’s investments are sometimes sold at a discount. As such, Treasury has used restructurings as a means of winding down CPP investments only on a limited basis. Although Treasury officials expect a limited number of restructurings to continue, they told us that they would approve the sales only if the terms represented the best deal for taxpayers. Auctions allow Treasury to sell its preferred stock. Treasury conducted the first auction of CPP investments in March 2012 and reported that it generated strong investor interest. Treasury also reported that this option could be beneficial for community banks that did not have easy access to the capital markets, because it could attract new, private capital to replace the temporary TARP support. Treasury expects this option to continue to be part of its effort to wind down CPP. Thus far, Treasury has sold investments individually but noted that it might combine other investments, particularly smaller investments, into pooled auctions. Unlike Treasury’s recent auctions of individual CPP preferred stock investments, in which multiple bidders were allocated portions of the preferred stock at a single clearing price, Treasury anticipates that the pooled auctions will result in a single highest bidder purchasing all of the securities included in the pool. Whether Treasury sells stock individually or in pools, the outcome of this option will depend largely on investor demand for these securities. In considering these options, we have previously noted that Treasury will need to balance the goals of protecting taxpayer-supported investments while expeditiously unwinding the program. Treasury officials said that they would continue to evaluate the CPP exit strategy but added that they expected to continue using these options for the foreseeable future. As of May 31, 2013, Treasury had received $222.6 billion in repayments and income, exceeding the $204.9 billion originally disbursed by almost $18 billion (see fig. 1). Further, 556 institutions had exited CPP as of May 31, 2013, including 212 institutions that exited by fully repaying their CPP investments, 128 that participated in auctions, and 165 that refinanced their investments through other federal programs. The $222.6 billion in total proceeds includes $193.5 billion in repayments; $2.4 billion in auction sales of original CPP investments; $18.9 billion in dividends, interest, and other income; and $7.9 billion in warrants sold. After accounting for write-offs and realized losses totaling $3.4 billion, CPP had $5.6 billion in outstanding investments as of May 31, 2013. Treasury has increasingly used the auction option after the first sale of CPP securities in March 2012 received investor interest. Through February 2012, 148 institutions had exited CPP by redeeming their preferred shares in full. As figure 2 shows, from March 2012—the month of Treasury’s first auction—through May 2013, 64 institutions exited by redeeming their investments while 128 institutions exited through 16 auctions. Each auction involved the sale of an institution’s outstanding CPP investment, also known as the par amount. In most cases, the final sales price for an institution’s shares was below the par amount. In particular, the $2.4 billion in total proceeds from the 16 auctions to date—from March 2012 through April 2013— represents 84 percent of the $2.9 billion principal investment in the institutions. For each round of auctions, the percentage of par amount that Treasury received ranged from 65 percent in the 12th auction to 93 percent in the 5th auction (see fig. 3). Out of all institutions that participated in these 16 auctions, final sales prices for individual institutions ranged from 17 percent to 131 percent of par. Treasury officials said that the auction results reflected the potential risk associated with the liquidity of the investment and the credit quality of the financial institutions, including their ability to make future dividend or interest payments, as well as the prospect of receiving previous missed payments that had accrued. For example, later auctions tended to include smaller institutions with more cumulative missed payments. In a few cases, the prospect of recouping these missed payments made them particularly attractive to investors and helped a number of institutions to sell shares at above their par value. Although Treasury has not generally recouped its full investment in individual institutions through the auctions, Treasury officials told us that accepting a discount and transferring ownership of these institutions to the private sector was in the best interest of the taxpayer. Because of the inherent risk factors of these institutions, Treasury officials did not believe that these institutions would be able to make full repayments in the near future. The officials added that had they chosen not to auction these positions, their values could have decreased later. Treasury officials also said that while auctions were generally priced at a discount to par, the prices were generally equal to or above Treasury’s internal valuations. According to representatives from some financial institutions that participated in the auctions, there are many reasons for seeking to exit CPP, including through the auction process. In particular, representatives from several institutions told us that compensation restrictions provided a strong incentive to exit. That is, as a condition of receiving TARP assistance, the financial institutions must meet a number of requirements related to incentive and bonus compensation arrangements for senior executive officers. Representatives from other institutions told us that there was a stigma associated with remaining in the program. As we have reported, Treasury officials said that the public’s negative opinion of TARP curtailed overall interest and participation in the program.