TARP Update: Geithner Outlines Administration’s Financial Stability Plan for "TARP II"

February 10, 2009

Today, U.S. Treasury Secretary Geithner presented a brief speech outlining the Administration’s framework for the next draw-down of $350 billion of the Troubled Asset Relief Program (TARP). This is an interim report summarizing that speech, with three key elements including: (1) creation of stress test; (2) expansion of TALF to as much as $1 trillion; and (3) public-private investment fund. In addition, the report below notes other issues pertaining to executive compensation, expansion of eligible TALF asset classes to CMBS, oversight and transparency measures, foreclosure mitigation, and regulatory reform, among other issues.

To recap, below are highlights of Geithner’s just-announced Financial Stability Plan:

Creation of "Stress Test" for CPP Program. Treasury will require financial institutions to go through a "stress test" to ensure the health of banks participating in the Capital Assistance Program (CPP). This forward-looking comprehensive "stress test" will entail an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected. Geithner noted that the Federal Reserve, FDIC, OCC, and OTS will coordinate on the "stress test" to bring an improved assessment of exposures on balance sheets. Further, the Treasury will require banking institutions with assets in excess of $100 billion to participate in the stress test.
Federal Reserve to Expand TALF Lending Program to As Much as $1 trillion. Geithner announced a joint initiative with the Federal Reserve to broaden existing resources of the Term Asset-Backed Securities Loan Facility (TALF). Geithner’s plan will increase the size by using $100 billion to leverage up to $1 trillion.
Federal Reserve to Expand TALF to Commercial Mortgage Backed Securities. According to a Treasury Fact sheet (though not discussed by Geithner in his speech), a Consumer & Business Lending Initiative will expand the initial reach of the TALF to also include commercial mortgage-backed securities (CMBS).
Public-Private Investment Fund of $400 Billion to $1 Trillion With Private Sector Pricing Mechanism. Geithner referenced the broad outline of a public-private investment fund to be coordinated by the FDIC, the Federal Reserve, the Treasury. According to a Fact Sheet, the new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion. Notably, under the program, valuation of assets will be determined by the private sector buyers purchasing the assets, such that the pricing of the assets will be determined by private sector.
Foreclosure Mitigation. Geithner indicated that Treasury will commit $50 billion to preventing foreclosures of owner-occupied middle class homes. However, Geithner did not provide further clarification on specifics.
New Transparency and Accountability Standards for Firms Receiving Exceptional Assistance; Not Retroactive. Geithner noted in his speech that the Administration will call for greater transparency, accountability and conditionality with tougher standards for firms receiving exceptional assistance under TARP. According to the Fact Sheet, such new standards will be imposed going forward and will not be retroactive. These stronger monitoring conditions were informed by recommendations made by formal oversight groups – the Congressional Oversight Panel, the Special Inspector General, and the Government Accountability Office — as well as Congressional committees charged with oversight of the banking system.
Regulatory Reform a Priority for Administration Before April G20 Conference. Geithner emphasized that U.S. regulators will be working with global regulators in preparation of the April G20 conference. Later this week, Geithner will be meeting with G7 group to ensure that the U.S. is working together with the World Bank, the IMF, and world leadership to ensure all are working together. By way of background, the TALF is a facility managed by the Federal Reserve that assists market participants in satisfying the credit needs of consumers and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.
Executive Compensation. Geithner in his speech referenced the issue of executive compensation limits, but did not elaborate on specifics. However, according to details in Treasury’s Fact Sheet (but not discussed in speech today), firms will be required to comply with the senior executive compensation restrictions announced February 4th, 2009, including those pertaining to a $500,000 in total annual compensation cap plus restricted stock payable when the government is getting paid back, "say on pay" shareholder votes, and new disclosure and accountability requirements applicable to luxury purchases.
Lobbyists and TARP. Geithner did not reference lobbyists in TARP context in his speech. However, we wanted to note that the Treasury’s Fact Sheet of the plans moving forward for TARP indicates that measures will be announced to ensure that lobbyists do not influence applications for, or disbursements of, Financial Stability Plan funds, and will certify that each investment decision is based only on investment criteria and the facts of the case.
Insurance Companies Not Referenced in Speech. Notably, after much speculation in media about eligibility of insurance companies in next phase of TARP, there were no references to insurance industry by Geithner today. Further, the Fact Sheet does not refer to insurance companies.

Written by Kirsten Wegner