TARP watchdog: Banks inconsistently exited from government support in a rush

{mosads}Initially, banks that participated in the Capital Purchase Program (CPP), wherein the Treasury invested the banks as a way to boost confidence in the financial system, were required to stay on a government lifeline for three years. However, the passage of the stimulus act in February 2009 removed that waiting period, and set off consistent pressure from banks as they sought to get out from under their government backstops.

In May of that year, the Federal Reserve wrapped up its stress tests of those banks, and detailed how they could go about repaying their TARP funds.

In June 2009, nine of those banks, which met certain capital requirements, were allowed to exit from federal support. The remaining eight, seen as weaker by regulators, were required to stay on support as they shored up their capital base.

The Fed later revised its guidance for exiting TARP to allow for a quicker exit for the remaining banks, which immediately led to some banks pressuring the government to let them off the leash. Under the new Fed policy, banks could exit TARP by meeting certain requirements, and by issuing $1 of common stock for every $2 it had to repay in TARP funds. The rationale behind that requirement is that it would allow the banks to re-enter the private market with a good cash footing, which would allow them to weather any future market turmoil.

However, even that plan faced resistance from the “notably persistent” banks, which instead pushed “more creative, cheaper and less sturdy alternatives.” Bank of America, PNC and Wells Fargo all asked for an expedited exit from TARP, but “balked” at the stock requirement.

When Bank of America, Citigroup and Wells Fargo all exited TARP in December 2009, only Citigroup actually met that requirement.

“There was arguably a missed opportunity to further strengthen the quality of each institution’s capital base to protect against future losses,” stated the report.

Helping banks out the door was Treasury Department. In an interview for the report, Treasury Secretary Timothy Geithner told SIGTARP that he was pressuring the firms as part of a “forceful strategy of raising capital early.” He argued that getting the banks back into the private market and raising cash was best for the American economy.

Nonetheless, that pressure opened the door for criticism that the Treasury “put accelerating TARP repayment ahead of ensuring that institutions exiting TARP were sufficiently strong to do so safely.”

Another complication from the Treasury’s pressure was that it created a bit of a financial market logjam. The department urged Wells Fargo to speed up its repayment plan, and as a result it, Bank of America and Citigroup issued billions of dollars in stock “nearly simultaneously.”

While all the banks were able to successfully complete their offerings, Citigroup was only able to sell a portion of its goal, and later complained that Wells Fargo “sapped demand” for its stock.