Bloomberg News

U.S. Regulators Eased TARP Repayment Terms for Large Bank Exits

September 30, 2011

Sept. 30 (Bloomberg) -- The U.S. Treasury Department and bank regulators relaxed terms to let large banks exit the Troubled Asset Relief Program in 2009, according to a report issued today by an internal watchdog.

Regulators also used ad hoc and inconsistent methods, the Special Inspector General’s report said. The regulators largely ignored the Federal Reserve requirements for repayment upon issuing $1 in new common equity for every $2 in TARP funds repaid, the report said.

“By not waiting until the banks were in a position to meet the 1-for-2 provision entirely with common stock, there was arguably a missed opportunity to further strengthen the quality of each institution’s capital base to protect against future losses without selling sources of revenue,” the special inspector general wrote.

In 2009, large banks began quickly exiting TARP out of concern over executive compensation restrictions and fear of being the last large TARP bank, the report said. They also were persistent and largely successful in efforts to resist regulatory demands for issuing common stock to exit, according to the special inspector general.

The report found that the Treasury, through hosting meetings and commenting on individual TARP recipient’s repayment proposals, encouraged banks in the TARP program to expedite repayment. In one instance, Treasury even urged Wells Fargo & Co. to speed up its repayment plan.

“Treasury’s involvement in the TARP exit proposal was motivated by a fundamental belief that stabilizing our financial system ultimately depended upon the nation’s largest financial institutions being able to raise private capital again,” said Tim Massad, Treasury assistant secretary for financial stability, wrote in a letter to the special inspector general. “It was for this reason that Treasury encouraged firms to raise private capital and to repay the taxpayers’ investments.”

The report comes as large banks are again being required by new Basel III rules to raise higher capital.

--Editors: Kevin Costelloe, Gail DeGeorge

To contact the reporters on this story: Cheyenne Hopkins at chopkins@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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