Tuesday, November 11, 2008

Neel Kashkari at the SIFMA TARP Summit

As part of SIFMA's Summit on the TARP, Neel Kashkari Interim Secretary for Financial Stability, gave an update on the TARP and the various programs that are up and running. He emphasized that TARP is one part of the combined government response to the financial crisis and that the main purpose of the TARP is to stabilize the financial system. Unfortunately this is the only guide we have as to how the money will be used. The program was designed with the flexibility to attempt to hit the moving target that is the global financial crisis. Or put another way, it can and will fight any fire that ignites.

The problem with fighting fires is it is reactive as opposed to proactive. Until there is clarity on the proactive steps to be taken the markets will languish in uncertainty.

The Capital Purchase Program

The Capital Purchase Program (CPP) is the program buying preferred shares in financial institutions. In keeping with the TARP's stated goals, the CPP's objective is to strengthen the financial system and increase the flow of financing to support the economy.

The structure of the CPP:

  1. $250 billion of senior preferred shares will be purchased by the Treasury. The shares will pay a 5% dividend for the first five years and then increase to 9%.
  2. The deadline for publicly traded banks to apply for the program is November 14, while private banks will get an extension since the terms are not final for the private banks.
  3. Minimum subscription amount is 1% of risk-weighted assets and the maximum is the lesser of $25 billion or 3% of risk-weighted assets.
  4. Participating companies are prohibited from increasing dividends for three years.
  5. Share repurchases are restricted.
  6. Executive compensation must meet the guidelines laid out in the Emergency Economic Stabilization Act of 2008.

A key point about the process is that while those who are approved to receive the money (healthy banks) will be announced, those who do not qualify (weak banks) will be "encouraged" to withdraw the application. If the Treasury "encourages" a bank to withdraw its application, the decision will not be announced.

The actual deployment of the money will take months as recipients of the money will have 30 days after Treasury approval to get shareholder approval and execute the three required documents: a stock purchase agreement, a certificate of designation, and a warrant purchase agreement.

During the question and answer session Assistant Secretary Kashkari was asked for a timeline on additional asset purchases. In particular, attendees wanted to know when and if the Treasury intended to purchase mortgage backed securities and other loans. Mr. Kashkari did not give a timeline and suggested that the Treasury was focused (read: swamped) by the sheer complexity of executing potentially thousands of purchase agreements.

The take-away from the speech is the Treasury is in "full execution mode" deploying the TARP money and that the program will morph into whatever is needed to promote financial stability. This means that there is considerable uncertainty as to the final form of the program. Continued uncertainty is not the financial markets friend.

Disclosures: None

No comments: