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TARP! - 3-24-09
T
A R P! What Happened to a Good Idea?
Before reading
this letter it would be helpful to read my letter to the Honorable
Timothy F. Geithner, United Sates Secretary of the Treasury dated
March 19, 2009, also posted on the bank's web site.
When the TARP
(Trouble Asset Relief Program) was first introduced the intended
purpose was to invest money in healthy banks to increase their
capital which could in turn increase their ability to lend. This
intention was one of the administrations plans for re-igniting the
economic engine of the country.
TARP investments
were made in return for a form of equity known as preferred stock. This
is different than common stock in the following manner. Preferred does
not have voting rights, preferred does not dilute the
common shareholder, preferred pays a cash dividend to holder of the
stock and common may or may not pay a dividend. The TARP preferred
stock paid a dividend of 5% annually to the government and provided
an additional benefit to the government of a convertible portion to
common stock. The TARP preferred stock has a window for repayment in
5 years. The dividends are payable quarterly to the treasury and
failure to make the payments would constitute a default which would
allow the Treasury to sanction the recipient by taking board seats
and/or making management assignments.
So, let’s
review the original intent of TARP………
-
Issued to healthy
banks to re-ignite the economic engine
-
The TARP is issued
in the form of preferred stock
-
The stock yields a
minimum of 5% and up to 6.5% interest to the government
-
There is a
repayment window for the stock
-
It carries serious
sanctions for failure to meet the contractual agreement
This all sounds
like a pretty good deal for all parties involved. I would like to
get a 5% return in today’s environment secured by stock in a
healthy company.
So, how did a
seemingly great program morph into a BANK BAILOUT program?
I believe that
there are several things that happened to the original intent of this
program.
-
First, the
Treasury changed the rules of engagement by allowing weak and zombie
banks access to this program.
-
Second, the
Treasury applied a “one rule fits all’ to the
program and as I stated in my letter to the Secretary, United Labor
Bank is not in any way similar to the troubled banks who received the
funds.
-
Third, Treasury
has changed the agreement by imposing after-the-fact restrictions and
very expensive oversight on the use of the funds.
-
And finally the
PRESS has been a huge player in the failure of this program and I think
that the following question demonstrates the proof of that statement.
Has anyone seen the press list the actual terms of the agreement of
TARP funds? That is a rhetorical question because if they had reported
the actual term it would not have been “pitch fork”
news. When can we get the complete story instead of partial stories for
the purpose of selling news?
Why hasn’t the
Treasury defended the original program to the public? I have
absolutely no idea. Why are so many of the healthy institutions
either applying to return the TARP or cancelling their pending
application? Because as healthy community banks they – and we
–
do not want to be associated with what has become a “Bank
Bailout”.
All of the news
recently has been about AIG and I think that we can agree that this
has been a colossal business failure supported by another failure by
Treasury to resuscitate a DOA company. I can only hope that in the
near future calmer heads will prevail.
Malcolm F. Hotchkiss
President and Chief Executive Officer
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