There have been several criticisms of TARP laying the basis for possible improvements that could be made if such a program were adopted in the future. The major criticisms are (1) too favorable terms for recipients, (2) too much or too little interference in recipient operations, and (3) lack of enforcement of the terms of support.
All CPP recipients received government funds on the same terms, and the terms have been criticized for being too favorable. As the Congressional Oversight Panel’s February 2009 report pointed out, the valuation firm hired by the Panel, Duff & Phelps, found that of the $184 billion in TARP funds that it analyzed, the securities that Treasury received in exchange had a market value of only $122 billion, or 66 percent of its face value.1 Similar results were found by another study by the Congressional Budget Office.2 There was also a short-lived criticism from the Panel that in some early exits the Treasury did not receive adequate compensation for the warrants that it received for its investments.3 The Panel, however, acknowledged in a later report that the prices for subsequent sales or redemptions were very close to its own estimate.4 SIGTARP also found separately that the government received a fair price for most of the warrants.5
The Treasury designed the terms for the CPP to be favorable for the banks to increase their capital base, to rescue the financial system, not to make money. Excessively demanding terms might have undermined the banks’ ability to participate in the program, thereby making it difficult to achieve the objective of stabilizing the financial sector.
The Treasury also did not want to signal which banks were worse off by differentiation of its terms—this was an extension of its policy requiring the nine initial recipients to take funds whether or not they were needed.6 This made it very difficult, for example, to eliminate all equity claimants or to impose some losses on longer term creditors. Further the Treasury acquired the ability in these deals to change the terms in the future, an option not valued in the Panel’s analysis.7 Other countries, as we will see, did not design broad programs and had different terms for different recipients, but this raised the ad hoc favoritism problem. Another criticism, as previously discussed, was not ousting or heavily diluting the common shareholders. Further, in a future TARP, some additional losses could be placed on creditors in combination with new capital injections. Bailouts could act in tandem with bail-ins.
As most of the largest banks exited CPP within a year of its implementation, discussions about potential excessive government interference in the day-to-day management of rescued firms concentrated on a few institutions such as Citigroup and AIG, in which the government held its position for a longer period—Treasury sold its final Citigroup and AIG shares in December 20108 and December, 2012,9 respectively. According to the Treasury, it developed several core principles to guide its oversight including (1) acting as a reluctant shareholder, (2) not interfering in day-to-day management decisions, (3) ensuring a strong board of directors, and (4) exercising voting rights only in core areas.10 On the one hand, many still criticized the government’s involvement as excessive, especially the engagement of a “pay czar” to set compensation standards for key employees.11 On the other hand, some criticized the Treasury for not interfering enough, particularly in not firing key management, as did the Japanese in their rescues during the lost decade.12
Some analysts have suggested that Treasury could have resolved the dilemma of acting both as a regulator and a controlling shareholder in its implementation of TARP by creating a separate corporation holding its TARP investments.13 The corporation would hire professional managers to manage the investments. The predominant strategy should be investment management, not politics.14 The corporation would report its holdings based on appropriate accounting standards.15 Commentators pointed to the example of RFC, which was an agency independent from the Treasury.16 Another example would be the UK Financial Investments Limited, which was the separate vehicle holding and managing UK government’s investments in Northern Rock, RBS, and other firms receiving government funds.17 The UK Treasury, however, had the final say on key issues and only left routine decisions to the management of the holding company.18
Another criticism of the CPP is that certain terms governing banks’ participation in the program have been ineffective. Although, as discussed above, the vast majority of CPP recipient institutions have exited the program, those that remain illustrate this problem. As of December 31, 2014, 76 percent of the remaining outstanding CPP investments were attributable to just 10 of the 34 institutions that had not yet exited the program ($359.7 million of the $470.3 million remaining).19 A majority of the remaining CPP institutions are smaller banks that were on the FDIC’s “problem bank list” as of December 31, 2014.20 As of that date, 26 of the 34 remaining CPP participants were not current on their dividend (or interest) payments to Treasury—25 of these banks were overdue by at least six payments.21 Under the terms of CPP investments summarized above, if a participant misses six quarterly dividend (or interest) payments, Treasury has the right to appoint up to two additional members to the bank’s board. Although 25 of the 34 remaining participants had missed six or more dividend payments as of December 31, 2014, none of these institutions have board members appointed by the Treasury.22 It is worth nothing that delinquencies were not entirely concentrated among the stragglers to exit the program—the aggregate amount of missed dividend (or interest) payments among all CPP banks as of that date was $520.9 million, for which 175 banks were responsible over time.23
It is instructive to see how foreign bailouts compare with TARP. Legislative bodies in many countries aside from the United States introduced recapitalization measures during 2008 and 2009 (this is before the eurozone crisis).24 As seen in table 24.1, the US CPP is the largest program in absolute amounts ($205 billion in commitments versus $107 billion for second-ranked Germany); but as a percentage of GDP, the US program was more modest. The Netherlands had the largest exposure with 4.3 percent of GDP committed, while the United States with 1.8 percent committed ranked at the bottom, also below Ireland (3.8 percent), the United Kingdom (3.5 percent), Germany (3.2 percent), and France (2.0 percent). In terms of participation, the US CPP has the largest number of beneficiaries with 707 recipients compared to 18 recipients of the European programs combined. The sheer size of the US CPP is due to the program’s openness to any US financial institution, whether systemically important or not.25 However, participation as a percentage of total assets in the banking system is highest in France (92.6 percent), followed by the United States (75.8 percent), Ireland (74.2 percent), the Netherlands (65.9 percent), the United Kingdom (34.1 percent), and Germany (18.5 percent). The option for large banks to opt out of the programs in the United Kingdom (Barclays PLC) and Germany (Deutsche Bank) explains the large contrast in participation rates.26
Analysis of the nonprice conditions set forth in the various recapitalization programs shows the US CPP with a relatively small set of such conditions (i.e., no restructuring requirements, few limits on executive compensation, and no binding lending requirements).27 By contrast, the United Kingdom prohibited bonuses for 2008 and required restoration of mortgage lending to small and medium enterprises to 2007 levels, while France prohibited stock options and stock grants to senior executives and required a 3 to 4 percent annual increase in overall lending levels.28
International CPP comparison
Note: US Government Accountability Office, Troubled Asset Relief Program 1, 5 (Jan. 2015), available at http://www.gao.gov/assets/670/667833 .pdf.
a. Converted using October 2008 exchange rate. Japanese programs were converted using the March 1998 and March 1999 exchange rates, respectively.
b. The percentages for the Japanese programs were converted using the 1998 and 1999 GDP, respectively.
c. Percent of total banking assets in program, calculated using data from approximately 12/31/2008.
d. Includes “effective” ban on dividends. For example, the TIP limited dividends to $0.01, and the SSFI prevented AIG from increasing its dividends from $0 for five years.
e. This chart summarizes the CPP terms for public institutions. Terms for public, private, S-corporation, and mutual banks were slightly different. f. Only effective after nonpayment of dividends for six quarterly periods (whether or no consecutive).
g. TIP is the Targeted Investment Program and it refers to the Treasury’s case-by-case investments in Citigroup and Bank of America.
h. The AIG Investment Program was formerly called the Systematically Significant Failing Institutions Program (SSFI).
i. For each €4.4 million in dividends (€5.9 million in the second Commerzbank tranche), interest rates increase by 0.01 percent.
j. Dexia, not included in the six because its recapitalization arose in different isolated event, was also recapitalized using SPPE funding in coordination with
Belgium and Luxembourg.
k. For TSS: EURIBOR +250 bps +5 x CDS (senior 5 years). For preferred shares, the higher of: (1) TSS interest rate increased by 24 bps every year or (2) rate equal to 105 percent of the dividends per ordinary share in 2009, 110 percent in 2010, 115 percent for 2011–2017, and 125 percent for 2018 and after.
l. 110 percent of the dividends per ordinary share in 2009, 120 percent in 2010, and 125 percent in 2011 and after.
m. Includes convertible preferred shared, nonconvertible preferred share, and subordinated debt. Loan amount, coupon rate, and step-up date varied across institutions.