TARP Thoughts  

By Ramsey Gregg, Keefe Bruyette & Woods

The advent of the troubled asset relief program (“TARP”) has provided much needed capital to some banks and left others in a state of unrest. While the Street may view TARP capital as government-backed bridge financing, its allocation is commonly viewed as a stamp of regulatory approval, particularly for banks with slim capital cushions and risky credit profiles. Moreover, there are plenty of banks and thrifts that have not been approved for TARP and are working feverishly to secure the Treasury’s backing.   

As of January 20, 2009, of the first $350 billion of TARP funds (out of the $700 billion total) that have been made available, 262 companies have received TARP funds totaling $193 billion, another 75 companies have received preliminary Treasury approval for nearly $25 billion (including the additional $20 billion for Bank of America), and, finally, 69 companies have disclosed that they have applied for almost $6 billion in TARP funds and are awaiting the regulator’s decision. In sum, 406 companies have applied for $224 billion of TARP funds (64% of today’s available pool) with 337 of those companies already receiving or approved to receive $228 million of TARP (62% of today’s available pool). 

Judging by these numbers, $122 million remains available to be doled out in the current allotment with another $350 million yet to be released by the Government. Moreover, while the headlines don’t state it, many banks decided not to participate in the program and, to a lesser extent, were likely told by their respective regulator that their application would be turned down. On a side note, according to Federal Reserve Bank data for the 12th District, approximately 20% of commercial banks (as of 9/30/2008) had CAMELS ratings of 3 or worse, which is the highest level since 1995. Our understanding is that banks with CAMELS ratings of 3 are on the fence and must make a strong case to get TARP while those rated 4 and 5 will not have access to the program. Looking back at the preceding paragraph, it is logical to assume that most of those 69 companies that are yet to hear their TARP verdict are likely feeling considerable anxiety.  Also, those are just the 69 companies that have disclosed that they’ve applied for TARP. There are many others that have applied, but not publicly disclosed their intention. Our understanding is that much of the backlog in applications are sitting at the primary regulatory agencies (Fed, FDIC, OCC, OTS) and are yet to be pushed to the Treasury. For the most part, once a bank’s primary regulator supports its TARP application, the Treasury will end up approving it. 

In some cases, the regulators have unofficially told banks that their TARP approval is contingent upon a private capital raise of an amount at least equal to the TARP capital.  Of course, this adds complexity to the process. Generally speaking, the traditional buy-side funds are virtually shut to banks with perceived credit quality concerns while much of the private equity world is waiting for their piece in an FDIC assisted transaction (see Indymac) or are biding their time in the anticipation that the FDIC will soon provide assistance to open banks, resulting in the desired protection against significant downside credit risk. The dilemma is that the banks relying on contingent TARP need it now while the buy side is mostly content to sit and wait. Not surprisingly, many of the banks that need TARP the most will not gain access to it and the regulatory clock can stop at any time.

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