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GAO-13-458, Capital Purchase Program United States Government Accountability Office Report to Congressional Committees May 2013 CAPITAL PURCHASE PROGRAM Status of the Program and Financial Health of Remaining Participants GAO-13-458 May 2013 CAPITAL PURCHASE PROGRAM Status of the Program and Financial Health of Remaining Participants Highlights of GAO-13-458, a report to congressional committees Why GAO Did This Study What GAO Found CPP was established as the primary As of March 31, 2013, the Department of the Treasury (Treasury) had received means of restoring stability to the about $222 billion from its Capital Purchase Program (CPP) investments, financial system under the Troubled exceeding the approximately $205 billion it had disbursed. Treasury estimated at Asset Relief Program (TARP). Under the end of December 2012 that CPP would have an approximate lifetime income CPP, Treasury invested almost $205 of $15 billion after all institutions had exited the program. Treasury’s March 2013 billion in 707 eligible financial data showed that 534 of the original 707 institutions had exited CPP. Most of institutions between October 2008 and these institutions exited by repurchasing their preferred shares in full or by December 2009. CPP recipients have refinancing their investments through other federal programs. In March 2012, made dividend and interest payments Treasury began selling its investments in the institutions through auctions, to Treasury on the investments. expediting the exit of a number of CPP participants. A relatively small number of TARP’s authorizing legislation requires GAO to report every 60 days on TARP the remaining 173 institutions accounted for most of the funds outstanding. activities. This report examines (1) the Specifically, 25 institutions accounted for $4.2 billion, or 68 percent, of the $6.1 status of CPP; and (2) the financial billion in outstanding investments. These investments were relatively widely condition of institutions remaining in dispersed throughout the United States, with 39 states having at least one the program. institution with investments outstanding and 12 states having at least 5 such institutions. To assess the program’s status, GAO reviewed Treasury reports on the status of CPP. GAO also used financial Status of Capital Purchase Program Funds and Participants and regulatory data to compare the financial condition of institutions remaining in CPP with those that had exited the program and those that did not participate. GAO provided a draft of this report to Treasury for its review and comment. Treasury generally concurred with GAO’s findings. Note: “Other” includes institutions that went into bankruptcy or receivership, had their investments sold by Treasury, or merged with another institution. The institutions remaining in CPP are generally less financially healthy than those that have exited. In particular, most remaining participants have missed scheduled dividend or interest payments. For example, 125 remaining institutions missed their February 2013 payment. Further, 107 remaining CPP institutions were on the Federal Deposit Insurance Corporation’s problem bank list in December 2012—that is, they demonstrated financial, operational, or managerial weaknesses that threatened their continued financial viability. Institutions that continue to miss dividend payments or find themselves on the problem bank list may have difficulty fully repaying their CPP investments. GAO’s analysis also showed that the remaining CPP institutions were financially weaker than those that had exited the program or had never participated. In particular, the remaining View GAO-13-458. For more information, CPP institutions tended to be less profitable, hold riskier assets, and have lower contact A. Nicole Clowers at (202) 512-8678 capital levels and reserves. or [email protected]. United States Government Accountability Office Contents Letter 1 Background 3 Treasury Estimates a Lifetime Gain for CPP as Institutions Continue to Exit the Program 4 Remaining CPP Institutions Are Generally Less Financially Healthy Than Those That Have Exited 9 Agency Comments and Our Evaluation 16 Appendix I Objectives, Scope, and Methodology 19 Appendix II Comments from the Office of Financial Stability 21 Appendix III GAO Contact and Staff Acknowledgments 22 Table Table 1: Aggregate Financial Information on the Analysis Population, as of December 31, 2012 13 Figures Figure 1: Status of the Capital Purchase Program, as of March 31, 2013 5 Figure 2: Status of Institutions That Received Capital Purchase Program Investments, as of March 31, 2013 6 Figure 3: Remaining Capital Purchase Program Investments, as of March 31, 2013 7 Figure 4: Remaining Participation in the Capital Purchase Program by State, as of March 31, 2013 8 Figure 5: Number of Institutions Missing Scheduled Dividend or Interest Payments and Number of Institutions Participating in the Capital Purchase Program by Quarter, February 2009 through February 2013 10 Figure 6: Number of Capital Purchase Program Institutions on FDIC’s Problem Bank List, December 2008 through December 2012 11 Page i GAO-13-458 Capital Purchase Program Abbreviations CDCI Community Development Capital Initiative CPP Capital Purchase Program EESA Emergency Economic Stabilization Act of 2008 FDIC Federal Deposit Insurance Corporation SBLF Small Business Lending Fund TARP Troubled Asset Relief Program Treasury U.S. Department of the Treasury This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page ii GAO-13-458 Capital Purchase Program 441 G St. N.W. Washington, DC 20548 May 7, 2013 Congressional Committees From October 2008 through December 2009, the U.S. Department of the Treasury (Treasury) invested almost $205 billion in 707 financial institutions as part of the government’s efforts to help stabilize U.S. financial markets and the economy. These investments were made through the Capital Purchase Program (CPP), the first and largest initiative under the Troubled Asset Relief Program (TARP).1 TARP gave Treasury the authority to buy or guarantee up to almost $700 billion of the “troubled assets” that were believed to be at the heart of the financial crisis, including mortgages, mortgage-backed securities, and any other financial instruments deemed appropriate, such as equity investments.2 Under this authority, in October 2008 Treasury created CPP to provide capital to viable financial institutions by purchasing preferred shares and subordinated debt. In return for its investments, Treasury received dividend or interest payments and warrants.3 The program was closed to new investments on December 31, 2009, and since then Treasury has continued to oversee and divest its CPP investments, collect dividend and interest payments, and sell warrants. As of March 31, 2013, about three- quarters of CPP participants had exited the program, many by repurchasing their preferred shares or subordinated debt with the approval of their primary bank regulators. 1As authorized by the Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq. EESA, which was signed into law on October 3, 2008, established the Office of Financial Stability within Treasury and provided it with broad, flexible authorities to buy or guarantee troubled mortgage-related assets or any other financial instruments necessary to stabilize the financial markets. 2Section 3(9) of EESA, 12 U.S.C. § 5202(9). EESA required that the appropriate committees of Congress be notified in writing that the Secretary of the Treasury, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, had determined that it was necessary to purchase other financial instruments to promote financial market stability. EESA originally authorized Treasury to purchase or guarantee up to $700 billion in troubled assets. The Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 123 Stat. 1632 (2009), amended EESA to reduce the maximum allowable amount of outstanding troubled assets under EESA by almost $1.3 billion, from $700 billion to $698.7 billion. 3A warrant is an option to buy shares of common stock or preferred stock at a predetermined price on or before a specified date. Page 1 GAO-13-458 Capital Purchase Program This report is based upon our continuing analysis and monitoring of Treasury’s activities in implementing the Emergency Economic Stabilization Act of 2008 (EESA), which provided us with broad oversight authorities for actions taken under TARP and required that we report at least every 60 days on TARP activities and performance.4 To fulfill our statutorily mandated responsibilities, we have been monitoring and providing updates on TARP programs, including CPP.5 This report examines (1) the status of CPP, including repayments and other proceeds, as well as investments outstanding; and (2) the financial condition of institutions remaining in CPP. To assess the status of CPP, we analyzed Treasury reports on the status of CPP, including reports on outstanding investments, dividends paid, and the number of institutions that had repaid their investments. To assess the financial condition of institutions that received investments
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