TARP—Five years On

TARP—Five years On

TARP, created in 2008 to restore stability to the nation’s banking system, is approaching a critical 5-year mark. For those banks still in the program beyond their five year anniversary, dividend payments will nearly double—from 5% to 9%.

TARP was originally passed by Congress as a “Troubled Asset Relief Program”. The intent was to purchase troubled assets from financial institutions. Treasury had other plans. It took the money allocated for TARP and created several different programs, one of which was the CPP (Capital Purchase Program).

Hundreds of banks originally in the  CPP have found ways to exit on their own terms well before they had to think about the 5-year dividend hike, and the Treasury itself has held dozens of auctions to divest others. In fact, the six most recently auctioned are expected to close this Monday, October 21st. (All six are behind in their dividend payments.) They are:

Of the 104 banks still in the CPP once you exclude those six, 71 have missed at least one dividend payment, most have missed many more. We’re wondering how an 80% increase in dividends will affect those payments.

The EESA (Emergency Economic Stabilization Act), which created TARP, became law on October 3, 2008; it was over the course of the next 14 months (through December 2009) that banks  and holding companies sought out those funds. They will encounter the 5-year mark over an equally staggered timeframe.

We’ve said it before and believe it warrants repeating: Even though the money was not used as it was earmarked, the bank programs of TARP made money. As of September 30, 2013, Treasury had recovered $273 billion from its $245 billion investment in the banking industry. If it doesn’t make another dime, the program has earned $28 billion for taxpayers.

The Treasury Department conducts an annual survey (chart below) to determine how the banks have put this money to use. Depending on the rate of return earned on their investment, banks may have differing views about the 9% dividend payments. We would expect the vast majority, however, to seek an exit route as quickly as possible.

Source: U.S. ‘Department of the Treasury