Capital Purchase Program
Encyclopedia
The Capital Purchase Program or CPP is a preferred stock
and equity warrant purchase program conducted by the US Treasury's Office of Financial Stability
as part of Troubled Assets Relief Program
(aka, TARP). According to the first congressionally mandated oversight report published by GAO
, "[TARP's] primary focus was expected to be the purchase of mortgage-backed securities (MBS) and whole loans... [but] within 2 weeks of enactment... the Treasury announced that it would make $250 billion of the $700 billion available to U.S. financial institutions through purchases of preferred stock." Because preferred stock is similar to debt in that it gets paid before common stock
, some economists have questioned whether the buying of preferred stock
by the CPP will be effective in getting banks to lend. Other economist have argued that the capital purchases represent a taxpayer subsidy of unsecured creditors. A review of investor presentations and conference calls by executives of some two dozen US-based banks by the New York Times found that "few [banks] cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future." In a letter to Congress the Director-designate of the National Economic Council Larry Summers said that the Obama administration would place tighter controls on how CPP funds could be used. In particular, the second $350 billion dollars would include restrictions on the payment of common stock
dividends and executive compensation
. Professor Summers also promised greater disclosure and more attempts to tie the funds to foreclosure mitigation efforts.
On January 16, 2009 the Congressional Budget Office
estimated that of the first $247 billion of securities purchased represented 26 percent ($64 billion) subsidy to the banks receiving funds. In his speech on February 10, 2009, the new Secretary of the Treasury Timothy Geithner announced the Capital Assistance Program
. This signaled an end to the capital purchase program.
obligations. None of the publicly traded banks had yet bought back their warrants owned by the U.S. Treasury by March 31, 2009. According to the terms of the U.S. Treasury's investment, the banks returning funds can either negotiate to buy back the warrants at fair market value, or the U.S. Treasury can sell the warrants to third party investors as soon as feasible. Warrants are call options that add to the number of shares of stock outstanding if they are exercised for a profit. The American Bankers Association
(ABA) has lobbied congress to cancel the warrants owned by taxpayers. The call them an "onerous exit fee." Yet, if the Capital Purchase Program warrants of Goldman Sachs are representative, then the Capital Purchase Program warrants were worth between $5-to-$24 billion dollars as of May 1, 2009. Thus canceling the CPP warrants amounts to a $5-to-$24 billion dollar subsidy to the banking industry at taxpayers expense. While the ABA wants the CPP warrants to be written off by taxpayers, Goldman Sachs does not hold that view. A representative of Goldman Sachs was quoted as saying "We think that taxpayers should expect a decent return on their investment and look forward to being able to provide just that when we are permitted to return the TARP money."
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
and equity warrant purchase program conducted by the US Treasury's Office of Financial Stability
Office of Financial Stability
The Office of Financial Stability is a new office within the Office of Domestic Finance of the United States Treasury created by theEmergency Economic Stabilization Act of 2008 to operate the Troubled Assets Relief Program....
as part of Troubled Assets Relief Program
Troubled Assets Relief Program
The Troubled Asset Relief Program is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008...
(aka, TARP). According to the first congressionally mandated oversight report published by GAO
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Gao is a town in eastern Mali on the River Niger lying ESE of Timbuktu. Situated on the left bank of the river at the junction with the Tilemsi valley, it is the capital of the Gao Region and had a population of 86,663 in 2009....
, "[TARP's] primary focus was expected to be the purchase of mortgage-backed securities (MBS) and whole loans... [but] within 2 weeks of enactment... the Treasury announced that it would make $250 billion of the $700 billion available to U.S. financial institutions through purchases of preferred stock." Because preferred stock is similar to debt in that it gets paid before common stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
, some economists have questioned whether the buying of preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
by the CPP will be effective in getting banks to lend. Other economist have argued that the capital purchases represent a taxpayer subsidy of unsecured creditors. A review of investor presentations and conference calls by executives of some two dozen US-based banks by the New York Times found that "few [banks] cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future." In a letter to Congress the Director-designate of the National Economic Council Larry Summers said that the Obama administration would place tighter controls on how CPP funds could be used. In particular, the second $350 billion dollars would include restrictions on the payment of common stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
dividends and executive compensation
Executive compensation
Executive pay is financial compensation received by an officer of a firm, often as a mixture of salary, bonuses, shares of and/or call options on the company stock, etc. Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker's wage...
. Professor Summers also promised greater disclosure and more attempts to tie the funds to foreclosure mitigation efforts.
On January 16, 2009 the Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
estimated that of the first $247 billion of securities purchased represented 26 percent ($64 billion) subsidy to the banks receiving funds. In his speech on February 10, 2009, the new Secretary of the Treasury Timothy Geithner announced the Capital Assistance Program
Capital Assistance Program
The Capital Assistance Program is a U.S. Treasury program that provides capital injections in exchange for mandatory convertible preferred stock and warrants to bank holding companies.-Background and timeline:...
. This signaled an end to the capital purchase program.
Warrants
By March 31, 2009 four banks out of over five hundred had returned their preferred stockPreferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
obligations. None of the publicly traded banks had yet bought back their warrants owned by the U.S. Treasury by March 31, 2009. According to the terms of the U.S. Treasury's investment, the banks returning funds can either negotiate to buy back the warrants at fair market value, or the U.S. Treasury can sell the warrants to third party investors as soon as feasible. Warrants are call options that add to the number of shares of stock outstanding if they are exercised for a profit. The American Bankers Association
American Bankers Association
The American Bankers Association is an industry trade group and professional association representing the United States' banking industry...
(ABA) has lobbied congress to cancel the warrants owned by taxpayers. The call them an "onerous exit fee." Yet, if the Capital Purchase Program warrants of Goldman Sachs are representative, then the Capital Purchase Program warrants were worth between $5-to-$24 billion dollars as of May 1, 2009. Thus canceling the CPP warrants amounts to a $5-to-$24 billion dollar subsidy to the banking industry at taxpayers expense. While the ABA wants the CPP warrants to be written off by taxpayers, Goldman Sachs does not hold that view. A representative of Goldman Sachs was quoted as saying "We think that taxpayers should expect a decent return on their investment and look forward to being able to provide just that when we are permitted to return the TARP money."
First Eight financial institutions
Eight finanicial institutions received funds on October 28, 2008. These are:- Bank of America Corporation
- Bank of New York Mellon Corporation
- Citigroup Incorporated
- Goldman Sachs Group Incorporated
- JPMorgan Chase & Company
- Morgan StanleyMorgan StanleyMorgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
- State Street Corporation
- Wells Fargo and Company
44 other participants in the CPP through purchases made on 11/14/2008 and 11/21/2008
- Bank of Commerce Holdings
- 1st FS Corporation
- UCBH Holdings, Incorporated
- Northern Trust Corporation
- SunTrust Banks, Incorporated
- Broadway Financial Corporation
- Washington Federal, Incorporated
- BB&T Corporation
- Provident Bancshares Corporation
- Umpqua Holdings CorporationUmpqua Holdings CorporationUmpqua Holdings Corporation is a financial holding company based in downtown Portland, Oregon, United States. Headquarters are in the Umpqua Bank Plaza, formerly the headquarters of the Benj. Franklin Savings and Loan...
- Comerica Incorporated
- Regions Financial Corporation
- Capital One Financial Corporation
- First Horizon National CorporationFirst Horizon National CorporationFirst Horizon National Corporation is a large banking company based in Memphis, Tennessee, USA. It is the parent company of First Tennessee Bank and FTN Financial....
- Huntington BancsharesHuntington BancsharesHuntington Bancshares, Inc., is a US$53 billion Midwestern bank holding company headquartered in Columbus, Ohio. It is the 24th largest American bank. As of October 22, 2008, it was listed on the S&P 500...
- KeyCorp
- Valley National Bancorp
- Zions BancorporationZions BancorporationZions Bancorporation is a member of the S&P 500, a bank holding company headquartered in Salt Lake City, Utah, USA. Among its subsidiaries are Amegy Bank of Texas, California Bank & Trust, National Bank of Arizona, Nevada State Bank, the Commerce Bank of Oregon, the Commerce Bank of Washington,...
- Marshall & Ilsley CorporationMarshall & Ilsley CorporationMarshall & Ilsley Corporation is a diversified financial services corporation headquartered in Milwaukee, Wisconsin, USA, with $63.5 billion in assets...
- U.S. BancorpU.S. BancorpU.S. Bancorp is a diversified financial services holding company, headquartered in Minneapolis, Minnesota. It is the parent company of U.S. Bank, the fifth largest commercial bank in the United States based on $330 billion in assets. U.S. Bank ranks as the sixth largest bank in the U.S. based on...
- TCF Financial CorporationTCF Financial CorporationTCF Financial Corporation is a bank holding company based in Wayzata, Minnesota, USA, employing more than 7,300 people. The holding company consists of several wholly owned subsidiaries including its principal subsidiary, TCF Bank, a nationally chartered bank. In the third quarter of 2010, the...
- Ameris Bancorp
- Associated Banc-CorpAssociated Banc-CorpAssociated Banc-Corp is a diversified regional bank holding company specializing in retail and commercial banking, commercial real estate lending, wealth management and specialized financial services. It is headquartered in Green Bay, Wisconsin. At September 30, 2011, it had $22 billion in...
- Banner Corp. / Banner BankBanner BankBanner Bank, the primary subsidiary of Banner Corporation , is a Washington-chartered commercial bank headquartered in Walla Walla, Washington. Founded as the National Building Loan & Trust Association in 1890, it is the oldest savings and loan institution in Washington...
- Boston Private Financial
- Cascade Financial Corporation
- Centerstate Banks of Florida Incorporated
- City National Corporation
- Columbia Banking System Incorporated
- First Community Bancshares Incorporated
- First Community Corporation
- First Niagara Financial Group
- First Pactrust Bancorp Incorporated
- Heritage Commerce CorporationHeritage Financial Corporation
- Hf Financial Corporation
- Nara Bancorp Incorporated
- Pacific Capital Bancorp
- Porter Bancorp Incorporated
- Severn Bancorp Incorporated
- Taylor Capital Group
- Trustmark Corporation
- Webster Financial Corporation
- Western Alliance Bancorporation