The idea gaining currency in a lot of places (including here) is that we have no idea where the TARP money is going. Actually, for the most part, we do. As for whether or not it will produce the intended results: Well, that depends on whether or not you believe one of the fundamental concepts of banking still applies. Let me explain some things to you, courtesy of the Department of the Treasury.
With the exception of the money sent to the auto companies, TARP money is being distributed to Qualified Financial Institutions (QFI), defined this way:
Qualifying Financial Institution ("QFI") means (i) any U.S. bank or U.S savings association not controlled by a Bank Holding Company ("BHC") or Savings and Loan Company ("SLHC"); (ii) any top-tier U.S. BHC, (iii)any top-tier U.S. SLHC which engages solely or predominately in activities that are permitted for financial holding companies under relevantlaw; and (iv) any U.S. bank or U.S. savings association controlled by a U.S. SLHC that does not engage solely or predominately in activities that are permitted for financial holding companies under relevant law. QFI shall not mean any BHC, SLHC, bank or savings association controlled by a foreign bank or company. For purposes of this program, "U.S. bank", "U.S. savings association", "U.S. BHC" and "U.S. SLHC" means a bank, savings association, BHC or SLHC organized under the laws of the United States or any State of the United States, the District of Columbia, any territory or possession of the United States, Puerto Rico, Northern Mariana Islands, Guam, American Samoa, or the Virgin Islands. The United States Department of the Treasury will determine eligibility and allocation for QFIs after consultation with the appropriate Federal banking agency.
That is most banks in the country, not just the ones we are hearing about in the news. Any QFI is entitled to apply for the program. If the QFI wants to draw from the TARP, they must issue senior preferred stock to the Treasury equivalent to the TARP funds. The amount is limited to no less than 1% and no more than 3% or $25 billion of the QFI's risk-weighted assets.
Here's the important part: A QFI must pay 5% dividends to the Treasury for the first five years the preferred stock is in existence; thereafter, it must pay 9%. In the first three years, the QFI can only redeem the Treasury's shares by recapitalizing, that is, selling new stock to the public. After three years, the bank may instead pay back the Treasury directly. If the QFI fails to pay dividends to the Treasury, it must suspend all dividend payments on other stock. If their failure extends to six payments, they must hand over two director positions to the Treasury.
The dividend is the critical piece. Remember the reason the bank pays you interest on a Certificate of Deposit? Right; it's because the bank plans to lend that money out at a higher rate. Banking 101. So what must a bank do with the TARP money? Legally, whatever they feel like; that's what we're all railing against. As a practical matter, however, they have only two choices. One is to use it to buttress against loan losses; the other is to loan it out.
The reason for what we see as lack of transparency, then, is that the TARP money is fungible -- meaning it's not going to anything specific; it really is going to each QFI's capital base, and sitting there. When that base becomes stable enough and large enough to lend, then the QFI will lend. They will want -- need -- to lend, to pay those 5% dividend payments to the Treasury. They will also want to redeem those shares as soon as possible, but especially at the three year point, when the 9% rate kicks in.
As for who's getting the money, the list is here. You'll note it's about 250 banks long. The big boys applied for and got their money first, of course; but plenty of community and regional banks are paying 5% for the TARP money.
Lest you think I'm shilling for the banks, I agree that more transparency was and is needed -- just not the kind most are considering. What I want to see is quarterly reports on each bank's lending practices: New loans granted, loans partially or fully forgiven, capital position changes, the date the bank estimates that it will leave the program. These should be public reports, summarized by the Treasury on a quarterly basis. If Sarbanes-Oxley could require such oversight, so can TARP.
Personally, I'm not convinced the approach the Bush Administration chose will work; but my reason is not because I expect that the money is going to gold-plated executive washrooms. It's not, nor is it going to executive bonuses. In the current economic climate, at 5% this is fairly expensive money the banks are getting. They really do have to find a way to make money using it. They may not be able to quickly -- much depends on exactly how bad their capital position is. But they can't sit on it forever. The first dividend payment for many QFIs is February 15th.