On February 10, 2009, Treasury Secretary Timothy Geithner introduced a Financial Stability Plan intended to help restart the flow of credit, clean up and strengthen our banks and provide critical aid for homeowners and small businesses. The Plan also will impose new, higher standards for transparency and accountability. A Fact Sheet published with Geithner’s remarks summarizes the ends and the means of the Plan as follows: “To protect taxpayers and ensure that every dollar is directed toward lending and economic revitalization, the Financial Stability Plan will institute a new era of accountability, transparency and conditions on the financial institutions receiving funds.” Two dominant themes in Geithner’s remarks and the Fact Sheet are that (i) our banking system is broken and must be fixed by a new framework of oversight and governance and (ii) earlier government handouts were misspent, so any new government support will be subject to greater scrutiny and limitations.

    Lack of Meaningful Oversight

    According to Geithner, one of the “many and complex” factors that contributed to the current financial crisis was lack of meaningful oversight of financial institutions. Geithner articulated some “guiding principles” derived in part from “the lessons of the last few months” that will shape the government’s future financial stability strategy. One of the principles is a thinly-veiled warning to banks that government support is for the benefit of the businesses and families who depend on banks and the country as a whole, and not the banks themselves. “Government support must come with strong conditions to protect the tax payer and with transparency that allows the American people to see the impact of those investments,” said Geithner.

    Where Did the TARP Money Go?

    These remarks likely reflect a perception that the government doled out a great deal of money to banks under the Troubled Asset Relief Program (TARP), particularly the Capital Purchase Program (CPP), and now has little to show for it because the program did not require banks to account for how the money was used. As Interim Assistant Secretary for Financial Stability Neel Kashkari noted in a January 13, 2009 speech, “[p]eople recently have begun to ask what the banks are doing with the money we’ve invested in them.” Kashkari then explained that Treasury has been working with banking regulators to design a program to measure the activities of banks that have received TARP capital. In testimony before the U.S. House of Representatives Financial Services Committee in December 2008, however, Kashkari recognized the challenges in monitoring and reporting of financial institution activities, not the least of which is that “it is difficult to track where individual dollars flow through an organization.”

    TARP, Take Two: The Financial Stability Plan

    The perceived shortcomings of the TARP likely influenced the new framework of oversight and governance at the foundation of the new Financial Stability Plan. Geithner promises that the American people will be able to see (i) where their tax dollars are going and the return on their government’s investment, (ii) whether the conditions placed on banks and institutions are being met and enforced, (iii) whether boards of directors are being responsible with taxpayer dollars and how they are compensating their executives and (iv) how these actions are impacting the overall flow of lending and the cost of borrowing.

    Ready for Your Stress Test?

    The Financial Stability Plan includes three new programs, one of which is aimed squarely at banks. Banking regulators will initiate “more consistent, realistic, and forward looking” risk assessments and introduce new measures to improve disclosure. Banking institutions that pass a comprehensive “stress test” will be eligible for a new program of capital support called the Capital Assistance Program (CAP). Although details of the CAP are still forthcoming and likely subject to change as conditions change, Geithner indicated that every dollar of assistance must be used to generate a level of lending greater than what would have been possible in the absence of government support.

    The sketchy details in the Fact Sheet include requirements and restrictions sure to elevate bankers’ stress levels. For example, applications for assistance must include a plan detailing how capital will be used to preserve and strengthen lending capacity. Recipients of aid must:

    • Submit monthly reports to the Treasury Department with detailed information about lending activities, including comparisons to estimated lending in the absence of government support;
    • Commit to participate in mortgage foreclosure mitigation programs;
    • Agree to restrictions on paying quarterly common dividends, repurchasing privately-held shares and pursuing acquisitions until the government investment is repaid; and
    • Comply with the senior executive compensation restrictions.

    Monitoring, Transparency and Accountability

    The focus on monitoring, transparency and accountability echoes recent guidance from the Federal Deposit Insurance Corporation (FDIC) that state nonmember institutions should implement a process to monitor their use of capital injections, liquidity support and/or financing guarantees obtained through financial stability programs. See FDIC Financial Institution Letter FIL-1-2009 (Jan. 12, 2009) (discussed in DTS Alert dated February 5, 2009). Given that government funds, capital and guarantees are being used to support banking institutions, banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers, as described in the November 10, 2008, “Interagency Statement on Responsible Lending” (see FIL-128-2008).

    In addition, the Government Accountability Office (GAO) has published several reports on the TARP, many of which have emphasized the lack of monitoring and reporting for CPP investments and recommended stronger measures for ensuring that participating institutions use the funds to meet the program’s purpose and comply with relevant requirements. See, e.g., “Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues,” GAO-09-359T (Feb. 5, 2009).


    “Transparent” in large part seems to be synonymous with “posted on the Internet.” Financial Stability Plan requirements will be available on a new website, FinancialStability.gov. Various reports (including, but not limited to, plans submitted by approved applicants and monthly lending reports mentioned above) will be posted there as well. The Treasury Department also recently issued a statement regarding posting of past and future TARP transaction documents to the Department’s website. See www.treas.gov/initiatives/ .

    No Free Lunch

    In light of these regulatory developments, financial institutions that are considering participating in the new Financial Stability Plan or other liquidity or guaranty program should carefully review the terms and conditions and determine if the scrutiny and limitations outweigh the benefits of accepting government support. For example:

    • Is the prospect of a “stress test” (and the accompanying framework of oversight and governance) too stressful?
    • Is it feasible to implement policies and procedures to track and report on use of funds?
    • Is it realistic (or even possible) to ensure that every dollar of government support is directed toward lending and economic revitalization?
    • Are you prepared for the government, press and public to read reports about your lending activities and second-guess your business decisions?
    • How will mortgage foreclosure mitigation programs affect your institution?
    • Are you willing and able to comply with the dividend, stock, acquisition and compensation restrictions?

    While in the short term an institution may be tempted to take the money, whether the long term consequences of doing so will best serve the institution requires careful analysis. We will discuss further possible consequences of the Treasury’s actions in future Alerts.