The Capital Purchase Program, providing for the Treasury Department to purchase perpetual preferred stock in banks, thrifts, and their holding companies, was launched with great fanfare Oct. 14 with the announcement that nine of the nation's largest banking organizations had agreed to participate, to the tune of $125 billion.
Since then the program's implementation has encountered a few bumps, exhibiting some of the same ad hoc, improvised quality characterizing other extraordinary rescue measures taken by the current administration and federal banking agencies in the past year.
Treasury and banking agency staff members have been working overtime, without days off, for months on end, but as of Oct. 31, more than two weeks after the program was announced, some basic elements had yet to be worked out. The investment agreement and related documentation to be executed by every applicant were released late on the afternoon of the 31st, and the terms and conditions for issuing warrants were still being worked out for institutions that are not publicly traded.
Even the fundamental issue of the program's purpose had not been fully clarified. It is not clear to many whether the aim is to promote bank lending, encourage strong institutions to acquire weaker ones, rescue institutions that would otherwise fail, or some combination of the three.
Perhaps most vexing is that the Bush administration set up the program in a manner that risks stigmatizing institutions that do not or cannot participate, as well as those that do.
The Treasury has indicated that funds will not be awarded to institutions likely to fail, and that it will make public the names of institutions that are awarded funds. Therefore, any bank or thrift that is perceived as needing additional capital but is not identified as a successful applicant might fall under suspicion of having been denied an investment because it is close to failure.
The Treasury's announcement that it will not publicize the names of institutions that withdraw applications, or whose applications are denied, does little to mitigate the problem. Merely not appearing on the periodically published lists of approved institutions could raise questions about an institution's health.
At the same time, some banks and thrifts are concerned that applying for and receiving the funds will also be perceived as a sign of weakness. This regrettable state of affairs could have been avoided.
The Emergency Economic Stabilization Act requires the Treasury to make public a description of assets it purchases under the program, including the amounts and pricing, but disclosing the identities of the sellers is not mandated.
In this context, it is understandable that Ed Yingling, the president of the American Bankers Association, urged Treasury Secretary Paulson in a letter made public Oct. 30 to clarify that the program is intended to provide capital to strongly capitalized institutions, rather than to shore up failing ones. He also urged the Treasury to extend the time for applying beyond the current deadline of Nov. 14, so that banks can assess the pros and cons of participating.
It is also unsurprising that many banks have been concerned about signing on to a program whose details are still unknown and whose reputational consequences for good or ill are difficult to predict. On Oct. 31 the Treasury stuck to the Nov. 14 deadline for publicly traded banks, but it indicated that privately held applicants would be granted a "reasonable" application deadline after the terms and conditions for such institutions are finally released.
It is to be hoped that Secretary Paulson also responds to the requests that the purposes be made more transparent.
For all the lingering uncertainty about the program's implementation and impact, banks and thrifts of all sizes should give serious consideration to applying, even if they do not feel compelled to do so by a present need for new capital. For the reasons noted above, there may be some reputational risk to not participating, but that is not the only or even the most important consideration. In the current environment, even the strongest institutions may find it advisable to prepare for more serious turbulence. It may be a long time before most banks can again tap the private capital markets at acceptable cost.
Our experience thus far on behalf of institutions that have elected to participate has been encouraging. The application process is straightforward. The agencies have developed a short, uniform application form, and the investment documentation the Treasury released Oct. 31 appears, at least on a quick initial review, to be generally unremarkable. Notably, though applicants are required to disclose the existence of any memorandum of understanding, cease-and-desist order, or similar supervisory agreement, having such an agreement in place does not appear to be a disqualifier.
Thus far the regulators have demonstrated commendable willingness to help banks and thrifts work through the issues that an application may raise to arrive at a decision that is appropriate for the particular applicant.
Some can expect to be asked to supplement the application with information indicating their pro forma financial condition, the proposed use of funds, and other matters, but the regulators are aware of the need for speed and discretion in implementing the program.
Each bank and thrift will have to make its own assessment, based its unique circumstances, about the potential advantages and disadvantages of participating. We expect that many will find the benefits of obtaining these funds to be well worth any associated burdens.