Kashkari Updates Progress of TARP
Location: Washington, DC
Author: Neel Kashkari
Date: Friday, January 9, 2009
The following are remarks by Interim Assistant Secretary for Financial
Stability Neel Kashkari at Brookings Institution.
Good afternoon. Thank you, Martin, for that kind introduction. I would also
like to thank the Brookings Institution for hosting us today. I will provide
a comprehensive update on the Treasury Department's progress in implementing
the Troubled Asset Relief Program (TARP), and then spend some time taking
questions from the audience and having a discussion.
We are in an unprecedented period and market events are moving rapidly and
unpredictably. We at Treasury have responded quickly to adapt to events on
the ground. Throughout the crisis, we have always acted with the following
critical objectives in mind: one, to stabilize financial markets and reduce
systemic risk; two, to support the housing market by avoiding preventable
foreclosures and supporting mortgage finance; and three, to protect
taxpayers. The authorities and flexibility granted to us by Congress have
been essential to developing the programs necessary to meet these
objectives.
A program as large and complex as the TARP would normally take many months
or years to establish. But, we did not have the luxury of first building the
operation, then designing our programs and then executing them. Given the
severity of the financial crisis, we had to build the Office of Financial
Stability, design our programs, and execute them - all at the same time. We
have made remarkable progress since the President signed the law only 97
days ago.
Today, I will brief you about five areas. First, I will give an update on
execution of the programs Treasury has implemented under the TARP. Second, I
will review the progress we've made in building the Office of Financial
Stability. Third, I will provide an update on our efforts to meet the
highest standards for compliance and oversight. Fourth, I will review the
thorough reporting requirements we continue to meet. Finally, I will update
you on some of the measurements we look at to judge if our programs are
working.
Update on TARP Programs
I will begin with the Capital Purchase Program (CPP). On October 14,
Secretary Paulson announced that we would allocate $250 billion of the
financial rescue package for a voluntary capital purchase program for
healthy, viable banks of all sizes. The CPP was designed to first stabilize
the financial system by increasing the capital in our banks, and then to
restore confidence so credit could flow to our consumers and businesses.
People often ask: why are we investing in healthy banks? Shouldn't the TARP
be used for failing banks? Healthy banks are in the best position to support
their communities by extending credit. A dollar invested in a healthy bank
is far more likely to be used to promote lending to creditworthy borrowers
than a dollar invested in a failing bank, which would more likely use it to
stay afloat.
It has been 86 days since Secretary Paulson announced the Capital Purchase
Program. We started from scratch, recruited and built a world class team,
designed the program details, hired necessary outside vendors, and
implemented a complex, but efficient processing model. In that time, we have
invested $178 billion in 214 institutions in 41 states across the country,
as well as Puerto Rico.
There is a huge demand for the program: the number of applications
under-review at the regulators is in the thousands, representing every state
in the country, and hundreds more have already been pre-approved by
Treasury. We are pleased with the large number of banks that have applied.
The regulators are working diligently to get through their review and
forward recommended applications to us as quickly as they can. We expect
their review to continue over the next few months.
We continue to process applications quickly but carefully to ensure our
program guidelines and goals are met. Our investment committee meets
virtually every day to review applications as soon as they are sent to us by
the regulators and we close transactions often within days of approval. In
fact, we find that institutions need more time to complete their legal
requirements than Treasury needs to execute the investments.
Our work will not let up until the last application has been reviewed and
processed. Completing investments in more than 200 institutions across the
nation in less than 90 days is a feat that I believe is unmatched in the
public or private sectors. This progress is remarkable not only in its speed
and quality, but also in its scope. We have reviewed applications from every
state in the nation and touched almost every banking market with
applications from small and large banks alike, including Community
Development Financial Institutions. The largest investment under the CPP has
been $25 billion and the smallest less than $2 million, with applications
for upcoming investments of a few hundred thousand dollars.
Automotive Industry Financing Program
Next, I will discuss Treasury's actions under TARP to support the auto
sector. While the TARP was designed to stabilize the financial sector, the
legislation provided sufficiently broad authority to act to stabilize the
domestic automotive industry. Absent congressional action, no other
authority existed within the federal government to stave off a disorderly
bankruptcy of one or more auto companies. Treasury was forced to act to
prevent a significant disruption of the automotive industry that would pose
a systemic risk to financial markets and negatively affect the real economy.
Last week, Treasury began funding transactions under this program. We funded
our full commitment of a $4 billion loan to Chrysler, and we funded the
first $4 billion of a $13.4 billion commitment to GM - the last $4 billion
of which depends on future congressional action. The terms of these loans
require the companies to move quickly to develop plans demonstrating
long-term viability, and they also include significant taxpayer protection
provisions.
Because the finance companies serve as the lifeblood of the automakers, we
knew that our program would need to address the short-term needs of the auto
finance companies as well. Last week, we funded a $5 billion investment in
GMAC. We also committed to an additional $1 billion loan to GM to be used to
participate in a rights offering at GMAC as part of its recapitalization in
becoming a bank holding company.
These financings were designed to use our limited remaining resources to
address the participating companies' short-term needs while providing them
enough time to begin the hard work with all stakeholders that will be
necessary to achieve viability.
Term Asset-Backed Securities Lending Facility
Support of the consumer finance sector is a high priority for Treasury
because of its fundamental role in fueling economic growth. Like other forms
of credit, affordable consumer credit depends on ready access to a liquid
and affordable secondary market – in this case, the asset-backed credit
market.
The Federal Reserve is setting-up a $200 billion program to support consumer
finance securitization markets, specifically credit cards, auto loans,
student loans and small business loans. Under the TARP, Treasury will
provide $20 billion in this facility, which will enable a broad range of
institutions to step up their lending and enable borrowers to have access to
lower-cost consumer finance and small business loans. The facility may be
expanded over time and eligible asset classes may be expanded later to
include other assets, such as commercial mortgage-backed securities,
non-agency residential mortgage-backed securities or other asset classes.
Treasury and the Federal Reserve continue to make progress in establishing
this facility, which we expect to become operational in February.
Asset Guarantee Program
We established the Asset Guarantee Program under section 102 of the EESA.
This program provides guarantees for assets held by systemically significant
financial institutions that face a risk of losing market confidence due in
large part to a portfolio of distressed or illiquid assets. Treasury is
exploring use of this program to address the $5 billion guarantee provisions
of our recent agreement with Citigroup.
Targeted Investment Program
As part of our recent $20 billion investment in Citigroup, Treasury also
established the Targeted Investment Program, the objective of which is to
foster financial market stability. In an environment of high volatility and
severe financial market strains, the loss of confidence in a major financial
institution could result in significant market disruptions that threaten the
financial strength of similar institutions. This investment in Citigroup
includes important restrictions on executive compensation and corporate
expenses as well as provisions to protect the taxpayers.
Building the Office of Financial Stability
Let me now turn to our work to establish the Office of Financial Stability.
I mentioned that a program as large and complex as the TARP would normally
take many months or years to establish. Given the severity of the financial
crisis, we had to build the Office of Financial Stability, design our
programs, and execute them - all at the same time.
Recruiting excellent people was the first and most important part of
successfully establishing the office. We started by tapping the very best,
seasoned, financial veterans from across the government and private sector
to help launch the program. We were successful in quickly recruiting
outstanding interim leaders for key positions in the office. In each case,
the interim official was charged with: one, setting up the office; two,
hiring permanent staff; three, operationalizing our programs; and, four,
identifying their permanent successor. That process has worked extremely
well.
Today we have almost 90 dedicated TARP staff, including full-time employees
we have hired since the law was signed and experienced detailees we have
recruited from across the government. In many cases, those detailees are
choosing to become permanent members of the TARP team. This does not include
the numerous main Treasury employees who are spending most of their time on
TARP. We also have a robust pipeline of outstanding new people joining the
team each week.
We have worked very hard to ensure the transition to the next Administration
is smooth. The only political position within in the TARP is the Assistant
Secretary position. Almost all of the remaining positions are being filled
by people who are planning to remain with the program after the transition.
The next Administration will inherit an Office of Financial Stability that
is fully-staffed and executing extremely well. We have worked very hard to
make sure there would be continuity so the program does not slow down. As I
previously mentioned, we have many applications to process for the CPP over
the next several months. We have made sure the team is in place to see that
work through. We have also worked closely with the GSA to acquire dedicated
space for the entire team. We moved in this past Monday and we expect the
Special Inspector General will move to the same space in the next few weeks.
For a sense of the execution challenges this team has already successfully
faced, consider that last week alone, our team closed $48 billion of
transactions. We signed and funded over $15 billion in our Capital Purchase
Program, a $20 billion investment in Citigroup, and a total of $13 billion
to GMAC, GM and Chrysler.
Compliance and Oversight
I will now turn to oversight. Congressional committees of jurisdiction are
the traditional bodies of oversight and Treasury has participated in five
Congressional hearings on the TARP since the EESA was passed. In addition,
the Congress established four additional avenues of oversight: one, the
Financial Stability Oversight Board; two, the Special Inspector General;
three, the Government Accountability Office; and four, the Congressional
Oversight Panel. I will briefly review Treasury's interaction with each
body.
First, we moved immediately to establish the Financial Stability Oversight
Board, which is chaired by Federal Reserve Chairman Bernanke. The law
requires the Board to meet once a month, but it has met multiple times since
the law was signed, with numerous staff calls between meetings. We have also
posted the bylaws and minutes of the Board meetings on Treasury's website.
Second, the law also requires appointment of a Senate-confirmed Special
Inspector General to oversee the program. We welcome the Senate's
confirmation of Neil Barofsky as the Special Inspector General. I meet
weekly with the Inspector General and our staffs meet regularly.
Third, the law calls for the Government Accountability Office to establish a
physical presence at Treasury to monitor the program. Treasury provided
workspace for our auditors within days of the President signing the law. I
have participated in multiple briefings with the GAO and our respective
staffs are meeting almost daily for program updates and to review contracts.
Finally, the law called for the establishment of a Congressional Oversight
Panel to review the TARP. That Oversight Panel was recently formed and we
had our first meeting on Friday, November 21 and our second meeting on
Thursday, December 18. The Congressional Oversight Panel posed a number of
questions to Treasury and we provided a detail response which we published
on our website on December 31.
Reporting and Transparency
Next, I will discuss reporting requirements and transparency. Reporting
results to Congress and the American people is a critical responsibility of
the TARP. People need to see what we are doing, understand why we are doing
it, and know the effects of our actions. The law defined numerous reporting
requirements for the TARP, which I will briefly review here. Treasury has
met all of our reporting requirements on time, and will continue to do so.
All of our reports are posted on the Treasury website.
* First, the law requires Treasury to publish a Transaction Report within
two business days of completing each TARP transaction. We have published
eleven transaction reports so far.
* Second, the law requires Treasury to publish a Tranche Report to Congress
within seven days of each $50 billion commitment that is made. To date,
Treasury has published four Tranche Reports, including one this week.
* Finally, the law requires Treasury to provide a detailed report on the
overall program within 60 days of the first exercise of the TARP purchase
authority and then monthly thereafter. We have published two such reports so
far, the most recent this week.
Measuring Results
Finally, I will address the important issue of measuring the results of our
programs. People often ask: how do we know our programs are working? The
most important evidence that our strategy is working is that we have stemmed
a series of financial institution failures. The financial system is
fundamentally more stable than it was when Congress passed the legislation.
While it is difficult to isolate one program's effects given policymakers'
numerous actions, one indicator that points to reduced risk of default among
financial institutions is the average credit default swap spread for the
eight largest U.S. banks, which has declined by about 275 basis points since
before Congress passed the EESA. Another key indicator of perceived risk is
the spread between LIBOR and OIS: 1-month and 3-month LIBOR-OIS spreads have
declined about 202 and 147 basis points, respectively, since the law was
signed and about 312 and 242 basis points, respectively, from their peak
levels before the CPP was announced.
People also ask: when will we see banks making new loans? It is important to
note that almost $75 of the $250 billion CPP has yet to be received by the
banks. Treasury is executing at a rapid speed, but it will take some time to
review and fund all the remaining applications. This capital needs to get
into the system before it can have the desired effect. In addition, we are
still at a point of low confidence – both due to the financial crisis and
the economic downturn. As long as confidence remains low, banks will remain
cautious about extending credit, and consumers and businesses will remain
cautious about taking on new loans. As confidence returns, Treasury expects
to see more credit extended.
People have then asked: how will you track lending activity? Treasury has
been working with the banking regulators to design a program to measure the
lending activities of banks that have received TARP capital. We plan to use
quarterly call report data to study changes in the balance sheets and
intermediation activities of institutions we have invested in and compare
their activities to a comparable set of institutions that have not received
TARP capital investments. Because call report data is infrequent, we also
plan to augment that analysis with a selection of data we plan to collect
monthly from the largest banks we have invested in for a more frequent
snapshot.
The increased lending that is vital to our economy will not materialize as
fast as any of us would like, but it will happen much faster as a result of
deploying resources from the TARP to stabilize the system and increase
capital in our banks.
Conclusions
While we have made significant progress, we recognize challenges lie ahead.
As Secretary Paulson has said, there is no single action the federal
government can take to end the financial market turmoil and the economic
downturn, but the authorities Congress provided last fall dramatically
expanded the tools available to address the needs of our system. We are
confident that we are pursuing the right strategy to stabilize the financial
system and support the flow of credit to our economy. We have worked around
the clock to build the Office of Financial Stability, design our programs,
and execute them and will hand the next Administration a program that is
staffed and fully operational. Thank you and I would be happy to take your
questions.
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