TARP double dipping is upon us, as the government indicates an ever-increasing willingness to dole out money to one and all. We've now seen 2 weaker institutions receive double dollops of government help -- Citi and Suntrust. What's telling is not merely that they both got two rounds of funds, but that they got it on different terms.  Among the differences are both their financial terms and their accompanying restrictions on executive compensation.  Both are indications of what future double dippers may (or may not get) as well as the broader intentions and inclinations of an open-walleted Treasury Department.

Suntrust was the most recent double dipper, requesting and receiving an additional $1.35 billion.  Given the proximity of this investment to the original $3.5 billion government investment, Treasury antennae (and hackles) should have been raised. After all, TARP funds are not supposed to be used to prop up weaker institutions, and Suntrust certainly seems a candidate for this designation.  Further, even Suntrust’s own shareholders sought stricter compensation restrictions.  In its late October shareholder proposal, the Teamsters Union sought to restrict executive compensation beyond the terms required in the TARP. For technical reasons, the SEC has permitted Suntrust to exclude the proposal from its upcoming proxy.

Surprisingly, then, the government didn't demand stricter restrictions.  Essentially, Treasury granted Suntrust the same terms as the initial transaction: preferred securities paying a 5% dividend in the first five years, restrictions on executive compensation including golden parachute payments, and a clawback on bonuses.  Of note, SunTrust looks like it would've been happy to get even more money - if only that nasty thing called the Emergency Economic Stabilization Act (EESA) didn't get in their way by imposing a 3% capital maximum.

However, SunTrust was not the first bank to go back to the government well - they are in the good company of Citigroup. Citi’s re-re-capitalization happened not long before, with its transaction closing on December 31st.  It will receive an additional $20 billion, on top of the $25 billion it received at the end of October.  However, this time, the Treasury granted Citi funds on very different terms. These include an 8% annual dividend, extension of employment compensation restrictions to include the senior leadership members as well as the senior executives, and a restriction on bonus payments to both of these groups to 60% of the prior year’s bonus pool. Along with these more punitive terms came even greater government largesse:  in addition to recapitalizing Citi, the government entered into a loss-sharing arrangement. This is accomplished through a government guarantee on $306 billion of mortgage-backed assets, with Citi assuming the first $29 billion of any losses and the government assuming 90% of any losses beyond that.

To be understated, this is all terribly…interesting.  In its initial presentations, TARP funding was to be limited to only strong insitutions, not weak ones. Treasury’s unwillingness to fund National City, perceived as a weaker bank, was rumored to be one of the realities that drove it into a quick merger with PNC in a transaction that just closed.  But that unwillingness appears to have evaporated.  Think about it - the government has three existing funding programs under TARP: the Capital Purchase Program (CPP) with approximately 215 participants; a program for “Systemically Significant Failing Institutions” with one participant, AIG; and the Automotive Industry Financing Program with three participants, GM, GMAC, and Chrysler.

However, the government seems determined to fund what, at times, seems like the entire U.S. financial system (and beyond).  Its determination is so great, they've even set up a dedicated program with an official sounding title under TARP, the Targeted Investment Program (TIP).  The TIP allows the Treasury Department to provide funding on a case-by-case basis for financial institutions it considers in need of additional assistance outside of the CPP. Its determination is to be based on such criteria as the how important the institution is to the U.S. economy, its ability to obtain alternative sources of funding, and the extent to which creditors and counterparties would be affected if the institution became destabilized.  Surprisingly, the Treasury Department just released the guidelines for this program on January 2nd yet carried out the Citigroup transaction on December 31st.

As the TARP program continues its metamorphosis, the Treasury Department has been forced to act first and then worry about the details later.  Needless to say, this is much to the consternation of the Congress and the U.S. taxpayers. However, a cause of equally great consternation but less uproar is the willingness to fund weakening institutions.  Before additional TARP double dipping further overwhelms, a review of the current set of single-dippers is called for.

Published:  January 8, 2009