Professional Documents
Culture Documents
American Bankers Association Letter To Treasury Secretary Timothy Geithner
American Bankers Association Letter To Treasury Secretary Timothy Geithner
American Bankers Association Letter To Treasury Secretary Timothy Geithner
Washington, DC 20036
1-800-BANKERS
www.aba.com
World-Class Solutions,
April 16, 2009
Leadership & Advocacy
Since 1875
We also strongly recommend that you extend the deadlines by which holding company
applications must have been approved in order for a holding company to be eligible to participate
in the CPP. Providing interested S corporation banks and mutual banks sufficient time to form
holding companies and apply for an investment in the newly formed holding companies would
lessen the inequities otherwise created by the differing capital treatments.
We request that you permit companies to withdraw from the CPP without having to pay
what amounts to a prepayment penalty. The American Recovery and Reinvestment Act of 2009
(ARRA) authorizes companies to withdraw from the CPP without waiting a specified length of
time or raising capital from third parties. Section 7001 of the ARRA states, in relevant part:
Participating institutions may be divided into two categories for purposes of this
discussion.
The first consists of publicly traded institutions, which issued preferred stock
plus warrants entitling Treasury (or the current holder) to acquire common stock
of the issuer in an amount equal to 15% of Treasury’s initial investment. These
warrants are immediately exercisable although, as far as we know, none have
yet been exercised.
1
The CPP has been implemented under the authority of Title 1 of the Emergency Economic Stabilization
Act, captioned “Troubled Assets Relief Program” (commonly referred to as TARP).
2
The second group consists of non-publicly traded institutions, which issued
preferred (or senior) securities plus warrants entitling Treasury to acquire
“warrant preferred” shares or “warrant securities” of the issuer (collectively
referred to herein as warrant shares). These warrants, which were exercised by
Treasury at closing, entitled Treasury to receive warrant shares in an amount
equal to 5% of its initial investment.
Upon withdrawing from the CPP, a publicly traded institution has the option of redeeming
the warrants at a price arrived at through an appraisal process; if it does not do so, Treasury will
liquidate the warrants by selling them to a third party. A non-public institution must pay Treasury
for the preferred/senior securities that the company issued and for the warrant shares. Thus,
depending on the type of institution in question, the issuing company either (a) must pay Treasury
a significant sum of money to redeem outstanding warrants or the warrant shares (as appropriate)
or (b) have its common shareholders’ interests diluted. The purpose of these warrants was to
provide what was deemed an appropriate return to government investment, and the warrants were
calibrated premised on the assumption that investments would remain in place several years.
Many banks participated in the CPP reluctantly and at the urging of their primary regulator.
The public backlash and media portrayal of the recipients of federal funds has caused many
participants to conclude that the burdens associated with the program far outweigh its benefits.
These institutions believe it is in the best interests of their customers, shareholders, and
communities to repay the funds. However, to do so the company must repay not only Treasury’s
investment in the bank plus accrued and unpaid dividends but also an additional profit for Treasury
equal to 5% of the investment (for non-publicly traded companies) or the fair market value of the
warrants (for publicly traded companies). For a very short term investment, this amounts to an
onerous exit fee, not a proper return on investment.2
Banks seeking to exit the CPP are not looking for a windfall. Rather, they simply want the
flexibility to leave a program that, for them, has quickly become unacceptable and changed in its
purpose. As long as the bank’s primary regulator agrees that the bank will remain able to meet the
needs of its community in a safe and sound manner, there is no reason for Treasury to impose such
a punitive obstacle to exiting the CPP. While the terms of the agreement were known to
participants prior to closing, what was unknown to all was that a program designed to shore up
public confidence in banks would have precisely the opposite effect in many cases.
Thank you very much for your attention to these issues. We would be pleased to provide
any further assistance you would find helpful.
Sincerely,
Diane Casey-Landry
2
We recognize that section 7001 of the ARRA directs Treasury to liquidate the warrants “at the current
market price.” We will be consulting with Congress on the need to amend this language to permit the flexibility
described above and request that Treasury support a proposed amendment as needed.