Trojan Horse Clause
Banks May Find TARP Comes With Long Strings Attached (Update1)
By Linda Shen
Dec. 19 (Bloomberg) -- Regional lenders, insurers and credit-card companies clamoring to get into the Treasury’s $700 billion rescue fund may not know what they actually signed up for until long after they’ve pocketed the money.
As financial firms race against a Dec. 31 deadline to become eligible for federal funds, they must decide if they can live with rules allowing the U.S. to “unilaterally amend” any part of its Troubled Asset Relief Program securities-purchase agreement. Bank officers and trade groups asked the government to delete the “open-ended obligation,” said Mark Tenhundfeld, regulatory-policy director at the American Bankers Association.
“It’s inconsistent with safe and sound banking practices,” Tenhundfeld said in an interview. “Treasury is saying, in essence, ‘Sign up, but we can’t tell you exactly what you’re signing up for.’”
The government could increase the dividend it’s being paid for preferred shares, require caps on executive compensation or force banks to halt foreclosures, said David Baris, executive director for the American Association of Bank Directors, in a Nov. 3 letter to Treasury Secretary Henry Paulson. At least 148 regional lenders have preliminary approval for more than $61.7 billion in TARP funds, according to data compiled by Bloomberg. Another $14.6 billion may be doled out to 45 other companies.
“This provision grants carte blanche for this or any other Congress to change any of the terms of the agreement,” said Baris. “Congress could do just about anything it wanted.” Some lenders that can qualify for TARP might not participate because of the amendment, he said.
Declined Government Funds
More than 30 banks refused to sell preferred shares and warrants to the government under TARP. Joe Conners, chief financial officer of Philadelphia-based Beneficial Mutual Bancorp Inc., said his bank declined TARP money in part because of the amendment.
“You’re signing a contract with a counterparty, and the counterparty in this case is going through a complete management change,” Conners said in an interview. “You’re basically signing away your right to have any kind of remedy if in fact they do change the rules.”
Publicly held financial firms have until year-end to gain bank or lender holding company status to qualify for TARP money, the Treasury said on its Web site. Closely held companies have until Jan. 15. Discover Financial Services, the fourth-biggest credit-card network, said yesterday it’s planning to convert to a bank holding company so it can get as much as $1.2 billion of TARP funds. American Express Co. won that status last month.
Under TARP, the government set aside $250 billion to recapitalize banks. It allocated $125 billion to nine larger firms, then invited banks, lenders, and any other company that could claim bank or savings and loan status to apply for the balance.
‘Lots of Deals’
Banks participating in TARP aren’t commenting on the amendment, and Tenhundfeld said it’s “unlikely” the amendment will be changed. Calls to Treasury spokeswoman Jennifer Zuccarelli weren’t returned.
The government has “already entered into a lot of deals that have that provision in there,” Tenhundfeld said. “They would have to go back and amend those agreements to limit their flexibility.”
Conners said the government wants to avoid facing lawsuits as it did amid the savings and loan crisis of the 1980s. More than 120 lawsuits were spawned by a 1989 law that wiped out the value of a paper asset known as supervisory goodwill, sending many savings and loans into insolvency. The government won most of the suits, and fewer than 20 are still active.
“The government changed the rules after the fact,” Conners said. “Now they’ve learned their lesson. They’ve put it in writing.” |
