At the beginning of February, US President Barack Obama’s new Treasury
secretary, Tim Geithner, unveiled his raft of measures aimed at restoring
investor and consumer confidence in the country’s banking sector, while also
curbing executive pay in those financial institutions the government was forced
to bail out.
Obama’s Financial Stability Plan aims to assure US taxpayers that every
dollar used in bank bailouts is directed toward lending and economic
revitalisation, and that there will be a new era of accountability, transparency
and conditions on the financial institutions receiving funds.
A key aspect of the plan is an effort to strengthen financial institutions so
that they have the ability to support recovery. This will be achieved through
1) A comprehensive stress test
This is a forward-looking assessment of what banks need to keep lending even
through a severe economic downturn. Key features include:
• Increased transparency, which will facilitate a more effective use of market
discipline in financial markets. The Treasury will work with bank supervisors,
the Securities and Exchange Commission and accounting standard setters in their
efforts to improve public disclosure by banks;
• All relevant financial regulators — the Federal Reserve, the Federal Deposit
Insurance Corporation, Office of the Comptroller of the Currency and the Office
of Thrift Supervision will work together in a co-ordinated way to bring more
consistent, realistic and forward looking assessment of exposures on the balance
sheet of financial institutions; and
•All banking institutions with assets in excess of $100bn will be required to
participate in the coordinated supervisory review process and comprehensive
2) A capital assistance programme
Once a financial institution has undergone a comprehensive “stress test” it will
have access to a Treasury provided “capital buffer” to help absorb losses and
serve as a bridge to receiving increased private capital.
3) A Financial Stability Trust
Any capital investments made by the Treasury under the capital assistance
programme will be placed in a separate entity the Financial Stability Trust
set up to manage the government’s investments in US financial institutions.
Firms will be required to show how the assistance from financial stability plan
will expand lending. The new rules state that:
• All recipients of assistance must submit a plan for how they intend to use
that capital to preserve and strengthen their lending capacity. This plan will
be submitted during the application process and the Treasury Department will
make these reports public;
• Firms’ monthly reports must show how many new loans they provided to
businesses and consumers and how many asset-backed and mortgage-backed
securities they purchased, accompanied by a description of the lending
environment in the communities and markets they serve. This report will also
include a comparison to their most rigorous estimate of what their lending would
have been in the absence of government support; and
• All information disclosed or reported to the Treasury by recipients of capital
assistance will be posted on www.FinancialStability.gov so taxpayers can
determine whether these programmes are succeeding in creating and preserving
lending and financial stability.
The Financial Stability Plan also aims to put strict limits on the “bonus
culture” that is seen by many as being at the root of the crisis. The government
says that limiting common dividends, stock repurchases and acquisitions provides
assurance to taxpayers that all of the capital invested by the government under
the Financial Stability Trust will go to improving banks’ capital bases and
promoting lending. All banks that receive new capital assistance will be:
• Restricted from paying quarterly common dividend payments in excess of $0.01 a
share until the government investment is repaid;
• Restricted from repurchasing any privately-held shares, subject to approval by
the Treasury Department and their primary regulator, until the government’s
investment is repaid; and
• Restricted from pursuing cash acquisitions of healthy firms until the
government investment is repaid. Exceptions will be made for explicit
supervisor-approved restructuring plans.
Firms will also be required to comply with the senior executive compensation
restrictions announced on 4 February, including those pertaining to a $500,000
total annual compensation cap plus restricted stock payable when the government
is getting paid back.
The Treasury Department also announced measures to ensure that lobbyists do
not influence applications for, or disbursements of, Financial Stability Plan
funds, and will certify that each investment decision is based only on
investment criteria and the facts of the case.
Added to that, the Treasury Department will post all contracts under the plan
on the financial stability website within five to 10 business days of their
completion. Whenever the Treasury makes a capital investment under these new
initiatives, it will make public the value of the investment, the quantity and
strike price of warrants received, the schedule of required payments to the
government and when government is to be paid back.
The terms of pricing of these investments will be compared to terms and
pricing of recent market transactions during the period the investment was made,
for Treasury secretary Tim Geithner’s statement.