Raw Finance

This morning the U.S. Treasury Department announced that it had invested $2.8 billion in 49 banks on December 19, 2008, through the Capital Purchase Program.  In addition, the Treasury closed $1.9 billion in transactions with 43 banks on December 23.  Full details of these transactions will be available on Monday, December 29.

The Capital Purchase Progam is part of the Troubled Asset Relief Program and was designed to make direct investments in banks, thus bolstering their balance sheets.  In return for the investment the Treasury receives preferred stock and warrants from the banks, which is expected to give the Treasury, and therefore the taxpayers, a future return on its investment when the financial industry regains its health.  The original allocation of TARP funds for the Capital Purchase Program was $250 billion.  To date, the Department has made $162 billion of investments, receiving preferred stock and warrants from participating institutions.    Investments have ranged from as small as $1.5 million to as large as $25 billion, financing community banking and Community Development Financial Institutions in 41 states and Puerto Rico.

Banks that participate in the Capital Purchase Program are subject to certain restrictions, including limitations on executive compensation as follows:

Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury is issuing interim final rules for these executive compensation standards.