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Exiting TARP: Repayments by the
Largest Financial Institutions

SIGTARP 11-005

September 29, 2011

Office of the special inspector general
For the Troubled Asset Relief Program
1801 L Street, NW, 4th Floor
Washington, D.C. 20220

September 29, 2011
MEMORANDUM FOR:

The Honorable Timothy F. Geithner, Secretary of the Treasury
The Honorable John Walsh, Acting Comptroller of the Currency
The Honorable Martin J. Gruenberg, Acting Chairman, Board of Directors
of the Federal Deposit Insurance Corporation
The Honorable Ben S. Bernanke, Chairman, Board of Governors of the
Federal Reserve System

FROM:

Christy L. Romero, Acting Special Inspector General for the Troubled
Asset Relief Program

SUBJECT:

Exiting TARP: Repayments by the Largest Financial Institutions

We are providing this audit report for your information and use. It discusses the development
and application of criteria by Treasury and Federal banking regulators for the largest banks to
repay and exit CPP and other TARP programs.
The Office of the Special Inspector General for the Troubled Asset Relief Program conducted
this audit under the authority of Public Law 110-343, as amended, which also incorporates the
duties and responsibilities of inspectors general under the Inspector General Act of 1978, as
amended.
We considered comments from the Department of the Treasury, the Federal Reserve Board, the
Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency when
preparing the final report. The comments are addressed in the report, where applicable, and
copies of agencies’ responses to the audit are included in Appendix G of this report.
We appreciate the courtesies extended to the SIGTARP staff. For additional information on this
report, please contact Mr. Kurt Hyde, Deputy Special Inspector General for Audit and Evaluation
(Kurt.Hyde@treasury.gov / 202-622-4633), or Ms. Kimberley A. Caprio, Assistant Deputy
Special Inspector General for Audit and Evaluation (Kimberley.Caprio@treasury.gov / 202-9278978).

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Exiting TARP: Repayments by the Largest Financial Institutions

Summary
The first program under the Troubled Asset Relief
Program (“TARP”) was the Capital Purchase
Program (“CPP”), through which the U.S. Department
of the Treasury (“Treasury”) invested in what
Treasury described as healthy and viable financial
institutions to promote financial stability and
confidence in the financial system. Approximately
80% ($163.5 billion) of all CPP funds went to the 17
CPP banks that were subject to the Supervisory
Capital Assessment Program (“SCAP”), which stresstested the nation’s 19 largest financial institutions and
estimated future losses, revenues, and needed
reserves.
Despite the dramatic efforts of the U.S. Government,
in early 2009, the market still lacked confidence in
some of the nation’s largest financial institutions and
some TARP recipients complained of a stigma
associated with their participation in the program.
Generally, under the original terms of CPP, banks
were not permitted to repay Treasury and exit TARP
for three years. That changed with the enactment of
the American Recovery and Reinvestment Act of
2009 (“ARRA”) on February 17, 2009, which
eliminated the waiting period. In May 2009, the
Federal Reserve Board (“FRB”) released the results
of the stress test for SCAP banks and FRB
subsequently issued guidance for TARP repayments.
FRB’s guidance for TARP exit by SCAP institutions
focused on capital – specifically the TARP recipient’s
ability to meet SCAP capital targets and its ability to
issue common stock in the market. Nine SCAP
institutions quickly repaid Treasury’s investment and
exited TARP in June 2009. The eight remaining
SCAP institutions that received CPP funds were
considered to be weaker by regulators than the nine
that exited TARP in June 2009. These included
some of the nation’s largest banks, such as Bank of
America Corp. (“Bank of America”), Citigroup Inc.
(“Citigroup”), and Wells Fargo & Company (“Wells
Fargo”). Non-public guidance issued by FRB on
November 3, 2009, and agreed to by the other
regulators and Treasury, added a provision that
would allow these SCAP banks to repay on an
expedited basis.
As part of SIGTARP’s continuing oversight, we
performed a review of the process that Treasury and
Federal banking regulators established for the largest
SIGTARP 11-005

banks to repay and exit CPP and other TARP
programs in which the banks participated.
SIGTARP’s reporting objectives for this audit were to
determine to what extent: (1) Treasury maintained a
consistent and transparent role in the TARP
repayment process; and (2) Federal banking
regulators consistently coordinated and evaluated the
TARP repayment request. SIGTARP focused this
review on repayments by the first 13 of the 17 SCAP
institutions that participated in CPP to repay
Treasury’s TARP investment.

What SIGTARP Found
In February 2009, when ARRA was enacted,
Treasury and Federal banking regulators had not
developed criteria or guidance to evaluate a bank’s
proposal to exit TARP. Treasury published basic
criteria in May, and on June 1, 2009, FRB issued
guidance for those banks that were subject to the
stress tests (SCAP institutions) to exit TARP. FRB’s
guidance primarily focused on the banks’ capital
levels. Institutions that met SCAP target capital
ratios were allowed to repay after satisfying certain
requirements, including issuing new common stock.
In June 2009, nine out of the 17 SCAP banks exited
CPP: JPMorgan Chase & Co., The Goldman Sachs
Group, Inc., Morgan Stanley, U.S. Bancorp, Capital
One Financial Corporation, American Express
Company, BB&T Corporation, The Bank of New York
Mellon, and State Street Corporation. The remaining
eight were not yet eligible to repay. Regulators saw
those institutions as weaker than the SCAP
institutions that exited TARP and required them to
meet additional criteria including raising additional
capital.
After FRB issued new, non-public guidance on
November 3, 2009, to the eight remaining SCAP
institutions, some institutions immediately requested
to exit TARP, under a provision in the revised
guidance that permitted expedited repayment. These
included Bank of America, Citigroup, Wells Fargo,
and PNC Financial Services Group, Inc. (“PNC”).
The November guidance provided that, subject to
meeting criteria such as demonstrating access to
long-term debt markets and satisfying SCAP
requirements, the remaining institutions may be
allowed to repay upon issuing at least $1 in new
common equity for every $2 TARP repaid. An FRB
official told SIGTARP that the 1-for-2 ratio was, in

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Exiting TARP: Repayments by the Largest Financial Institutions

part, based upon an assessment of the banks’ capital
levels from the recently completed stress tests.
SIGTARP found that interagency sharing of data,
vigorous debate among regulators, and hard-won
consensus increased the amount and improved the
quality of the capital that SCAP institutions were
required to raise to exit TARP. FRB agreed to
consult with the Federal Deposit Insurance
Corporation (“FDIC”) and the Office of the
Comptroller of the Currency, on repayment
proposals. That consultation often generated both
conflict and frustration because of varied and
occasionally conflicting policy approaches as
regulators pushed back at different times on
repayment proposals. FDIC, exposed through its
deposit insurance fund and its emergency lending
program, was by far the most persistent in insisting
that banks raise more common stock. The checksand-balances that resulted from this interagency
coordination helped to ensure that the nation’s
largest financial institutions were better capitalized
upon exiting TARP than prior to TARP. However,
three aspects of the TARP exit process serve as
important lessons learned.
First, Federal banking regulators relaxed the
November 2009 repayment criteria only weeks after
they were established, bowing at least in part to a
desire to ramp back the Government’s stake in
financial institutions and to pressure by institutions
seeking a swift TARP exit to avoid executive
compensation restrictions and the stigma associated
with TARP participation. The large financial
institutions seeking to exit TARP were notably
persistent in their efforts to resist regulatory demands
to issue common stock, seeking instead more
creative, cheaper, and less sturdy alternatives that
provide less short- or long-term loss protection than
new common stock. Bank of America, Wells Fargo,
and PNC, for example, requested expedited
repayment, but each institution balked at issuing the
amount of common stock required by regulators.
When Bank of America, Citigroup, and Wells Fargo
repaid Treasury in December 2009, only Citigroup
met the 1-for-2 minimum established by the
guidance, combining new common stock and other
types of capital to meet a more stringent requirement.
Because the regulators failed to adhere to FRB’s
clearly and recently established requirements, the
process to review a TARP bank’s exit proposal was
ad hoc and inconsistent.

SIGTARP 11-005

Second, by not waiting until the banks were in a
position to meet the 1-for-2 provision entirely with
new common stock, there was arguably a missed
opportunity to further strengthen the quality of each
institution’s capital base to protect against future
losses without selling sources of revenue. Although
the 1-for-2 minimum was established as a capital
buffer to allow each bank to absorb losses under
adverse market conditions, the discussion quickly
switched to analysis of how much common stock the
market could absorb during a frenzied period in which
each of these TARP banks wanted to exit at that time
based in part on news that other large banks were
exiting TARP. Concerned about executive
compensation restrictions and a lack of market
confidence that might result from being the last large
TARP bank to exit, banks successfully convinced
regulators that it was the right time to exit TARP, and
that the market would not support a 1-for-2 common
stock issuance. There was arguably a missed
opportunity to wait until the market could absorb a 1for-2 common stock issuance, which would have had
long lasting consequences in further strengthening
the quality of the banks’ capital base.
Third, SIGTARP also found that Treasury
encouraged TARP banks to expedite repayment,
opening Treasury to criticism that it put accelerating
TARP repayment ahead of ensuring that institutions
exiting TARP were sufficiently strong to do so safely.
Treasury Secretary Timothy F. Geithner told
SIGTARP that putting pressure on firms to raise
private capital was part of a “forceful strategy of
raising capital early” and “We thought the American
economy would be in a better position if [the firms]
went out and raised capital.” Treasury’s involvement
was also more extensive than previously understood
publicly. While regulators negotiated the terms of
repayment with individual institutions, Treasury
hosted and participated in critical meetings about the
repayment guidance, commented on individual TARP
recipient’s repayment proposals, and in at least one
instance urged the bank (Wells Fargo) to expedite its
repayment plan. The result was a nearly
simultaneous exit by Bank of America, Wells Fargo,
and Citigroup, involving offerings of a combined total
of $49.1 billion in new common stock in an already
fragile market, despite warnings that large and
contemporaneous equity offerings might be too much
for the market to bear. While none of the offerings
failed, Citigroup exercised only a portion of its
overallotment option, and later complained that Wells

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Exiting TARP: Repayments by the Largest Financial Institutions

Fargo’s simultaneous offering sapped demand for
Citigroup’s stock.
The lessons of the financial crisis and the events
surrounding TARP repayments and exit demonstrate
the importance of implementing strong capital
requirements and holding institutions strictly
accountable to those requirements. Some of the
nation’s largest financial institutions had too little
capital before the last crisis, a fact that not only
contributed to the crisis itself but also necessitated
the subsequent bailouts. Regulators leveraged
TARP repayment requirements to improve the quality
of capital held by the nation’s largest financial
institutions in the wake of the financial crisis, but
relaxed those requirements shortly after establishing
them. Whether these institutions exited TARP with a
strong and high quality capital structure sufficient to
absorb their own losses and survive adverse market
conditions without further affecting the broader
financial system remains to be seen. There will
always be tension between the protection of the
greater financial system through robust capital
requirements and the desire of individual financial
institutions to maximize profits and shareholder
returns. While striking the right balance is no easy
task, regulators must remain vigilant against
institutional demands to relax capital requirements
while taking on ever more risk.

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Exiting TARP: Repayments by the Largest Financial Institutions

Table of Contents
Introduction ................................................................................................................................................. 1
Background ................................................................................................................................................. 4
June 2009 Guidance and Subsequent Repayments ................................................................................... 10
November 2009 Clarifying Guidance ....................................................................................................... 17
Bank of America’s TARP Exit ................................................................................................................. 24
Citigroup’s TARP Exit ............................................................................................................................. 34
Wells Fargo’s TARP Exit ......................................................................................................................... 44
PNC’s TARP Exit ..................................................................................................................................... 50
Capital Quality Improved Among Bank of America, Citigroup, Wells Fargo, and PNC, but
Pressures Remain................................................................................................................................... 56
Conclusions ............................................................................................................................................... 59
Management Comments ........................................................................................................................... 64
Appendix A – Scope and Methodology .................................................................................................... 65
Appendix B – Role of Federal Banking Regulators ................................................................................. 68
Appendix C – Additional FAQs on Capital Purchase Program Repayment Published by Treasury
in May 2009 ........................................................................................................................................... 69
Appendix D – June 2009 and November 2009 TARP Repayment Guidance to SCAP Institutions ........ 71
Appendix E – FRB Redemption Request Decision Memo ....................................................................... 76
Appendix F – SCAP Institutions’ Exit from CPP ..................................................................................... 80
Appendix G – Management Comments from FRB, OCC, and Treasury ................................................. 81
Appendix H – Audit Team Members........................................................................................................ 87

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1

Introduction
The first use of Troubled Asset Relief Program (“TARP”) funds was the Capital
Purchase Program (“CPP”), through which the U.S. Department of the Treasury
(“Treasury”) made investments in qualifying banks, bank holding companies, and
other financial institutions in exchange for preferred stock1 (or certain debt
instruments)2 and warrants.3 Through CPP, Treasury sought to invest funds in
“healthy, viable institutions” as a way of promoting financial stability,
maintaining confidence in the financial system, and permitting lenders to meet the
nation’s credit needs. From October 2008 through December 2009, when CPP
closed to new investments, Treasury invested $204.9 billion in 707 institutions.
Approximately 80% of all CPP investments – $163.5 billion – went to the 17 CPP
banks that were subject to the Supervisory Capital Assessment Program
(“SCAP”), a joint Treasury and regulator program that stress-tested the nation’s
19 largest financial institutions.4
Despite the dramatic efforts of the U.S. Government, in early 2009, the market
still lacked confidence in some of the nation’s largest financial institutions and
some TARP recipients complained of a stigma associated with their participation
in the program. Under the original terms agreed to by each CPP recipient, banks
and other financial institutions were not permitted to repay Treasury’s TARP
investment and exit TARP for three years, unless certain exceptions applied.5
When asked about the rationale for establishing a repayment waiting period,
Treasury referred the Office of the Special Inspector General for the Troubled
Asset Relief Program (“SIGTARP”) to language published by former Treasury
Secretary Henry Paulson, citing the important role that CPP funds played in
calming markets and restoring confidence in the banking industry. On
February 17, 2009, the American Recovery and Reinvestment Act of 2009
(“ARRA”) changed the timing and conditions under which CPP recipients could
repay Treasury’s TARP investment. ARRA provided that “subject to consultation
1

Preferred stock is equity ownership that usually pays a fixed dividend prior to distributions for common stock owners
but only after payments due to holders of debt and depositors. It typically confers no voting rights. Preferred stock
also has priority over common stock in the distribution of assets when a bankrupt company is liquidated.
2
The debt instruments were subordinated debt, which ranks below senior debt but above equity with regard to investors’
claims on company assets or earnings. Senior debt holders are paid in full before subordinated debt holders are paid.
There may be additional distinctions of priority among subordinated debt holders.
3
The Emergency Economic Stabilization Act of 2008 (“EESA”) mandated, with limited exceptions, that Treasury
receive warrants granting it the right to purchase at a previously determined price shares of common stock for certain
publicly traded institutions or preferred stock or debt for certain non-publicly traded institutions for which it provided
assistance.
4
The SCAP stress tests were a forward-looking exercise designed to estimate losses, revenues, and reserve needs. The
tests were conducted between February 2009 and April 2009, with results announced in May 2009. Of the 19
institutions that participated in SCAP, 17 were CPP participants. See the Background for further discussion of SCAP.
5
For the purposes of this report, “exit” from TARP refers to the removal of restrictions placed on TARP recipients by
EESA, either through the repurchase of securities held by Treasury or through other means of ending Treasury’s TARP
investment in the institution.

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2

with the appropriate Federal banking agency…[Treasury] shall permit a TARP
recipient to repay…[TARP funds] without regard to whether the financial
institution has replaced such funds from any other source or to any waiting
period.”
In February 2009, at the time ARRA was enacted, Treasury and the Federal
banking regulators had not developed criteria or guidance to evaluate a bank’s
proposal to repay Treasury’s TARP investment by repurchasing its preferred
shares held by Treasury and exit TARP. In May, the Federal Reserve Board
(“FRB”) released the results of the SCAP stress tests and some SCAP banks
immediately requested to repay Treasury and exit TARP. That month, Treasury
published basic criteria for CPP institutions seeking to exit TARP, and on
June 1, 2009, FRB issued a press release with guidance specific to SCAP banks
that wanted to repay Treasury and exit TARP. Institutions that met the target
capital ratios established by SCAP were allowed to repay after satisfying certain
requirements, including raising common stock through a public issuance. Those
that did not meet the SCAP targets were required to wait. That month, nine out of
the 17 SCAP banks that participated in CPP exited the program: JPMorgan Chase
& Co. (“JPMorgan”), The Goldman Sachs Group, Inc. (“Goldman Sachs”),
Morgan Stanley, U.S. Bancorp, Capital One Financial Corporation (“Capital
One”), American Express Company (“American Express”), BB&T Corporation
(“BB&T”), The Bank of New York Mellon (“BNY Mellon”), and State Street
Corporation (“State Street”).
In the fall of 2009, some of the SCAP banks remaining in TARP began
communicating to Treasury and the Federal banking regulators their desire to
repay and exit TARP. These included some of the nation’s largest banks, such as
Bank of America Corp. (“Bank of America”), Citigroup Inc. (“Citigroup”), Wells
Fargo & Company (“Wells Fargo”), and the PNC Financial Services Group, Inc.
(“PNC”). Some of these institutions expressed concern about the perceived
stigma associated with their participation in TARP as well as being subject to
TARP executive compensation restrictions. Treasury and the Federal banking
regulators engaged in discussions about revising the June criteria to provide
additional guidance for these SCAP banks to repay and exit TARP. The result
was new non-public guidance issued by FRB on November 3, 2009, which added
an option for remaining SCAP banks to issue a certain amount of common equity
to be considered for TARP repayment on an expedited basis.
SIGTARP focused its review on repayments by the largest CPP recipients;
specifically, the first 13 (of the 17 SCAP institutions that participated in CPP) to
repay Treasury’s CPP investment and exit TARP, with additional detail on those
occurring after FRB issued revised repayment guidance in November 2009.6
6

In response to a draft of this report, FRB strenuously objected to the inclusion of a significant amount of text on the
grounds that it was confidential and that disclosure would violate the bank supervision privilege. In doing so, FRB
expressed concern that SIGTARP’s inclusion of certain discussion among regulators about specific repayment requests

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3

Though they represent less than 2% of the number of institutions receiving CPP
funds, the repayments by the 13 institutions reviewed in this report comprise
approximately 81.5% of the total principal amount repaid to Treasury under CPP
as of August 31, 2011. According to Treasury, as of that date, 219 banks and
financial institutions have fully repaid Treasury’s CPP investment and exited the
program. Treasury had received a total of $183.3 billion (or 89.4%) in principal
repayments of its $204.9 billion CPP investment, and had collected an additional
$25.6 billion in proceeds through dividends, interest, the sale of warrants, and
gains on common stock investments.
This report examines the development of TARP repayment guidance and its
application by Treasury and the Federal banking regulators to the first 13 SCAP
institutions to exit the program.7 Specifically, the objectives of the audit were to
determine the extent to which:



Treasury maintained a consistent and transparent role in the TARP repayment
process; and
Federal banking regulators consistently coordinated and evaluated TARP
repayment requests.

For discussion of the audit scope and methodology, see Appendix A. For
additional information and comments from responding agencies, see Appendix G.

might, among other things, affect FRB’s ability to maintain open communication with supervised financial institutions.
SIGTARP respectfully disagrees with FRB’s prediction of harm and believes that the exclusion of such information
unnecessarily inhibits transparency, and is a missed opportunity to shed additional light on transactions that involved
billions of dollars in taxpayer money. Nevertheless, out of an abundance of caution, SIGTARP has removed some of
the text, while reaching agreement with FRB on the inclusion of other portions.
7
SIGTARP included in its review any SCAP institution that had repaid TARP as of December 31, 2010. Since that date,
three more SCAP institutions have repaid and exited TARP.

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4

Background
By September 2008, financial markets suffered from a severe loss of investor
confidence. During that month, a succession of major U.S. financial institutions
either collapsed or approached the brink of failure, there was historic turmoil in
financial markets, and the Government stepped in to provide unprecedented
Federal assistance through TARP. On October 13, 2008, in a meeting with thenTreasury Secretary Henry Paulson and other senior Government leaders, nine
large and systemically important institutions8 agreed to accept $125 billion in
TARP capital funding. These nine institutions were chosen for their perceived
importance to the broader financial system. The next day, Treasury announced
the establishment of CPP, making up to $250 billion in capital funding –
including the $125 billion accepted by the original nine banks the day before –
available to a broad array of qualifying financial institutions9 that were deemed to
be healthy and viable by Federal regulators10 and Treasury.
On October 28, 2008, the original nine financial institutions became the first
recipients of TARP funds disbursed through CPP. Through the program,
Treasury sought, in part, to “encourage U.S. financial institutions to build capital
to increase the flow of financing to U.S. business and consumers and to support
the U.S. economy.” The terms of CPP limited the amount of funding that
qualifying institutions could receive to between 1% and 3% of their risk-weighted
assets,11 up to a maximum of $25 billion.12 The original terms also generally
restricted institutions from repaying CPP funds within three years of Treasury
making the investment.13 In exchange for its investment, Treasury received

8

The nine institutions were: Bank of America, BNY Mellon, Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch,
Morgan Stanley, State Street, and Wells Fargo. Bank of America acquired Merrill Lynch in January 2009. For details
on the selection of these nine institutions and Bank of America’s acquisition of Merrill Lynch, see SIGTARP report
“Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the
U.S. Financial System,” October 5, 2009.
9
Pursuant to EESA, qualifying financial institutions were allowed to participate in TARP “without discrimination based
on size, geography, or form of organization.”
10
The institutions participating in CPP are currently regulated by FRB, the Federal Deposit Insurance Corporation
(“FDIC”), and the Office of the Comptroller of the Currency (“OCC”). Pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act, the Office of Thrift Supervision (“OTS”) will be eliminated 90 days after its
powers and functions were transferred to the other Federal banking agencies on July 21, 2011. Appendix B identifies
and explains the role of each Federal banking regulator.
11
The risk-weighting of assets is the classification of assets according to the risk of loss from investment in the asset. A
bank’s assets are weighted according to credit risk, and some assets, such as debentures, are assigned a higher risk than
others, such as cash or government bonds. This asset calculation is used in determining the capital requirement for a
financial institution.
12
In May 2009, Treasury increased the maximum amount of CPP funding that small institutions could receive 3% to 5%
of risk-weighted assets. Small institutions were defined as those with total assets less than $500 million.
13
Institutions that sold qualifying perpetual preferred stock or common stock for cash proceeds worth at least 25% of
Treasury’s CPP investment to repay were excepted from this restriction. OCC determined whether equity offerings
qualified an institution for this exception.

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5

dividend-paying preferred stock (or certain debt instruments) and warrants to
purchase common stock.
Treasury had invested $204.9 billion in 707 financial institutions by the time CPP
closed to new investments in December 2009. While the 707 CPP participants
reflected a diverse array of financial institutions, nearly half of the $204.9 billion
in CPP funds were concentrated in four of the largest banks – Bank of America,
Citigroup, JPMorgan, and Wells Fargo – each of which received the maximum
$25 billion investment permitted under the program.14

Bank of America and Citigroup Received Additional Government
Support
Despite a public statement by Treasury and Federal banking regulators that CPP
was limited to healthy institutions, within months of receiving $25 billion each in
CPP funds, two SCAP banks – Bank of America and Citigroup – each received
additional TARP funds under the Targeted Investment Program (“TIP”),15 as well
as agreements for protection on losses of certain assets on those institutions’
books and records under the Asset Guarantee Program (“AGP”).16
In November 2008, Citigroup teetered on the brink of failure. The company
would lose $27.7 billion in 2008, and by November 19, 2008, its stock price had
dropped precipitously. With Citigroup’s survival in doubt, the Government,
through TARP and other means, stepped in to save it. The Government provided
Citigroup with an additional $20 billion of TARP funds in exchange for preferred
stock under TIP and a Federal guarantee of a portion of losses on a designated
pool of $306 billion in Citigroup assets under AGP.
In December 2008, Bank of America was considering terminating a planned
acquisition of Merrill Lynch, another CPP recipient that incurred significant
losses in the fourth quarter of 2008. Because Treasury and FRB officials believed
termination of the acquisition could potentially weaken Bank of America and
destabilize the financial system, they pressured Bank of America to complete the
acquisition and provided Bank of America with $20 billion in additional TARP
funds through TIP, as well as an agreement for a Federal guarantee of a portion of
losses on a pool of up to $118 billion in assets.17
14

Wells Fargo was in the process of acquiring Wachovia when the institutions agreed to accept CPP capital on
October 13, 2008. After the acquisition was completed, Wells Fargo became the fourth-largest financial institution in
the United States by total assets.
15
The objective of TIP was to invest funds on a case-by-case basis to strengthen the economy and protect American
jobs, savings, and retirement security where the loss of confidence in a financial institution could result in significant
market disruptions that threaten the financial strength of similarly situated financial institutions. The only institutions
to receive funds under TIP were Citigroup and Bank of America.
16
AGP was created to provide guarantees for assets held by systemically significant financial institutions that faced a
high risk of losing market confidence due in part to a portfolio of distressed or illiquid assets.
17
Although Bank of America’s loss sharing term sheet was negotiated in January 2009, a final agreement was never
reached. On May 6, 2009, Bank of America requested termination of the agreement, which was terminated on

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6

Treasury and Regulators Announced and Implemented the
Supervisory Capital Assessment Program
Despite the dramatic efforts
Supervisory Capital Assessment
undertaken by the Government to
Program
bolster the capital adequacy of
financial institutions in late 2008 and
SCAP was a stress test of the nation’s 19
early 2009, a Treasury report prepared
largest financial institutions conducted in
early 2009 by FRB in coordination with
at the time concluded that the market
other regulators and Treasury. FRB
still lacked confidence in some of the
designed SCAP to estimate losses,
nation’s largest financial institutions,
revenues, and reserve needs for these 19
institutions under two macroeconomic
impairing the ability of the overall
scenarios – one that reflected a baseline
financial system to lend. On
projection and another that reflected a
February 10, 2009, Treasury and
more severe recession than the baseline
projections.
regulators jointly announced a
Financial Stability Plan. Among other
elements, the plan established a Financial Stability Trust, which was intended to
strengthen confidence in financial institutions through, along with other
initiatives, comprehensive stress tests of all banking institutions with 2008 yearend assets in excess of $100 billion, later named SCAP.18
Applying the asset threshold, regulators identified the nation’s 19 largest bank
holding companies for participation in SCAP. SCAP was designed to identify the
potential losses, resources available to absorb losses, and the additional capital
needed, if any, for each of the participating institutions.19 According to FRB, the
19 institutions subject to SCAP collectively held two-thirds of the assets and more
than half of the loans in the U.S. banking system. Of the 19 SCAP institutions, 18
participated in one or more TARP programs.20 Seventeen SCAP institutions were
CPP recipients, and one SCAP institution, GMAC, now known as Ally Financial
Inc., received funding through TARP’s Automotive Industry Financing Program.
Between February 2009 and April 2009, regulators performed stress tests on each
of the 19 SCAP institutions. On April 24, 2009, FRB published details on the
design and implementation of the SCAP process. According to the FRB
September 21, 2009. Bank of America agreed to pay $276 million to Treasury, $57 million to FRB, and $92 million to
FDIC in exchange for the costs incurred by the Government and the benefits received by Bank of America through the
announcement of its participation in the agreement.
18
In addition to establishing a Financial Stability Trust, the Financial Stability Plan also called for the establishment of a
new Public-Private Investment Fund, a Consumer and Business Lending Initiative, new governance provisions and
restrictions, Housing Support and Foreclosure Prevention, and a Small Business Community Lending Initiative.
19
The 19 SCAP institutions were: American Express Company, Bank of America, BB&T, BNY Mellon, Capital One,
Citigroup, Fifth Third Bancorp (“Fifth Third”), GMAC LLC (“GMAC”), Goldman Sachs, JP Morgan, KeyCorp,
MetLife Inc. (“MetLife”), Morgan Stanley, PNC, Regions Financial Corporation (“Regions”), State Street, SunTrust
Banks, Inc. (“SunTrust”), U.S. Bancorp, and Wells Fargo.
20
MetLife was the only SCAP institution to receive no direct support through TARP. However, on November 1, 2010,
MetLife purchased the American Life Insurance Company from the American International Group, Inc., which
received money from TARP’s Systemically Significant Failing Institutions Program.

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description, between February and April, institutions were asked to project their
credit losses and revenues for 2009 and 2010, as well as reserves necessary to
cover expected losses in 2011, under two economic scenarios: baseline and more
adverse. SCAP’s baseline economic scenario reflected a consensus expectation
among professional forecasters on the depth and duration of the recession. FRB
constructed the more adverse scenario from the baseline scenario, taking into
account the historical track record of forecasters as well as their current
assessments of uncertainty for unemployment and gross domestic product. By
using a common set of economic scenarios and conceptual framework, regulators
sought to apply a consistent and systematic approach across all 19 institutions.
The more adverse economic scenario projected a recession that would be longer
and more severe than the expectations of professional forecasters. SCAP
institutions were required to have enough capital to meet target capital adequacy
ratios under the more adverse scenario. The stress tests included a common
equity component. By including this, Treasury and regulators acknowledged that
markets had heavily discounted other types of capital and emphasized the
importance of common equity to a bank’s capital base. A joint statement issued
in May 2009 by Treasury, FRB, FDIC, and the Office of the Comptroller of the
Currency (“OCC”) explained, “Common equity is the first element of the capital
structure to absorb loss and offers protection to more senior parts of the capital
structure. All else equal, more Tier 1 Common Capital gives a [bank holding
company]21 greater permanent loss absorption capacity and a greater ability to
conserve resources under stress by changing the amount and timing of dividends
and other distributions.”
SCAP established target capital ratios of at least 6% of risk-weighted assets in
Tier 1 Capital and at least 4% in Tier 1 Common under the more adverse scenario
projected through December 31, 2010. Tier 1 Capital is a measure used by
regulators to identify an institution’s stable and readily available capital, and
includes common equity and preferred equity elements. Tier 1 Common, a subset
of Tier 1 Capital, includes only the common equity elements of Tier 1 Capital.
According to regulators, for the purposes of SCAP, Tier 1 Common was
calculated by subtracting preferred stock, qualifying trust preferred securities, and
minority interests in an institution’s subsidiaries from the calculation of its Tier 1
Capital.22

21
22

A bank holding company is a company that owns and/or controls one or more U.S. banks.
In support of the stress tests, regulators asked SCAP institutions to provide documentation for their projected losses
and resources, including projected income and expenses by major category, domestic and international portfolio
characteristics, forecasting methods, and important assumptions. According to the terms of the program, institutions
that did not meet the target capital adequacy ratios described above would have to submit a plan to raise sufficient
capital by early November 2009 or accept additional capital through the Capital Assistance Program (“CAP”). CAP
was created to give financial institutions access to additional capital as needed. However, on November 9, 2009,
Treasury announced that CAP had been closed without making any investments under the program.

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On May 7, 2009, FRB publicly released the results of the SCAP stress tests,
announcing that the unprecedented nature of the program and the conditions that
precipitated it led to the “unusual step of publicly reporting the findings of this
supervisory exercise.” Nine of the 19 SCAP institutions, including eight CPP
participants, were found to have sufficient capital to maintain target capital
ratios.23 Ten SCAP institutions, of which nine were CPP recipients, were
required to raise additional capital to meet SCAP requirements.24 Collectively,
these 10 firms were $74.6 billion short of the capital requirements, with the vast
majority of the shortfall pertaining to the institutions’ Tier 1 Common reserves.25
According to FRB, these results indicated that the institutions’ capital structures
were too strongly tilted away from common equity,26 and the institutions would
therefore need to augment their capital base by raising additional common equity.
FRB gave each of the 10 institutions that did not meet SCAP requirements
30 days to submit a detailed capital plan for reaching target capital ratios, advising
that wherever possible the institutions should actively seek to raise new capital
from private sources. In addition to issuing common stock, capital actions such as
converting preferred stock to common stock, selling assets, and limiting dividends
and stock repurchases were also permitted means of meeting the target ratios.
After submitting their plans, the remaining SCAP institutions had until
November 9, 2009, to implement their plans and meet the target capital ratios.
Table 1 on the following page shows the results of the SCAP stress tests.

23

The nine institutions that were not required to raise additional capital to meet SCAP requirements were American
Express, BB&T, BNY Mellon, Capital One, Goldman Sachs, JPMorgan, MetLife, State Street, and US Bancorp.
24
The 10 institutions required to raise additional capital to meet SCAP requirements were Bank of America, Citigroup,
Fifth Third Bancorp, GMAC, KeyCorp, Morgan Stanley, PNC, Regions Financial, SunTrust, and Wells Fargo. With
the exception of GMAC, which did not participate in CPP, each of the 10 SCAP institutions required to raise
additional capital met the SCAP requirements by the November 9, 2009, deadline. Rather than accessing CAP to
address the shortfall, GMAC received capital through the Automotive Industry Financing Program.
25
After taking into account completed or contracted capital actions and the effects of first quarter 2009 operating results.
26
The capital structure of some SCAP institutions relied heavily on preferred equity, which have debt-like characteristics
and do not provide the same level of protection provided by common equity.

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TABLE 1

SCAP RESULTS
TARP Program
Participation

Capital Raise
Required by
SCAP ($ bn)

CPP, TIP

$33.9

Wells Fargo

CPP

13.7

GMAC

AIFP

11.5

Institution
Bank of America

Citigroup

CPP, TIP, AGP

5.5

Regions

CPP

2.5

SunTrust

CPP

2.2

KeyCorp

CPP

1.8

Morgan Stanley

CPP

1.8

Fifth Third

CPP

1.1

PNC

CPP

0.6

American Express

CPP

0.0

BB&T

CPP

0.0

BNY Mellon

CPP

0.0

Capital One

CPP

0.0

Goldman Sachs

CPP

0.0

JPMorgan

CPP

0.0

State Street

CPP

0.0

CPP

0.0

Did not participate

0.0

U.S. Bancorp
MetLife
TOTAL

$74.6

Sources: FRB and Treasury.
Note: In stress testing Citigroup, regulators counted as common stock the amount of
private and Government preferred stock that Citigroup announced it would convert
to common stock, though the conversion was not finalized until after the SCAP
results were announced.

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June 2009 Guidance and Subsequent
Repayments
This section describes the development and the issuance by regulators in
June 2009 of guidance for SCAP institutions seeking to exit TARP, as well as the
repayments by certain SCAP institutions in June 2009. The eight institutions that
met SCAP capital targets at the time of the stress tests, and a ninth that met the
targets shortly thereafter, applied to repay Treasury and exit TARP. All nine
were approved by FRB after issuing sufficient common equity and meeting the
other requirements outlined in the June 2009 guidance.
In early 2009, while Treasury was making additional TARP investments in some
institutions, ARRA removed the three-year repayment waiting period governing
CPP investments.27 A few TARP recipients sought to repay in the weeks
following ARRA’s enactment, and during this time Treasury published basic
guidance advising institutions to notify their primary regulator of their desire to
repay TARP. Treasury also began meeting with regulators to discuss criteria and
procedures for evaluating applications to repay and exit TARP.
Between February 2009 and June 2009, Treasury and FRB issued general
guidance on TARP repayment, developed in coordination with FDIC, OCC, and
OTS. In May 2009, Treasury published answers to frequently asked questions
outlining the requirements and criteria that applied broadly to all 707 institutions
that would participate in the program, and specified that additional requirements
would apply only to SCAP institutions. FRB later elaborated on repayment
guidance pertaining to SCAP institutions in June 2009 through guidance
specifying that only institutions that met the SCAP target capital ratios and other
criteria were eligible to repay and that each institution applying to do so would
also have to demonstrate access to equity markets. Figure 1 on the following
page is a timeline of key events related to the development of the repayment
guidance.

27

ARRA, enacted on February 17, 2009, provided, “subject to consultation with the appropriate federal banking agency,
if any, [Treasury] shall permit a TARP recipient to repay [the CPP investment] without regard to whether the financial
institution has replaced such funds from any other source or to any waiting period.”

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FIGURE 1

PROCESS FOR ALL CPP PARTICIPANTS

DEVELOPMENT OF TARP REPAYMENT PROCEDURES AND GUIDANCE
(FEBRUARY 2009 - JUNE 2009)

Feb 17, 2009
Congress enacts
ARRA, which permits
institutions to repay
TARP funds subject to
regulator approval

Feb 18, 2009
At standing meeting among
regulators and Treasury,
repayment procedures are
discussed, noting existing
capital reduction processes

PROCESS FOR SCAP INSTITUTIONS ONLY

FEB 2009

Feb 26, 2009
Treasury publishes a
list of FAQs on CPP
repayment, excluding
information on
repayment criteria

Mar 4, 2009
At standing meeting
among regulators and
Treasury, Treasury
outlines logistics and
regulators discuss
process and criteria
their agencies will use

MARCH 2009

Feb 10, 2009
Treasury announces that
regulators will conduct a
“stress test” of 19 of the
largest bank holding
companies under the
Supervisory Capital
Assessment Program
(“SCAP”)

May 2009
Treasury publishes a
second list of FAQs
on the repayment
process, providing
greater detail on
criteria used by
regulators

MAY 2009

May 7, 2009
Regulators release
the results of the
SCAP stress tests

JUNE 2009

June 1, 2009
FRB publicly
announces guidance
outlining SCAP
repayment criteria

Sources: Treasury, Public Law 111-5, FRB, and OCC.

Treasury and Regulators Developed Repayment Guidance
As the primary Federal regulator for all bank holding companies, FRB is
responsible for supervising approximately 82% of all the institutions that
participated in CPP,28 including each of the 17 SCAP institutions that
participated. In this role, after coordinating with other regulators to evaluate
repayment applications, FRB issues a recommendation to Treasury on whether or
not each bank holding company should be allowed to repay. In doing so, FRB
seeks consensus with other Federal regulators – FDIC, OCC, or previously OTS –
if one or more of the regulators has a significant connection to the holding
company’s largest subsidiary banks or thrifts, either through regulating a
subsidiary or by insuring deposits.

28

FRB supervises all bank and financial holding companies and state member banks, which collectively comprise 82%
of the 707 institutions that participated in CPP. The remaining institutions are not subsidiaries of a bank or financial
holding company and are not state member banks. Among those, responsibility for supervising and issuing a
recommendation on CPP repayment to Treasury lies with FDIC for all non-member banks (9% of CPP participants);
OTS for all thrifts and savings and loan institutions (8% of CPP participants); and OCC for all national banks (1% of
CPP participants).

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On March 17, 2009, FRB disseminated a template of a decision memorandum
developed to summarize evaluations of CPP repayment requests. The template
specifically instructs Federal Reserve Banks to consult with the regulators of the
institution’s subsidiary banks. Other criteria listed in FRB’s decision memo
template include the institution’s current capital ratios and summary financial
ratings; its forecasted condition once funds are repaid; and the appropriateness of
the institution’s capital planning processes.29
In May 2009, as FRB announced the results of the SCAP stress tests, some SCAP
institutions requested to repay Treasury’s CPP investment. Treasury’s repayment
guidance published that month stated that all SCAP institutions “must have a
post-repayment capital base at least consistent with the SCAP buffer,30 and must
be able to demonstrate its financial strength by issuing senior unsecured debt for a
term greater than five years not backed by FDIC guarantees, in amounts sufficient
to demonstrate a capacity to meet funding needs independent of government
guarantees.” These requirements prohibited institutions from using FDIC’s
Temporary Liquidity Guarantee Program (“TLGP”)31 to demonstrate their ability
to issue long-term debt.
On March 4, 2010, Treasury told the Congressional Oversight Panel (“COP”),
“After the stress test results were announced on May 7, 2009, Treasury officials
encouraged [FRB, FDIC, and OCC] to develop and articulate the conditions that a
bank would have to satisfy in order to be permitted to repay TARP assistance.
Treasury urged the regulators to develop and communicate any such conditions or
standards, so that banks wishing to repay could decide whether, how and when
they could meet the standards.” According to Treasury Secretary Timothy F.
Geithner, he told colleagues at Treasury and FRB “that it was important that they
lay out a clear set of criteria for repayment as soon as possible and that we
maximize incentives for the firms to go out and raise private capital on as large a
scale as possible.” Treasury, however, also told COP that while it “was asked for
and offered its opinions on proposed standards, the standards were determined by
the regulators and Treasury deferred to their judgment as to what should be

29

See Appendix E for a template of the FRB Redemption Request Decision Memo for CPP repayment evaluations.
The term “SCAP buffer” is shorthand for the requirement that SCAP institutions be able to maintain capital ratios of at
least 6% of risk-weighted assets in Tier 1 Capital and at least 4% in Tier 1 Common Capital under the more adverse
scenario projected through December 31, 2010.
31
The Temporary Liquidity Guarantee Program (“TLGP”) was established in October 2008 to address “disruptions in
the credit market, particularly the interbank lending market, which reduced banks’ liquidity and impaired their ability
to lend. The goal of TLGP is to decrease the cost of bank funding so that bank lending to consumers and businesses
will normalize.” The program does not rely on the taxpayer or the deposit insurance fund, but is entirely funded by
industry fees. Participating institutions may issue debt under TLGP’s Debt Guarantee Program, which provided an
FDIC guarantee of newly issued senior unsecured debt of participating insured depository institutions and other
eligible entities. New guarantees were issued until October 31, 2009, with the debt being guaranteed until “the earliest
of the opt-out date, the maturity of the debt, the mandatory conversion date for mandatory convertible debt, or
December 31, 2012.”
30

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required.” Secretary Geithner similarly told SIGTARP that Treasury “left the
principal verdict with [FRB].”

FRB Issued Guidance to SCAP Institutions in June 2009
On June 1, 2009, FRB issued a press release outlining the criteria for SCAP
institutions to redeem Treasury’s TARP investment. FRB’s release stated that
any SCAP institution “seeking to redeem U.S. Treasury capital must demonstrate
an ability to access the long-term debt markets without reliance on [TLGP] and
must successfully demonstrate access to public equity markets.” The release set
forth other factors that would be considered by FRB, including whether the SCAP
institutions would be able to maintain capital levels consistent with supervisory
expectations. Finally, the release provided that SCAP institutions must have a
robust longer-term capital assessment and management process geared toward
achieving and maintaining a prudent level and composition of capital
commensurate with the company’s business activities and firm-wide risk profile.
A senior FRB official told SIGTARP that the requirement to demonstrate access
to equity markets meant that the institution had to issue additional common stock
prior to repaying and exiting TARP. According to the official, this requirement
was an essential condition of CPP repayment and a market test of each firm’s
viability. In determining the appropriate size of the common stock issuance
required for each institution, FRB considered whether the issuance would
generate enough capital for the institution to remain above SCAP target capital
ratios after removing TARP capital.
FDIC and OCC played a minor role in reviewing the June 2009 repayments, in
part because regulators viewed these repayments as less controversial and less
complicated than later repayments. Senior-level OCC officials said that they were
given a chance to object to repayment proposals, but had no conversations
concerning the size of the common stock issuances required by FRB and voiced
no objections to them. A senior-level FDIC official said that his agency provided
input to FRB on the repayments, but that the input was informal. Additionally,
FRB did not consult with OTS at all on the repayment application submitted by
American Express, though OTS regulated the company’s largest subsidiary.
According to an OTS official, this was an oversight on the part of FRB, and
representatives from the two agencies later met to ensure it did not happen with
future repayment applications. American Express is the only SCAP institution
with a large subsidiary that was regulated by OTS.

Repayments by SCAP Institutions in June 2009
The eight CPP institutions found to have met the SCAP stress test requirements
became eligible to repay TARP immediately after the June 2009 guidance was
issued. Each institution applied to do so in the month leading up to the issuance
of the guidance. These eight institutions – American Express, BB&T, BNY
Mellon, Capital One, Goldman Sachs, JPMorgan, State Street, and U.S. Bancorp
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– were soon joined by a ninth – Morgan Stanley – which raised enough capital to
become eligible shortly after the SCAP results were announced and also applied
to repay.
All nine of these institutions were approved for TARP repayment and exited
TARP on June 17, 2009, repaying a combined total of $66.7 billion to Treasury.32
The remaining eight institutions were required to wait, at a minimum, until they
raised enough capital to meet SCAP requirements and met the other criteria set
forth in the June 2009 guidance before they could apply to repay and exit
TARP.33 Then-FDIC Chairman Sheila Bair told SIGTARP that the stronger
institutions, in terms of capital adequacy, exited in the first round of SCAP
repayments.
Prior to exiting TARP, each institution that repaid in June 2009 issued new
common equity in response to the requirement that they demonstrate access to
equity markets. Table 2 below shows the amount of common stock issued in
connection with TARP repayment by each institution that repaid on
June 17, 2009.
TABLE 2

COMMON STOCK ISSUED IN CONNECTION WITH TARP
EXIT IN JUNE 2009
Common
Stock
Issued ($bn)

TARP
Repayment
($bn)

Morgan Stanley

7.0

10.0

JPMorgan

5.8

25.0

Goldman Sachs

5.8

10.0

U.S. Bancorp

2.8

6.6

State Street

2.3

2.0

BB&T

1.7

3.1

Capital One

1.5

3.6

BNY Mellon

1.4

3.0

American Express

0.5

3.4

Institution

Sources: Treasury, FRB, and the Securities and Exchange Commission.

Treasury, as well as FRB, emphasized the importance of replacing TARP capital
with some amount of private capital. Secretary Geithner told SIGTARP that
putting pressure on firms to raise private capital was part of “a forceful strategy of
raising capital early.” According to the Secretary, “You can’t force private capital
to come in, but you can go to firms and ask them to raise it… We thought the
32

Northern Trust Corporation, a large financial institution that did not participate in SCAP, also exited TARP on
June 17, 2009.
33
These eight were Bank of America, Citigroup, Fifth Third Bancorp, KeyCorp, PNC Financial Services, Regions
Financial, SunTrust, and Wells Fargo.

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American economy would be in a better position if [the firms] went out and raised
capital… It doesn’t matter whether [the firms] thought it was in their interest. We
thought it was in our interest.” FRB Governor Daniel Tarullo34 told SIGTARP
that FRB would not have allowed the institutions to “repay TARP without them
having enough capital to absorb losses.” He added that the common stock the
institutions were required to issue resulted in “a big upgrade in their capital
position.”
According to FRB analysis of the June 2009 repayments, the projected capital
ratios of each institution remained above SCAP targets after CPP funds were
removed from their capital structure. FRB officials explained to SIGTARP that,
using data collected through the recently completed stress tests, they would “back
up” each institution’s projected capital ratios by subtracting TARP capital to aid
in estimating the amount each would have to raise through common equity
issuance. An FRB official also noted that some institutions may have elected to
issue additional common stock to take advantage of more receptive equity
markets.
TARP funds added to the preferred capital base of each recipient, and therefore,
TARP repayment altered the recipient’s capital structure. Generally, the
repayments replaced TARP preferred capital with a smaller amount of higher
quality common capital. For most institutions, the repayments resulted in a
reduction in Tier 1 Capital – which includes both preferred and common equity
elements – because when an institution exits TARP, it redeems the TARP
preferred stock from Treasury and removes it from its capital structure. However,
because regulators required banks to raise some amount of new common stock to
exit TARP, the repayments generally increased the amount of Tier 1 Common –
which includes only common equity elements – held by the institutions.
For SCAP institutions repaying in June 2009, TARP repayment lowered an
institution’s Tier 1 Capital ratio by an average of 114 basis points35 (from 11.06%
to 9.91%) as projected by FRB through 2010. However, FRB also projected that
Tier 1 Common ratios increased by an average of 133 basis points (from 6.57% to
7.90%) due to the new common stock each repaying institution was required to
issue.36 According to FRB’s projections, two institutions – State Street and
BB&T – would see an increase of 300 basis points in their Tier 1 Common ratios
from issuing common stock and exiting TARP. Figure 2 shows the net change in
projected Tier 1 Capital and Tier 1 Common ratios for the nine SCAP institutions
that repaid in June 2009.
34

Upon taking office on January 28, 2009, Governor Tarullo became Chairman of FRB’s Committee on Bank
Supervision.
35
A basis point represents 1/100 of a percent. For example, an increase from 5.25% to 5.50% would be an increase of
25 basis points.
36
The average change in FRB’s projected Tier 1 Capital and Tier 1 Common ratios for institutions that repaid in
June 2009 was determined by calculating a simple average of the institutions’ projected ratios.

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FIGURE 2

NET CHANGE IN PROJECTED CAPITAL RATIOS FROM TARP REPAYMENT BY SCAP INSTITUTIONS
REPAYING IN JUNE 2009

Source: SIGTARP analysis of FRB data.
Note: American Express’ projected Tier 1 Common ratio under SCAP conditions remained unchanged after TARP repayment.

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November 2009 Clarifying Guidance
This section details the events leading to the revision of the TARP repayment
guidance for remaining SCAP institutions by FRB on November 3, 2009.
Figure 3 shows the timeline of key events related to the development of revised
TARP repayment guidance for SCAP institutions.
In the months following the SCAP stress tests and the June 2009 repayments,
each of the eight SCAP institutions that remained in CPP brought their capital
ratios into compliance with the SCAP capital requirements through common stock
issuance and conversion, asset sales, and other capital actions. Bank of America
and Wells Fargo began talking to the press in early September 2009 about their
plans to repay TARP. Over the following weeks, Federal banking regulators and
Treasury began to discuss revising the criteria for remaining SCAP institutions to
repay and exit TARP, culminating in FRB’s issuance of revised guidance on
November 3, 2009.
FIGURE 3

PROCESS FOR SCAP INSTITUTIONS ONLY

DEVELOPMENT OF REVISED TARP REPAYMENT GUIDANCE FOR SCAP INSTITUTIONS
(SEPTEMBER 2009 – NOVEMBER 2009)
SEPTEMBER 2009

OCTOBER 2009

Sept 1, 2009
Media reports that
BAC and WFC are
seeking to repay
TARP

Oct 2009
FRB leads
discussions with
FDIC, OCC and
Treasury to revise
repayment guidance
for remaining SCAP
institutions

NOVEMBER 2009

Oct 15, 2009
Treasury sends FRB
its own repayment
analysis for
remaining SCAP
institutions

Oct 20 & 23, 2009
Treasury hosts
meetings with heads
of Federal banking
agencies to discuss
revised guidance

Nov 3, 2009
FRB issues
confidential revised
guidance with 1-for2 expedited
repayment option

Nov 24, 2009
TARP repayment
plans due to FRB
per revised
guidance

Sources: Treasury, FRB, FDIC, The Wall Street Journal, and Bloomberg.

Regulators Discussed Revising the Repayment Guidance; Treasury
Weighed in on the Criteria
In October 2009, FRB led discussions with FDIC, OCC, and Treasury to revise
the repayment guidance for the eight SCAP institutions that remained in TARP.
With the support of Secretary Geithner, who said that part of Treasury’s job “was
to make sure there was more consistency and consensus” regarding the repayment
guidance, regulators discussed specifying the minimum amount of common
equity that remaining institutions would have to raise before being allowed to
repay TARP immediately. In addition to seeking consistency, Treasury was also
concerned that to avoid diluting the holdings of common shareholders, some

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institutions might decide to hold on to TARP capital and repay slowly through
earnings, rather than issue new common equity.37 Secretary Geithner told
SIGTARP, “We did sometimes go to the firms themselves and told them they
needed to go raise as much as capital and as soon as possible, to prove to people
that they were able to repay the government and to put the institutions back in
private hands.”
Regulators sought to establish guidance that would help them to gain comfort
with expedited repayments. FRB Governor Tarullo told SIGTARP that since the
stress tests judged the remaining institutions to be unable to maintain sufficient
capital in adverse conditions, it was necessary to revise the June guidance to
provide additional assurance that they would be viable after TARP repayment.
By October 15, 2009, FRB arrived at such a framework, proposing to offer
remaining SCAP institutions two paths to full repayment: 1) repay upon
completion of supervisory review of the firm’s internal capital assessment and
planning process (or longer-term capital plans);38 or 2) expedite repayment by
raising at least 50% of outstanding TARP funds in common equity. The latter is
referred to as the 1-for-2 provision because the final version of the provision
required firms seeking immediate repayment to raise at least $1 in common stock
for every $2 they repaid in TARP funds.39 Former FRB Vice Chairman Donald
Kohn told SIGTARP that there were sound public policy reasons for including the
1-for-2 provision, noting that “the sooner the banks demonstrated they could go
out to the market and get out from under TARP, the sooner confidence could be
restored.”
Regulators developed the 1-for-2 provision based on their estimate that it would
align the Tier 1 Capital and Tier 1 Common ratios of the remaining institutions
with those of the institutions that exited TARP in June 2009. FRB Governor
Tarullo told SIGTARP that during the financial crisis, it became clear that the
markets cared about common equity, not Tier 1, and that the 1-for-2 provision
provided the “right order of magnitude” to position the remaining banks to absorb
potential future losses. An FRB official noted the similarity between the
proposed guidelines and the requirements of earlier SCAP repayments, writing
that it was “consistent with what we did for the first nine.” FRB officials
discussed how to measure common equity raised toward meeting the 1-for-2
provision. They considered crediting common equity raised in response to the
SCAP stress tests that exceeded minimum capital targets, crediting earnings to

37

Issuing new common equity dilutes the holdings of existing common shareholders by increasing the number of shares
outstanding and reducing the ownership stake of each share of common stock.
38
While firms that exited in June were also required to submit their longer-term capital plans to FRB, supervisory review
and acceptance of the plans was not a prerequisite for repayment approval for those firms.
39
Regulators sometimes also referred to the 1-for-2 provision as a “safe harbor” for exiting TARP. However, it was not
a safe harbor in that it did not guarantee that an institution would be allowed to repay TARP.

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absorb losses in excess of expectations,40 or crediting the sale of assets. Treasury
developed its own repayment analysis for the remaining SCAP institutions around
that time. Treasury’s analysis also envisioned a common equity raise of
approximately 50%, or 1-for-2, of the amount the institution would repay, with
certain institutions required to raise additional capital above that minimum.
Despite the similarities between the proposals developed by FRB and Treasury,
regulators had yet to agree on revised repayment guidance for the remaining
SCAP institutions. At issue was whether to count capital that was not raised
through equity issuances, as well as the amount of capital above the 1-for-2
minimum that certain institutions would have to raise.

Treasury Facilitated Meetings with Regulators to Finalize the
Revised Guidance
A senior Treasury official told SIGTARP that during this time, some remaining
SCAP institutions were receiving conflicting messages from regulators about the
new repayment requirements, and the conflicting messages were beginning to sow
uncertainty in the markets. According to Secretary Geithner, “there had to be
clarity on the guidance that could be applied evenly to firms and that was quickly
understandable.” To that end, Secretary Geithner hosted at least two meetings
with the heads of Federal banking agencies in late October 2009 to discuss the
repayment guidance. Secretary Geithner told SIGTARP that the meetings were
part of a “constant conversation” about the repayment guidance.
During the meetings, FDIC pushed for strict wording that would require
institutions seeking expedited repayment to meet the 1-for-2 ratio entirely by
issuing new common stock. FDIC and other regulators also acknowledged early
on that certain institutions would be required to raise additional capital beyond
that minimum. Citigroup, for example, might need to raise 100% of Treasury’s
preferred stock investment, or 1-for-1, to justify an expedited repayment of TIP
funds. Then-Chairman Bair told SIGTARP that FDIC reluctantly agreed to the
1-for-2 ratio as a minimum requirement for most remaining institutions, but
would have preferred the more stringent 1-for-1 ratio to apply to all remaining
institutions. She added that FDIC ultimately found the 1-for-2 provision
reasonable because institutions that met it would increase the quality of their
capital, and in the process, receive market validation of their common stock.
According to then-Chairman Bair and a senior FDIC official, there was specific
agreement among regulators that all capital raised toward the 1-for-2 provision
would consist entirely of newly issued common stock, and not asset sales or
employee stock issuances.

40

Specifically, excess pre-provision net revenue (“PPNR”). PPNR is net interest income, fees and other non-interest
income, net of non-credit-related expenses. It represents the earnings capacity that can be applied to capital or loan
losses and therefore, is a resource available to a firm to absorb some of its estimated losses under the SCAP scenarios.

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However, according to then-Comptroller of the Currency John Dugan, there was
no formal agreement to a firm 1-for-2 requirement or that it be composed entirely
of newly issued common stock, and that OCC expressed concerns about such a
rigid requirement. A senior OCC official told SIGTARP that applying such a
requirement to all remaining institutions ignored other considerations, such as
earnings accrued in the interim, equity already raised in excess of SCAP
requirements, and “the reality of the bank’s balance sheet.” Further, according to
then-Comptroller Dugan, he “was very worried about the prospect of a capital
raise that failed to achieve an unduly high number and what that would do to
confidence in particular banks and the banking system.” He explained to
SIGTARP that given the fragile state of the markets at the time, he was concerned
that the 1-for-2 provision in particular was too high a bar for institutions to meet if
it consisted only of new equity issuance and did not credit other forms of equity
raising, including asset sales. He thought the goal should be to maximize the
amount of equity that could be raised, while not setting the bar so high that it
could not be achieved successfully. The difficulty in a 1-for-2 issuance would
become an important concern as regulators deliberated over Bank of America’s
repayment proposals the following month. Former FRB Vice Chairman Kohn
summed up each regulator’s perspective, telling SIGTARP that while FDIC
wanted the 1-for-2 to be met entirely with new common stock, “the OCC was
much more relaxed than that, and [FRB] was a little more relaxed than the FDIC.”
While OCC, FDIC, and Treasury were all given an opportunity to weigh in on the
revisions, FRB, as the primary Federal regulator of each SCAP institution, was
ultimately responsible for issuing the guidance. According to FRB Governor
Tarullo, this arrangement was beneficial from a public administration perspective
because there were multiple, sometimes conflicting, policy goals associated with
the repayment of TARP funds, and FRB was best suited to account for all policy
considerations. He told SIGTARP that FDIC was understandably concerned
about its exposure to institutions through TLGP and the deposit insurance fund,
and that OCC tends to look more narrowly at specific national banks with less of
a macro perspective. Treasury’s policy goal, according to Governor Tarullo, was
to get Government ownership ramped back. Governor Tarullo added that “you
want the decision maker to be someone who has an interest in all of the
conflicting policy aims.” With respect to TARP repayment, that entity was FRB.
He explained that it was a two-key process. First, FRB had to agree to let the
bank repay, and second, Treasury had to agree to be repaid, but the second key
would turn automatically if FRB turned the first key. Former FRB Vice
Chairman Kohn, who acted as a liaison to Treasury on repayment discussions,
told SIGTARP that he kept Treasury apprised of repayment discussions because
as the supplier of TARP capital, Treasury wanted to know the terms under which
it would be repaid.

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FRB Issued November 2009 Guidance with a “1-for-2” Repayment
Option
On November 3, 2009, FRB issued the guidance non-publicly to the eight SCAP
institutions that had yet to exit TARP. In doing so, FRB included the strict
1-for-2 provision for expedited repayment developed by FRB and advocated by
FDIC, and required each remaining institution to submit a detailed TARP exit
plan within 21 days. Specifically, the guidance allowed institutions to either
expedite repayment by issuing $1 of new common equity for every $2 of TARP
repaid41 or to wait until supervisors completed their review of the institution’s
longer-term capital plan. The expedited option allowed firms to apply the 1-for-2
provision toward a partial repayment, but did not address the use of asset sales or
other means of generating capital beyond issuing new common stock. According
to one FRB official, “We designed the [1-for-2] with an option for a partial
[repayment] specifically to allow a firm to begin getting out while we do the
capital assessment work that needs to be done.” The guidance also provided that
institutions may be allowed to repay subject to the 1-for-2 provision. According
to regulators, the caveat was included to suggest that some of the remaining
SCAP institutions would need to raise additional capital. Similar to the guidance
issued in June 2009, the November 2009 guidance also addressed the institutions’
ability to lend, their access to equity markets, their ability to issue debt, their
capital adequacy, and their ability to serve as a source of financial and managerial
strength to subsidiaries.
Figure 4 summarizes the SCAP-specific repayment guidance issued by Treasury
and FRB from May 2009 through November 2009, which are reproduced in full
in Appendix C and Appendix D, respectively.

41

Issuing new common equity typically refers to offering new common stock in equity markets.

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FIGURE 4

SUMMARY OF TARP REPAYMENT GUIDANCE TO SCAP INSTITUTIONS
May 2009 – Treasury FAQs on CPP Repayment
In addition to demonstrating to regulators their overall soundness, capital adequacy, and
ability to lend, the 19 institutions that were subject to the SCAP stress tests must meet the
following criteria in order to repay CPP:
1.

Maintain a post‐repayment capital base at least consistent with the SCAP buffer; and

2.

Demonstrate their financial strength by issuing senior unsecured debt for a term greater than
five years not backed by FDIC guarantees.

June 1, 2009 – FRB Guidance for Repayment by SCAP Institutions
A SCAP institution will become eligible to repay TARP only once it has met the SCAP capital
requirements and submitted a description of its internal capital assessment, planning, and
management processes. The following will inform the decision‐making process for the 19
institutions that participated in SCAP:
1.

Whether the institution can repay and remain in a position to fulfill its role as an intermediary
that facilitates lending to creditworthy households and businesses;

2.

Whether, after repayment, the institution will be able to maintain capital levels consistent with
the SCAP buffer, supervisory expectations, industry norms and historical levels for the firm,
including its own internal capital targets;

3.

Whether the institution has demonstrated access to common equity through public issuance in
equity capital markets and demonstrated the ability to raise a significant amount of unsecured
senior debt without reliance on Government guarantees;

4.

Whether the institution and its bank subsidiaries will be able to meet obligations to
counterparties, as well as ongoing funding requirements; and

5.

Whether the institution will be able to continue to serve as a source of financial and managerial
strength and support to its subsidiary bank(s) after repayment.

November 3, 2009 – FRB Clarifying Guidance for Repayment by SCAP Institutions
In addition to the requirements outlined in the June guidance, remaining SCAP institutions
may be permitted to redeem TARP capital subject to:
1.

Submitting a plan detailing how the institution plans to repay TARP capital; and

2.

Satisfying one of the following conditions. Either:
a.

Issue new common equity worth 50% of the amount of TARP capital the institution is
seeking to repay; or

b.

Wait until supervisors have completed a review of the institution’s longer‐term capital
planning processes.

Sources: Office of Financial Stability (“OFS”) and FRB.

The 1-for-2 provision placed stricter repayment standards on the remaining SCAP
institutions compared to those that exited in June 2009. Former FRB Vice
Chairman Kohn told SIGTARP that regulators “wanted to toughen it up a little
because the next set of banks were almost by definition less strong than the first
set. Otherwise, they would’ve repaid right away,” noting that the remaining

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banks “demonstrated that they needed more oversight.” An FRB official also
noted that 1-for-2 was not an arbitrarily selected ratio, and that the stress tests
conducted earlier in the year provided FRB with insight on the amount of capital
required to secure the remaining SCAP institutions in worse-than-expected
market conditions. These assertions are supported by FRB analysis conducted as
the guidance was being developed. The analysis showed that the remaining
SCAP institutions’ Tier 1 Common ratios – the indicator markets and regulators
were primarily concerned with – were significantly lower than those of the
institutions that exited in June 2009.
Although the November 2009 guidance specified that the remaining SCAP
institutions were required to issue at least half (1-for-2) of the amount they sought
to repay in common stock, regulators later approved repayments under terms that
included somewhat smaller offerings, supplemented with capital raised through a
combination of proceeds from other sources, such as asset sales. Senior FDIC
officials told SIGTARP that the terms of some repayments ran contrary to
language specifying that the required capital raise would consist only of new
common stock. Then-Chairman Bair expressed frustration over the reliance on
asset sales and employee stock issuances to meet the 1-for-2, referring to those
sources of capital as “gimmicks,” in part because unlike new common stock they
did not provide market validation of the firm’s strength. Regulators ultimately
decided to relax the terms of the existing guidance to allow asset sales and other
forms of capital count toward the 1-for-2, but to count those types of capital less
than new common stock.
As of June 30, 2011, seven institutions had repaid TARP funds pursuant to the
November 2009 guidance: Bank of America repaid CPP and TIP in
December 2009; Citigroup repaid TIP in December 2009; Wells Fargo repaid
CPP in December 2009; PNC repaid CPP in February 2010; Fifth Third repaid
CPP in February 2011; and both KeyCorp and SunTrust repaid CPP in
March 2011.

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Bank of America’s TARP Exit
To exit TARP immediately in compliance with the 1-for-2 provision outlined in the
November 2009 guidance, Bank of America was required to issue $22.5 billion in
new common equity before being allowed to repay its $45 billion TARP preferred
stock.
Despite the plain terms of the repayment guidance, from November 4, 2009,
through December 1, 2009, Bank of America submitted 11 repayment proposals
(10 for full repayment and one for partial repayment), with each falling short of
the 1-for-2 provision and including other sources of capital in place of newly
issued common stock. There was considerable discussion among the regulators
and Treasury regarding how much common stock Bank of America could
successfully issue and whether partial repayments and an exit from TARP in
multiple stages could be a viable alternative to a full repayment and an immediate
exit. Bank of America was adamant that it needed to repay in full and
immediately exit TARP, citing concerns including market perception and
restrictions established by the Special Master for TARP Executive Compensation.
As the negotiations progressed, FRB, OCC, and Treasury became increasingly
more comfortable with permitting other sources of capital as a substitute for
meeting the 1-for-2 provision in the repayment guidance, while FDIC pushed
hard to maintain the strict requirement, as originally established, that the 1-for-2
provision apply only to new common stock. Figure 5 shows the timeline of key
events related to Bank of America’s repayment and exit from TARP.

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FIGURE 5

KEY TARP REPAYMENT EVENTS FOR BANK OF AMERICA (BAC)
Oct 28, 2009
BAC’s Board
considers TARP
repayment scenarios,
including full $45B
and a partial $32.5B;
Proposes $8B
issuance

Dec 9, 2009
BAC repays $45B
and exits TARP
Dec 1-2, 2009
BAC submits 11th and
final proposal; FRB
approves on 12/2; BAC
announces equity
offering
> $19.3B ISSUANCE*

Nov 20, 2009
FRB prepares to
approve BAC’s
proposal for $14B
issuance;
FDIC opposes

Sep 2009
BAC notifies FRB of
its desire to repay
TARP in Oct 2009

Note: Issuance occurred after announcement and
was completed at a later date
*BAC issued common equivalent securities,
which converted to common stock on Feb 24, 2010

Bank of America Corp. (BAC)

SEP 2009

OCT 2009

NOV 2009

DEC 2009

JAN 2010 FEB 2010

Nov 2009 Guidance

Nov 3, 2009
FRB issues nonpublic revised
guidance with 1-for2 expedited
repayment option

Nov 24, 2009
Deadline for
repayment plans
required by FRB
guidance

Sources: SIGTARP, OFS, FRB, OCC, and Bank of America.

Bank of America approached FRB and Treasury early in fall 2009, before the
November 2009 guidance was issued, to inquire about repaying Treasury’s
investment and exiting TARP. On September 11, 2009, then-CEO Kenneth
Lewis met with Secretary Geithner in Washington at the CEO’s request.
According to Mr. Lewis, he told Secretary Geithner that Bank of America wanted
to begin repayment discussions, and the Secretary replied that Bank of America
would need to “raise a lot of equity” to exit TARP.
Trust Preferred Securities

On October 28, 2009, senior executives at
Bank of America presented three potential
Securities with both equity and debt
characteristics, created by establishing a
TARP repayment scenarios to its board of
trust and issuing debt to it.
directors. Two of the three scenarios
envisioned a partial TARP repayment
Pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act, trust
during the fourth quarter of 2009 and a
preferred securities issued after
phased exit from TARP. The third
May 19, 2010, by a bank or thrift holding
scenario envisioned repaying the full
company with more than $500 million in
assets will no longer count as Tier 1
$45 billion in preferred stock and
Capital.
immediately exiting TARP during the
fourth quarter of 2009. To provide some
of the capital for the full repayment, Bank of America proposed to issue $8 billion
in new common stock and $4 billion in trust preferred securities. During this

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meeting, Bank of America’s board formally authorized senior executives to hold
discussions with the Government about repaying Treasury and exiting TARP.

Bank of America Submitted Proposals to Exit TARP Immediately
After FRB Issued Revised Guidance in November 2009
The guidance FRB issued on November 3, 2009, required Bank of America to
issue $22.5 billion in new common stock to be eligible for full and immediate
TARP repayment under the 1-for-2 provision.42 Through this provision, Bank of
America could also repay in part and exit TARP in multiple stages. Alternatively,
the institution could wait and repay TARP once supervisors completed a
satisfactory review of the bank’s longer-term capital plans.
On November 4, 2009, the day after
Bank of America Proposal 1
FRB issued the revised guidance,
(Nov. 4, 2009)
Bank of America indicated its
• $9.25 billion common issuance
preference to repay TARP in full and
• $4.0 billion trust preferred securities
immediately exit. A former Bank of
America executive told SIGTARP that
repaying in full and exiting TARP immediately was preferable because a partial
repayment would not address the uncertainty in the market associated with the
bank’s continued participation in TARP.
Rather than seek approval through the 1-for-2 provision, however, Bank of
America asked FRB to expedite its review of Bank of America’s longer-term
capital plan and, subject to satisfactory completion of that review, allow the bank
to repay its full TARP investment (including warrants) and exit TARP
immediately. To fund the repayment, Bank of America proposed to issue
$9.25 billion in new common stock, $4 billion in trust preferred securities, and
use $33.75 billion in existing liquidity. However, because Bank of America’s
initial repayment proposal failed to improve the bank’s capital position, FRB
rejected it.
During the week of
Bank of America Proposal 2
November 9, 2009, FRB and OCC
(Nov. 12, 2009)
examiners conducted an abridged
• $12.7 billion common issuance
review to gauge Bank of America’s
• $5.0 billion trust preferred securities
internal capital assessment and
planning processes. Examiners
concluded that while the bank had improved these processes, any TARP
repayment proposal outside of the 1-for-2 provision would need to be
42

A $22.5 billion public issuance and repayment of $45 billion in TARP funds represents $1 of new common stock for
every $2 repaid, the minimum ratio required by the guidance. Then-Chairman Bair told SIGTARP that although it was
not discussed during meetings about the guidance, FDIC’s view was that Bank of America would be required to raise
somewhere between 1-for-2 and 1-for-1.

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accompanied by a more complete review by FRB. According to Bank of
America, regulators indicated that a complete review of the bank’s longer-term
capital plans could take up to four months. Instead, Bank of America prepared a
second repayment proposal, which sought expedited repayment through the 1-for2 provision. On November 12, 2009, Bank of America submitted the proposal to
FRB, requesting to fully repay the $45 billion in TARP funds and immediately
exit by issuing $12.7 billion in common stock, $5 billion in trust preferred
securities, and using existing liquidity. The terms proposed still fell short of the
requirements established under the 1-for-2 provision.
On November 13, 2009, FRB received two new repayment proposals from Bank
of America – one requesting a full $45 billion repayment and immediate TARP
exit, and the other proposing a partial repayment of $35 billion followed by an
exit from TARP in stages. The latter proposal hinged on Treasury committing to
remove Bank of America’s exceptional assistance designation43 after the partial
repayment. The exceptional assistance designation imposed additional
Bank of America Proposals (Nov. 13, 2009)
Proposal 3 ($45B repayment)
• $12.7 billion common issuance
• $5.0 billion trust preferred securities
• $1.5 billion asset sales

Proposal 4 ($35B repayment)
• $7.7 billion common issuance
• $5.0 billion trust preferred securities
• $1.5 billion asset sales

restrictions on the bank, including subjecting it to heightened executive
compensation restrictions under the purview of the Special Master for TARP
Executive Compensation. Bank of America executives told SIGTARP that
removal of this designation, and the accompanying executive compensation
restrictions, was just one of many factors influencing their decision to seek
repayment. FRB viewed both proposals as insufficient because they failed to
meet the 1-for-2 provision.

43

Institutions deemed by Treasury to have received exceptional financial assistance are those that participated in the
Systemically Significant Failing Institutions Program, Targeted Investment Program, Automotive Industry Financing
Program, or any future Treasury program designated by the Secretary as providing exceptional assistance. This
designation subjects institutions to additional reporting requirements and certain restrictions, including restrictions on
executive compensation. For more detail, see SIGTARP’s June 2010 audit report, “Treasury’s Monitoring of
Compliance with TARP Requirements by Companies Receiving Exceptional Assistance.”

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As Bank of America Submitted Additional Proposals, OCC and
Treasury Indicated Support for Proposals that Fell Short of the
1-for-2 Provision
On November 16, 2009, Bank of
Bank of America Proposal 5
America submitted a fifth repayment
(Nov. 16, 2009)
proposal, seeking to repay the full
• $13.0 billion common issuance
$45 billion and immediately exit by
• $5.0 billion trust preferred securities
issuing $13 billion in new common
• $5.3 billion asset sales
• $1.7 billion employee stock compensation
stock equivalent,44 $5 billion in trust
preferred securities, $1.7 billion in
stock to employees in lieu of paying
cash bonuses, applying proceeds from $5.3 billion in asset sales, and using
existing liquidity. Because Bank of America shareholders would need to
authorize additional shares to permit the institution to issue the $13 billion in
common stock, the bank proposed issuing a common stock equivalent and
incentivizing shareholders to later vote for its conversion to common stock.
While the proposal would significantly increase Bank of America’s Tier 1
Common ratio, it was still inconsistent with the 1-for-2 provision, and regulators
considered whether its approval would set a precedent for the remaining SCAP
institutions.
Nevertheless, Bank of America submitted a sixth full repayment and immediate
exit proposal to FRB on November 17, 2009, increasing the common stock it
proposed to issue to $14 billion, the
Bank of America Proposal 6
proceeds from asset sales to
(Nov. 17, 2009)
$6.8 billion, and removing the trust
preferred securities altogether.
• $14.0 billion common issuance
• $6.8 billion asset sales
Although the 1-for-2 provision was
• $1.7 billion employee stock compensation
designed to apply only to new
common stock, after receiving this
proposal, FRB considered relaxing the guidance to allow for the inclusion of other
sources of capital. Regulators discussed how to count asset sales in the 1-for-2
guidance, but did not accept this proposal.

44

Common stock equivalent is an interim security that converts to common stock upon shareholder approval. The terms
of Bank of America’s common stock equivalent also provided that, if sufficient shares of common stock had not been
authorized within 105 days of the issuance of the common stock equivalent, the dividend on the common stock
equivalent would have increased from the rate on common stock to 10%, and continued to increase by 2% each quarter
thereafter until the rate reached 16%.

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Bank of America submitted another full repayment proposal the following day.
Without increasing the amount of
common stock the bank proposed
Bank of America Proposal 7
(Nov. 18, 2009)
to issue, the proposal submitted on
November 18, 2009, added back
• $14.0 billion common issuance
$2.5 billion of the trust preferred
• $2.5 billion trust preferred securities
• $8.8 billion asset sales
securities and increased the
• $1.7 billion employee stock compensation
proposed proceeds from asset sales
45
to $8.8 billion. Later that day,
OCC cited the proposed repayment’s positive impact on the institution’s capital
and liquidity, additional savings from no longer paying TARP dividends,
increased managerial flexibility, and client stabilization. OCC internally stated
that the proposal “meets all technical requirements” established by regulators.
Former Comptroller Dugan explained that OCC viewed the 1-for-2 provision as
“a fine benchmark, but not an ironclad requirement,” and was concerned that
institutions might miss a window of strong investor demand for financial stocks if
regulators held the line on repayment requirements that were, in his view, “too
rigid.” After reviewing the proposal, Treasury also advised FRB to move forward
on Bank of America’s TARP repayment. FRB and FDIC continued discussions
about whether to allow asset sales into the 1-for-2 provision. According to FRB,
Treasury provided input that asset sales should count at a 1-for-1 ratio, meaning
that a bank could redeem $1 of TARP for every $1 generated by an asset sale up
to a predetermined cap.

FDIC Maintained Its Opposition as Bank of America Submitted Its
Eighth and Ninth Proposals, While Regulators Debated the
Feasibility of a $22.5 Billion Common Stock Issuance
Bank of America submitted an eighth proposal to FRB on November 20, 2009,
that offered to issue an additional
$1 billion in trust preferred
Bank of America Proposal 8
(Nov. 20, 2009)
securities beyond the terms
previously proposed. FDIC learned
• $14.0 billion common issuance
that FRB was prepared to approve
• $3.5 billion trust preferred securities
• $8.8 billion asset sales
this most recent TARP repayment
• $1.7 billion employee stock compensation
request. Then-Chairman Bair wrote,
“Well, we will have to oppose this
and so notify the bank.” She told SIGTARP she was frustrated that the proposal
did not meet the expedited repayment terms that regulators had agreed to.
FRB and FDIC then engaged in conversations about how much capital the market
could absorb. Bank of America asserted that it would not be able to successfully
fill a $22.5 billion common stock offering, and that a partial repayment would
45

Bank of America also proposed to reduce the amount of assets sold by twice the amount of any common stock issued
in excess of $14 billion.

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also not be feasible. According to the bank, it was concerned that a partial
repayment might lead investors to suspect that regulators had additional credit
concerns or that additional repayments would require another equity offering.
While some within FRB remained unconvinced, according to an FRB governor,
Treasury was also inclined to believe that issuing $22.5 billion was “out of reach
or that it risks a failed offering – a very bad outcome.” When asked about this
concern, a senior Treasury official told SIGTARP that a determination on what
the market could bear was “always a judgment call” because “there were lots of
moving parts, and it wasn’t black and white.”
On November 21, 2009, then-Chairman Bair acknowledged that Bank of America
might have to accept dilution and sell its stock at a discount to augment the size of
the proposed offering, but noted “that should not be our concern.” She further
stated, at that time, that if Bank of America could not meet the 1-for-2 minimum,
“then that reflects market weakness which just validates the view that they aren’t
yet strong enough to exit.” She later told SIGTARP that “the argument [FRB and
OCC] used against us – which frustrated me to no end – is that [Bank of America]
can’t use the 2-for-1 because they’re not strong enough to raise 2-for-1. That just
mystified me. The point was if they’re not strong enough, they shouldn’t have
been exiting TARP.” She added that “with TARP being over, Treasury couldn’t
come back in,” 46 and FDIC was concerned about its exposure to Bank of America
through its deposit insurance fund and the institution’s participation in TLGP.
Then-Chairman Bair was also concerned in late November 2009 that acceptance
of the proposal would have repercussions with other TARP banks seeing the
Government as loosening its repayment standards and expecting a similar deal.
She added, at the time, that “none of us liked the TARP program but let’s not
compound the error now by allowing a weak institution to prematurely exit.”
FRB Governor Tarullo told SIGTARP that the issue was not about the strength of
Bank of America, but was really about “how much could the market absorb.”
Regulators sought the input of Wall Street advisors. Governor Tarullo told
SIGTARP that despite bringing in these advisors, “nobody could be certain” how
much Bank of America could successfully issue and that FRB “had to make a
judgment as to some amount, which would be difficult to pull off.” FRB
Governor Kohn told SIGTARP that FRB wanted to push Bank of America to
issue as much new common stock as the market would allow, but there was a
feeling “that if they went out for something and didn’t get it, it would be a vote of
no confidence.” He added that “it was better to go out for a little less and top it
off” by exercising the overallotment option. Officials from OCC and Treasury
also told SIGTARP that requiring Bank of America to issue $22.5 billion in new
common stock – the largest ever common stock offering in the U.S. – would have
risked a failed equity offering, potentially destabilizing the firm and threatening
46

On December 9, 2009, one week after FRB approved Bank of America’s final repayment proposal, Secretary Geithner
extended Treasury’s authority to commit TARP funds until October 3, 2010, pursuant to section 120 of EESA.
Without the extension, Treasury’s authority would have terminated on December 31, 2009.

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confidence in the broader financial system. FRB Governor Tarullo added that “it
was not in anyone’s interest, not the firms, not Treasury, or the financial system to
have one firm go out and fail to get the amount in question.”
Meanwhile, on November 23, 2009, Bank of America submitted its ninth proposal
to FRB to repay TARP in full and immediately exit, increasing the size of the
proposed common stock offering to
Bank of America Proposal 9
$15 billion, and adjusting the amount
(Nov. 23, 2009)
of trust preferred securities and the
proceeds it proposed to generate
• $15.0 billion common issuance
• $4.0 billion trust preferred securities
through asset sales. On
• $7.6 billion asset sales
November 25, 2009, two Bank of
• $1.7 billion employee stock
America directors met with thencompensation
Chairman Bair to discuss exiting
TARP. Former Bank of America CEO Kenneth Lewis told SIGTARP that it was
important to receive FDIC’s approval to exit TARP. Mr. Lewis said that the
understanding within Bank of America was that “for all practical purposes” Bank
of America’s TARP exit “wouldn’t go forward without [FDIC’s] support.” ThenChairman Bair told SIGTARP that while FDIC “had no legal standing on this,”
the regulator had “implicit leverage…to weigh into the process” that is built into
agency relationships.
At the meeting, the two Bank of America directors briefed then-Chairman Bair on
the bank’s operating condition, including its need to repay TARP in order to
complete a successful CEO search. She reaffirmed FDIC’s position that 1-for-2
was the minimum requirement. According to Bank of America, she also offered
as an alternative to arrange an interagency agreement to allow for a partial TARP
repayment and the bank’s removal from the exceptional assistance designation.
FDIC told SIGTARP that partial repayment and limited relief from employment
restrictions for the purpose of recruiting a new CEO would have been preferable
to a TARP repayment that was inconsistent with the 1-for-2 provision.

Regulators Sought Advice and Consensus on the Amount of
Common Stock Bank of America Could Issue
On November 25, 2009, all three regulators held a conference call with the
outside advisors to Bank of America and FRB to discuss differing views of the
amount of common stock that Bank of America would be able to successfully
issue in the market. That same day, financial markets were rattled by an
announcement that the Government of Dubai’s flagship holding company would
seek to postpone debt payments. The resulting uncertainty further complicated
discussions about the timing and size of Bank of America’s proposed raise.
Because no one could predict how the market would react to various issuance
targets, on November 29, 2009, regulators began to discuss a “best efforts” plan in
which Bank of America would try to raise as much common stock as possible
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such that any remaining TARP capital would be repaid through other means.
Regulators would push for as much issuance of common stock as the market
would bear, and any shortfall could be replaced with trust preferred securities and
asset sales through an agreed-upon path to exit over time.
On November 30, 2009, Bank of America reasserted that only a plan that would
get it out of TARP entirely through one lump sum repayment was feasible. An
FRB official noted to SIGTARP that the option built into the November 2009
guidance that allowed for a partial repayment and multi-staged exit from TARP
turned out to be impractical for some firms, in part because customers and
investors believed that TARP participation carried a stigma. FRB Governor
Tarullo reiterated this point, telling SIGTARP, “It was a binary situation where
markets were going to view firms as out of the Government embrace or not.”

FRB Approved Bank of America’s 11th and Final Proposal After
Reaching Agreement with FDIC on the Terms
On December 1, 2009, Bank of America submitted its 10th proposal to FRB, this
time to repay TARP in full and
Bank of America Proposal 10
immediately exit by issuing
(Dec. 1, 2009)
$18.8 billion in common stock,
$4 billion in trust preferred
• $18.8 billion common issuance
• $4.0 billion trust preferred securities
securities, and $1.7 billion in
• $1.7 billion employee stock compensation
common stock to employees. FDIC
did not believe that Bank of America Bank of America Proposal 11
should get any credit for trust
(Dec. 1, 2009)
preferred securities because, in its
• $18.8 billion common issuance
view, trust preferred securities had
• $4.0 billion asset sales
proven not to have the loss
• $1.7 billion employee stock compensation
absorbing capacity of common
equity, and the guidance clearly
called for new common equity. Regulators ultimately determined that it would be
preferable to count some amount of prospective asset sales, if backed by a
commitment to raise additional common stock to the extent that the asset sales
were not completed.
Later on December 1, 2009, Bank of America submitted an 11th and final
proposal, replacing the trust preferred securities with asset sales to be completed
by December 31, 2010. The institution now proposed to repay the full $45 billion
TARP commitment and immediately exit by issuing $18.8 billion in common
stock, $1.7 billion in common stock to employees, and committing to enter into
binding contracts to sell assets by June 30, 2010, that would generate an
additional $4 billion in common equity by December 31, 2010, backstopped by
common stock, and using existing liquidity.

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The amount of common stock Bank of America eventually agreed to issue was
more than twice the amount the institution initially proposed. Mr. Lewis told
SIGTARP that each proposal Bank of America submitted was a “reasonable
proposal” and that the institution was not “low-balling” as a tactic in negotiations.
FDIC officials, however, told SIGTARP that in their view Bank of America’s
outside advisor did low-ball its estimate of the amount the institution would be
able to raise through an equity offering. Then-Chairman Bair told SIGTARP that
FDIC eventually agreed to the 11th proposal after Bank of America officials made
a verbal commitment to her that the bank would raise equity through an
overallotment option in accordance with the 1-for-2 provision rather than rely on
earnings from the asset sales.
On December 2, 2009, FRB approved Bank of America’s repayment proposal and
Bank of America issued a press release detailing the terms of its exit from TARP.
Bank of America’s common stock offering on December 4, 2009, raised
$19.3 billion, though the overallotment option was never exercised, and Bank of
America repaid Treasury’s $45 billion TARP investment in full on
December 9, 2009. Then-Chairman Bair told SIGTARP that the offering was
“oversubscribed” and said that FDIC was “disappointed” that the will was not
there to issue additional common stock. She added, “They could’ve gotten the
whole thing” and met the requirement to raise $22.5 billion in new common stock
in accordance with the 1-for-2 provision as originally designed. Governor Tarullo
told SIGTARP that once Bank of America raised this “enormous amount of
capital,” other TARP recipients thought that maybe they too should “go down this
path” and raise equity in a sufficient amount to repay TARP in full and
immediately exit.
Bank of America increased its common stock issuance by $500 million from
$18.8 billion to $19.3 billion, still short of the $22.5 billion called for by the 1for-2 guidance. As a result, the amount of additional capital it was required to
raise in 2010 decreased from $4 billion to $3 billion. Realizing that it would not
meet a June 30, 2010, interim deadline to enter binding contracts, Bank of
America requested that FRB waive the interim deadline and use more favorable
accounting rules that were in place at the time the repayment agreement was
signed to credit the proceeds from asset sales. FRB agreed to waive the interim
deadline, but maintained the requirement that all asset sales be completed
according to current accounting rules by December 31, 2010. On
November 15, 2010, Bank of America reported to the Federal Reserve Bank of
Richmond (“FRB Richmond”) that it would generate more than $3.1 billion in
post-tax profit with the completion of an asset sale on November 23, 2010. At
that point, nearly one year after its exit, Bank of America satisfied the terms
agreed to during the institution’s exit from TARP in December 2009.

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Citigroup’s TARP Exit
The Conversion of Treasury’s CPP Investment to Common Stock,
Citigroup’s Repayment of TIP, and Treasury’s Sale of Its Citigroup
Common Stock
This section details the events leading to Citigroup’s repayment of and exit from
TARP. Citigroup’s TARP exit proceeded differently from the other institutions
discussed in this report, largely because Citigroup converted Treasury’s
$25 billion CPP investment from preferred stock to common stock. While
Treasury’s $20 billion TIP investment in Citigroup remained subject to repayment
procedures similar to those pertaining to other SCAP institutions, Citigroup was
required to raise additional capital beyond the minimum established by the
November 2009 guidance. The SIGTARP report, “Extraordinary Financial
Assistance Provided to Citigroup, Inc.,” issued on January 13, 2011, describes in
detail the process by which Citigroup sought to and ultimately repurchased the
TIP trust preferred securities, as well as the trust preferred securities held by
Treasury pursuant to AGP, and thus exited those aspects of its participation in
TARP. In addition to summarizing the relevant events described in that report,
this section adds several additional details. Figure 6 below shows the timeline of
key events related to Citigroup’s repayment and exit from TARP.

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FIGURE 6

KEY TARP REPAYMENT EVENTS FOR CITIGROUP (C)
Nov-Dec 2009
FRBNY conducts
2nd stress test using
new data &
assumptions to
determine amount
C would need to
raise to repay TIP
Sep 11, 2009
Treasury’s converts
$25B CPP investment
in C to common stock;
C discusses TIP
repayment with
FRBNY

Nov 5, 2009
FRBNY notifies C
that ineligible to
repay subject to
1-for-2 provision in
Nov 2009 guidance

Dec 13-14, 2009
C submits final
repayment proposal;
FRB approves on
12/14; C announces
offering
> $17.6B ISSUANCE**

Dec 9, 2009
C submits first formal
proposal to
repurchase all $20B
preferred stock (TIP)
and terminate AGP

Dec 23, 2009
C repays $20B (TIP)
and AGP is terminated

Citigroup, Inc. (C)

SEP 2009

OCT 2009

NOV 2009

DEC 2009

JAN 2010 FEB 2010

Post-Nov 2009 Guidance Repayments

Nov 3, 2009
FRB issues nonpublic revised
guidance with 1-for2 expedited
repayment option

Nov 24, 2009
Deadline for
repayment plans
required by FRB
guidance

Dec 1-2, 2009
BAC submits final proposal;
FRB approves on 12/2; BAC
announces equity offering
> $19.3B ISSUANCE*

Note: Issuances commenced after announcement
and were completed at a later date
*BAC issued common equivalent securities,
which converted to common stock on Feb 24, 2010
**C also issued $3.5B in tangible equity units

Dec 9, 2009
BAC repays $45B and
exits TARP

Sources: SIGTARP, OFS, FRB, Citigroup, and Bank of America.

As Citigroup’s share price continued to decline in late 2008 and early 2009,
regulators recognized that concerns persisted about the quality of the institution’s
capital. According to OCC examiners, the market viewed the $45 billion of
TARP preferred equity Citigroup received as the equivalent of debt, and wanted
Citigroup to be infused with more common equity. Citigroup approached
regulators to discuss such an infusion, and FRB began to analyze alternatives to
bolster Citigroup’s common equity levels – specifically its Tangible Common
Equity (“TCE”).47 Treasury and regulators decided to focus on converting
Treasury’s preferred stock to common stock.
In addition to converting the preferred stock held by Treasury, regulators also
advocated for Citigroup to incentivize private shareholders to convert their
preferred stock to common stock. FDIC suggested that Citigroup suspend the
dividends the institution paid to its private preferred shareholders in order to do
so. Citigroup, for its part, worked to obtain commitments from private investors
47

TCE, as defined by Citigroup, represents common equity minus goodwill and intangible assets, other than Mortgage
Servicing Rights, net of related deferred taxes. Other companies may calculate TCE differently.

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to convert their preferred stock to common stock, pending Treasury’s agreement
to also convert its investment.48
Citing the “urgency of the situation” and the potential ramifications of not
completing the exchange offer, Treasury’s Investment Committee49 advised
Secretary Geithner to participate in the offer under the condition that Treasury’s
involvement was contingent upon an unspecified amount of private-sector
participation.50 According to a memorandum prepared by Treasury’s Investment
Committee on February 26, 2009, taking no action to convert the Citigroup
investment to common stock could have hastened the deterioration of Citigroup
and reverberated throughout the U.S. economy, contributing materially to weaker
economic performance and higher unemployment.

Treasury’s CPP Investment Was Converted from Preferred Stock to
Common Stock, Making Treasury Citigroup’s Single Largest
Common Stock Holder
On February 27, 2009, Treasury and Citigroup publicly announced the exchange
offer. Citigroup also agreed to exchange up to $27.5 billion of existing private
preferred and trust preferred stock to common stock.51 Through a press release,
Citigroup CEO Vikram Pandit announced that the singular goal of the exchange
was to increase the institution’s TCE from the fourth quarter 2008 level of
$29.7 billion to as much as $81 billion.
Citigroup’s stock price stabilized shortly after the exchange was announced, but
the transaction could not be completed before the execution of an agreement
between Treasury and Citigroup on June 9, 2009. On July 23, 2009, and
July 30, 2009, Treasury converted its $25 billion in Citigroup preferred stock to
common stock equivalent, an interim security that would convert to common
stock upon authorization.

48

A Citigroup executive sent an email to Secretary Geithner on February 21, 2009, stating that Citigroup had $15 billion
of private preferred stock “ready to convert” should Treasury agree to convert some of its investment. The executive
also indicated that the proposed conversion, combined with asset sales, would boost the institution’s TCE to a
satisfactory level “without having the [U.S. Government] own too much of Citi.”
49
Treasury’s TARP Investment Committee was created to serve as a decision-making body to approve the investment
decisions made under TARP authority. The Investment Committee consists of TARP’s Chief Investment Officer and
senior Treasury officials from financial markets, economic policy, financial institutions, and financial stability.
50
Treasury would assume additional risk by converting the preferred securities it held to more junior common equity,
and forgo revenue from dividend payments owed to Treasury under the CPP preferred investment agreement. Treasury
also agreed to exchange the preferred stock issued under TIP and AGP for trust preferred securities with the dividend
rate on the new securities remaining unchanged. The final term sheet specified that Treasury would convert an amount
of preferred stock equal to the amount converted by private equity holders, up to the $25 billion issued under CPP,
provided that private equity holders converted at least $11.5 billion worth of preferred stock.
51
Citigroup would later increase the amount of the exchange offer to $33 billion to meet the regulatory requirements
announced with the results of the SCAP stress tests.

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Around this time, FDIC expressed concern about Citigroup’s management and its
liquidity. In response to these concerns, Citigroup assured regulators that it would
take specific action to strengthen its supervisory oversight of the bank’s
management and undergo a management review conducted by an independent
third party consultant agreed to by all the regulators. Then-FDIC Chairman Bair
told SIGTARP that some of the promises Citigroup made were “half-filled.”
While she said she was pleased with some of the management changes that
resulted from the review, she added that she “thought there would have been more
changes at the top.” However, according to OCC, the independent management
review was consistent with Citigroup’s assurances, and then Comptroller Dugan
told SIGTARP that he was unaware of any unfulfilled promises.
The common stock equivalent Treasury received in late July 2009 ultimately
converted to approximately 7.7 billion shares of common stock at $3.25 per share
on September 11, 2009. At the time, Treasury became the largest single
shareholder of Citigroup, holding approximately 33.6% of Citigroup common
stock.52 The conversion would ultimately affect Citigroup’s exit from CPP
because the guidance outlining the process and criteria whereby SCAP institutions
were permitted to repurchase TARP preferred shares did not apply to Treasury’s
common stock investment in Citigroup. Instead – unlike the other SCAP
institutions that received CPP funds – Citigroup’s exit from the program was
dependent upon Treasury selling the common stock it held to the public market.
Treasury ultimately sold its Citigroup stock into the market from April 26, 2010,
through December 10, 2010.

Citigroup Sought to Repay TIP and Regulators Debated the Amount
and Composition of the Capital Citigroup Would Be Required
to Raise
After converting its CPP investment in Citigroup to common stock, Treasury still
held the $20 billion in trust preferred securities invested through TIP. Citigroup
was permitted to repurchase this investment subject to approval from FRB, the
holding company’s primary Federal regulator.53 On September 11, 2009 – the
same day the CPP conversion was completed – Citigroup CEO Pandit met with
Federal Reserve Bank of New York (“FRBNY”) President William Dudley to
discuss repaying TIP and terminating the ring-fence guarantee provided by the
Government through AGP. During the meeting, Citigroup presented its financial
condition, including the results of an internal stress test.

52
53

The agreed-upon price per share was based on the average of Citigroup’s stock price over the previous 20 days.
As noted above, the SIGTARP report, “Extraordinary Financial Assistance Provided to Citigroup, Inc.,”
January 13, 2011, describes in detail the process by which Citigroup sought to and ultimately did repurchase the TIP
trust preferred securities, as well as the trust preferred securities held by Treasury pursuant to AGP, and thus exited
those aspects of its participation in TARP.

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FRBNY concluded that the information provided by Citigroup about its financial
condition was insufficient to determine whether or not Citigroup was in a
condition to repay TIP and terminate AGP. FRB later told Citigroup to wait until
the agency issued revised guidance to remaining SCAP institutions on TARP
repayment. FDIC also conducted an independent analysis of Citigroup’s planning
and forecasting processes and identified many of the same issues identified by
FRBNY.
Nonetheless, regulators continued to discuss Citigroup’s condition and prospects
for repaying Treasury’s $20 billion TIP investment and terminating AGP.
According to FRB Governor Tarullo, given Citigroup’s “travails, its challenges,”
regulators would “treat them differently than a lot of institutions.” He added that
Citigroup would have to raise more capital, “way beyond 1-for-2.” According to
FDIC, regulators had agreed during the late October meetings that Citigroup
would need to raise a minimum of $1 in capital for every $1 in TARP funds it
repaid. OCC also stated that all regulators understood that Citigroup would be
held to a higher standard, up to 1-for-1, though neither then-Comptroller Dugan
nor OCC staff recalled a formal agreement during the late October meetings
establishing such a requirement.54
While discussing Citigroup’s capital needs, regulators moved closer to issuing the
November 2009 repayment guidance to all SCAP institutions. However, some
Treasury and FRB officials were concerned that publicizing the guidance might
stigmatize Citigroup because the institution would not be eligible to exit subject to
the 1-for-2 minimum provision allowing consideration for expedited repayment.
According to a former senior Treasury official, the concern within Treasury “was
all about confidence and stability,” with officials wary of taking any action that
might destabilize an institution. Similarly, an FRB governor told SIGTARP that
“if ultimately we’re saying those that are repaying are healthy, then we’re
implicitly saying that those that won’t aren’t.” FRB decided to issue the revised
guidance non-publicly.
On November 5, 2009, an FRBNY official met with Citigroup CEO Pandit and
Citigroup’s Chief Financial Officer to discuss the revised guidance. During the
meeting, the FRBNY official informed Citigroup management that the 1-for-2
provision would not apply to Citigroup. Instead, Citigroup would have to repay
Treasury’s $20 billion TIP investment with a larger proportion of newly raised
common equity than other SCAP institutions. That amount would be subject to
the results of a repayment stress test to be conducted by FRBNY, FRB, and OCC
starting on November 9, 2009. The repayment stress test for Citigroup used the
format and process of the original SCAP stress test, but several data inputs were
updated. For example, the original SCAP stress test used Citigroup financial data
54

A draft version of the guidance disseminated on the same day as one of the meetings held at Treasury notes that in
some circumstances an institution may be required to fully offset the redemption of Treasury capital by raising $1 of
new private common equity and $1 of new private preferred equity for every $2 in TARP funds being repaid.

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as of December 31, 2008, while the repayment stress test used financial data as of
September 30, 2009. The worst-case unemployment rate used in the stress test
was increased from 10.4% to 11.1% to reflect an increase in the actual
unemployment rate from 8.9% in April 2009 to 10% in November 2009. While
actual housing prices had risen during that period, the worst-case forecast for
housing prices in the repayment stress test was maintained at the same level used
in the SCAP stress test.
The stress test was not the only factor influencing the assessment of Citigroup’s
capital needs to exit TARP. Complicating the analysis were other variables that
could impact the institution’s access to capital, including a decision on whether to
terminate the ring-fence guarantee provided through AGP and a decision by
Treasury on whether to grant a blanket exception to a rule impacting the sale of
Citigroup common stock held by Treasury. Because Citigroup would still hold
CPP funds, a decision on whether the institution would remain subject to stricter
compensation restrictions, including being subject to the purview of the Special
Master for TARP Executive Compensation, was also pending resolution.

Announcement of Bank of America’s Repayment Intensified Market
Speculation About Citigroup’s Repayment Plans and Citigroup
Requested to Exit from AGP in Addition to TIP
As regulators discussed Citigroup’s capital raise requirements, Bank of America’s
December 2, 2009, announcement that it would repay TARP intensified market
speculation about Citigroup’s repayment prospects. That day, a Citigroup
executive sent news reports to OCC highlighting some of the speculation.
Subsequent media reports speculated on the possibility that no repayment
agreement would be reached before the end of the year. According to an FRB
email, Citigroup CEO Pandit also voiced concern to a senior Treasury official that
Citigroup might become stigmatized by its continued participation in TIP and
wondered how to respond publicly to the news of Bank of America’s exit from
TARP. When asked about the conversation, the Treasury official told SIGTARP
that Mr. Pandit was “concerned about being the last one in extraordinary
assistance from a competitive standpoint, for recruiting employees.” Mr. Pandit
told SIGTARP that “having $45 billion from the Government had no positive
impact on Citigroup’s image” and also confirmed that the desire to escape
management compensation restrictions was a factor motivating Citigroup’s desire
to exit TARP.55
In the midst of the media speculation, regulators continued to seek consensus on
the composition of the capital raise that would be required of Citigroup to repay
TIP. That week, Citigroup specified that the institution was requesting a
55

As detailed in SIGTARP’s report, “Extraordinary Financial Assistance Provided to Citigroup, Inc.,” there were several
motivations for Citigroup’s decision to repay its TIP funds when it did, which included executive compensation
restrictions, employee morale, and the institution’s image.

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simultaneous termination of the ring-fence guarantee provided through AGP.
Then-FDIC Chairman Bair expressed concern about terminating the ring-fence,
worrying that Citigroup’s request was “all about compensation.” FRB
recalculated the amount Citigroup would be required to raise to reflect the
additional capital offset necessary to terminate AGP. FRB determined that
Citigroup would need to raise a total of $23.1 billion in common equity to meet
the 1-for-1 TIP repayment requirement and simultaneously offset the capital hit
that would result from terminating the ring-fence received through AGP.

Citigroup Submitted Three Proposals to Fully Repay TIP and
Terminate Its Participation in AGP
On December 9, 2009, Citigroup sent
FRBNY its first formal repayment
proposal. The proposal, like the two that
followed on December 10, 2009, and
December 13, 2009, proposed to fully
repay all $20 billion in Citigroup TIP
trust preferred securities and to terminate
Citigroup’s involvement in AGP.
Citigroup proposed to issue $15 billion in
common stock and to supplement the
raise with a $2.25 billion overallotment
option (or green shoe),56 $2.5 billion in
tangible equity units,57 and $1 billion in
employee stock compensation. FRBNY
responded to Citigroup’s proposal by
informing the institution that the capital
raise detailed in the proposal did not
contain enough common equity.

Citigroup Proposal 1
(Dec. 9, 2009)
• $15 billion common stock issuance
• $2.25 billion common stock
overallotment option
• $2.5 billion tangible equity units
• $1 billion employee stock
compensation

Tangible Equity Units
Innovative financial instruments that
allowed Citigroup to raise additional
common equity beyond the common stock
it planned to issue.
Citigroup would receive full payment for
the instruments in advance in exchange for
stock to be delivered in three years and
interest and principal payments on a note
during the intervening period. Based on a
review of the instrument’s characteristics,
FRB agreed to permit Citigroup to treat
80% of the value of the tangible equity
units as Tier 1 Capital.

On December 10, 2009, Citigroup
submitted a second proposal, in which it
proposed to increase the amount it would
issue through each type of capital
instrument. Citigroup now proposed to issue $17 billion in common stock
supplemented with a $2.55 billion overallotment option, $3.5 billion in tangible
56

In this case, the overallotment option allowed the underwriters to sell up to $2.25 billion more than the initial allotment
of $15 billion, if the initial allotment was fully subscribed.
57
Citigroup requested that 80%, or $2.0 billion, of the tangible equity units count toward common equity. The tangible
equity units consisted of a stock purchase contract and a junior subordinated amortizing note. The stock purchase
contract has a settlement date of December 15, 2012, and prior to completion of a 10:1 reverse stock split would have
settled for between 25.3968 and 31.7460 shares of Citigroup common stock (between 2.5397 and 3.1746 shares post
split). The amortizing notes will pay holders equal quarterly installments of $1.875 per amortizing note, totaling a
7.5% cash payment per year for each $100 of tangible equity units. The final payment is scheduled for
December 15, 2012.

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Citigroup Proposal 2

equity units, and $1.7 billion in
(Dec. 10, 2009)
employee stock compensation. An
• $17 billion common stock issuance
FRBNY official told SIGTARP that at
• $2.55 billion common stock
the time FRBNY considered the
overallotment option
• $3.5 billion tangible equity units
amount of capital to be adequate but
• $1.7 billion employee stock
was concerned that Citigroup might not
compensation
be able to fill its overallotment option,
which was dependent on market
demand for its stock. In light of this concern, FRBNY informed Citigroup that
the next repayment proposal should include a clause stipulating actions that
Citigroup would need to take in the event the overallotment option was not
sufficiently exercised.
On Sunday, December 13, 2009, Citigroup submitted its final proposal to
FRBNY. Unlike previous proposals, the latest proposal included capital raise
conditions and the cancellation of $1.8 billion of trust preferred securities in
connection with the termination of AGP. The proposal also included an
acknowledgment that “if the offering of common stock and tangible equity units
[did] not generate at least $21.3 billion of additional equity capital, the regulators
would expect Citigroup to issue additional [trust preferred securities] in a ratio of
$2 for every $1 the equity raised falls short of $21.3 billion, subject to a minimum
equity raise of $19.8 billion, up to a maximum of $3.0 billion of [trust preferred
securities].” Citigroup would have had to fill at least $1.5 billion of the
overallotment option in order to satisfy the requirement to generate additional
equity capital of $21.3 billion.
In part to address then-FDIC Chairman
Bair’s concern that the ring-fence
termination was motivated by a desire
to remove compensation restrictions,
Treasury and regulators specified in the
ring-fence termination agreement that
during 2010, FRB would review the
compensation of the institution’s top 30
earners, in consultation with FDIC and
OCC. With this agreement in place,
regulators signed off on the proposal.

Citigroup Proposal 3
(Dec. 13, 2009)
• $17 billion common stock issuance
• $2.55 billion common stock overallotment
option
• $3.5 billion tangible equity units
• $1.7 billion employee stock
compensation
• Agreement to issue additional trust
preferred securities as a backstop
against failing to meet equity targets

The terms of the cancellation of AGP trust preferred securities, under which
$1.8 billion was canceled, resulted from separate negotiations with Treasury.58
The Government kept the other $5.2 billion in Citigroup trust preferred securities
as payment for its guarantee of the asset pool for one year. According to this final
58

For further details on the termination of Citigroup’s participation in AGP, see SIGTARP’s report “Extraordinary
Financial Assistance Provided to Citigroup, Inc.,” issued on January 13, 2011.

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Citigroup repayment proposal, Citigroup expected a $1.1 billion capital benefit to
result from the cancellation of the $1.8 billion in AGP trust preferred securities
that the Government surrendered. With this $1.1 billion benefit added to the
expected new capital raise of $24.05 billion, Citigroup expected its proposal
would generate up to $25.15 billion in capital.

FRB Approved Citigroup’s Proposal to Fully Repay TIP and
Terminate Its Participation in AGP; Treasury Sold Its CPP
Investment in Citigroup
On Monday, December 14, 2009 – one day after Citigroup submitted its final
proposal – FRB sent Citigroup a letter indicating FRB approved Citigroup’s final
request to repay the TIP capital and terminate AGP. The letter also detailed the
conditions Citigroup would need to meet to exit the two programs. On
Wednesday, December 16, 2009, Citigroup priced its offering and announced the
details of the corresponding capital raise, which Citigroup began executing that
same day.
Citigroup’s common stock offering occurred nearly simultaneously with Wells
Fargo’s, possibly impacting market demand for Citigroup’s stock. Citigroup
expressed frustration that Wells Fargo issued common stock to repay TARP
nearly simultaneously. Mr. Pandit told SIGTARP, “Wells Fargo was perturbing
in issuing equity right before we did.” He added, “Anytime you have $20 billion
in equity to raise, and you go to bank buyers and there is another large raise, of
course there is an impact from that.”
Ultimately, Citigroup did not meet the $1.5 billion overallotment option necessary
to satisfy the total $21.3 billion additional equity capital requirement. Instead, the
institution raised only $600 million from the overallotment, resulting in a
$900 million capital shortfall and a need to raise at least $1.8 billion in additional
trust preferred securities during the first quarter of 2010 to meet the requirement
agreed to with the regulators if the equity raise fell short.
On December 23, 2009, Citigroup, Treasury, FDIC, and FRBNY all signed the
Termination Agreement for Citigroup’s participation in AGP. That same day,
Treasury and Citigroup also signed an agreement for the repayment of TIP. In
March 2010, Citigroup raised $2.3 billion in trust preferred securities, satisfying
the capital raise requirement under the terms of its repayment proposal.
Although Treasury initially planned to sell some of its common stock investment
in Citigroup concurrently with the institution’s equity offering, it retained all of its
CPP investment after Citigroup repaid TIP and terminated AGP. On
March 29, 2010, Treasury announced that, under a prearranged written trading
plan, it would sell its Citigroup common stock in an “orderly and measured”
fashion over the course of 2010, subject to market conditions. Treasury
ultimately sold this stock into the market from April 26, 2010, through
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December 10, 2010, generating $31.85 billion in proceeds to Treasury, or
$6.85 billion more than Treasury’s original CPP investment in Citigroup. On
January 25, 2011, Treasury auctioned warrants to purchase common stock in
Citigroup that it received through CPP, TIP, and AGP for an aggregate of
$312.2 million.

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Wells Fargo’s TARP Exit
This section details the events leading to Wells Fargo’s repayment of TARP funds
received through CPP. Wells Fargo proposed meeting the 1-for-2 provision in
part by issuing stock through a private equity transaction. Regulators discussed
how to treat this transaction at length until December 12, 2009, when the
institution finally removed the transaction from its repayment proposal, and a
final agreement was reached for Wells Fargo to exit TARP two days later.
Figure 7 below shows the timeline of key events related to Wells Fargo’s
repayment and exit from TARP.
FIGURE 7

KEY TARP REPAYMENT EVENTS FOR WELLS FARGO (WFC)

Nov 24, 2009
WFC repayment plan
notes that it has “been
asked by Treasury to
repay TARP;” Proposes
private $4.5B Prudential
transaction but no
common issuance

Dec 12, 2009
WFC proposals eliminates
Prudential transaction and
increases common
issuance to $10.4B

Dec 10, 2009
WFC repayment plan
includes $2.8B common
issuance along with
Prudential transaction

Dec 14, 2009
WFC submits final
proposal; FRB
approves; WFC
announces offering
> $12.2B ISSUANCE

Dec 23, 2009
WFC repays $25B
and exits TARP

Wells Fargo & Company (WFC)

SEP 2009

OCT 2009

NOV 2009

DEC 2009

JAN 2010 FEB 2010

Post-Nov 2009 Guidance Repayments

Nov 3, 2009
FRB issues nonpublic revised
guidance with 1-for2 expedited
repayment option

Nov 24, 2009
Deadline for
repayment plans
required by FRB
guidance

Dec 1-2, 2009
BAC submits final proposal;
FRB approves on 12/2; BAC
announces equity offering
> $19.3B ISSUANCE*

Note: Issuances commenced after announcement and were completed at a later date
*BAC issued common equivalent securities, which converted to common stock on
Feb 24, 2010
**C also issued $3.5B in tangible equity units

Dec 13-14, 2009
C submits final proposal
to repay TIP and
terminate participation in
AGP; FRB approves on
12/14; C announces
offering
> $17.6B ISSUANCE**

Dec 23, 2009
C repays $20B and AGP is
terminated

Dec 9, 2009
BAC repays $45B and
exits TARP

Sources: SIGTARP, OFS, FRB, Wells Fargo, Citigroup, and Bank of America.

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Wells Fargo Proposal 1
OCC officials told SIGTARP that Wells
(Sept. 22, 2009)
Fargo originally planned to repay TARP
over time by accumulating and retaining
Payments: 4 installments (4Q09 –
3Q10)
earnings, and making smaller, partial
TARP repayments using those earnings
rather than making a one-time repayment using proceeds from a common stock
issuance. Wells Fargo’s CEO John Stumpf explained to SIGTARP that the
institution sought to repay TARP while minimizing the dilution to current
shareholders that would result from issuing new common stock. On
September 22, 2009, bank executives provided FRB with a TARP repayment plan
that reflected this strategy. The plan envisioned Wells Fargo repaying Treasury’s
$25 billion TARP investment over four installments, proposing to make the final
payment in the third quarter of 2010. Regulators, however, were in the midst of
developing what would become the November guidance that would govern
repayments.

Wells Fargo Sought to Use Settlement with Prudential Toward
the 1-for-2 Provision
Wells Fargo sought to apply the
settlement of a pending transaction with
Prudential Financial, Inc. (“Prudential”)
An option contract giving the owner
toward the 1-for-2 provision. As a
the right, but not the obligation, to sell
a specified amount of an underlying
result of acquiring Wachovia in
asset at a set price within a specified
December 2008, Wells Fargo owned a
time.
controlling interest in a retail securities
brokerage joint venture with Prudential.
Prudential elected to exercise a “put option” to sell its minority interest in the joint
venture to Wells Fargo, creating a $4.5 billion59 obligation that Wells Fargo was
required to settle with Prudential by January 4, 2010. This obligation could be
settled in cash or in Wells Fargo common stock, which Prudential intended to
liquidate by selling to public markets.
Put Option

Wells Fargo planned to issue common stock to
settle the Prudential transaction and apply the
private issuance toward the 1-for-2 provision
to seek partial repayment.60 On the day FRB
issued the revised guidance, Wells Fargo met
with regulators to discuss this possibility, but
did not receive clarity on whether the

Wells Fargo Proposal 2
(Nov. 24, 2009)
Payments: 3 installments
Sources of capital raise:
• $4.5 billion Prudential (private)
common stock issuance
• $1.2 billion employee stock
issuance

59

In its November 4, 2009, letter, Wells Fargo estimated the value of Prudential’s minority interest to be up to $5 billion.
In repayment proposals later submitted to FRB, Wells Fargo specified that it planned to issue $4.5 billion of common
stock to settle with Prudential. The latter amount is used here for simplicity.
60
The November 2009 guidance stated that firms may repay all or part of TARP by “issu[ing] $1 of new common equity
for every $2” repaid so long as the firm can, among other things, show “recent access to public equity markets”
(emphasis added).

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Prudential transaction would count. On November 24, 2009, Wells Fargo
submitted a TARP repayment proposal that relied on receiving credit for the
Prudential transaction.
In early December 2009, regulators discussed Wells Fargo’s request to count
stock issued privately through the Prudential transaction toward the 1-for-2
provision. While the private transaction did not demonstrate public market
access, it would improve the quality
Wells Fargo Proposal 3 (Dec. 3, 2009)
of Wells Fargo’s capital by
increasing the institution’s common
Payments: 2 installments
equity. As regulators discussed the
Sources of capital raise:
• $1.25 billion public common stock
request, on December 3, 2009, one
issuance
day after FRB approved Bank of
• $4.5 billion Prudential (private) common
America’s TARP repayment plan,
stock issuance
• $1.1 billion employee stock issuance
Wells Fargo submitted a proposal to
repay half, or $12.5 billion, of
Treasury’s $25 billion TARP
investment by the end of 2009, and to repay the remainder in the second quarter
of 2010. The institution proposed to use the 1-for-2 expedited repayment
provision for the first payment, in part by using the $4.5 billion common stock
issued through the Prudential transaction.
However, FDIC indicated the Prudential transaction did not meet the
requirements of the expedited repayment provision established in the
November 2009 guidance. On December 7, 2009, at the bank’s request, FDIC
and Wells Fargo met to discuss the transaction. During the meeting, then-FDIC
Chairman Bair and other FDIC officials told Wells Fargo that the plan would
have to comply with the November 2009 guidance and that FDIC was not
supportive of counting the Prudential transaction toward the 1-for-2 provision.

Regulators Informed Wells Fargo that only a Proposal for Full TARP
Repayment Could Provide the Institution with Certainty
Although Wells Fargo planned to
make partial TARP repayments,
officials from the Federal Reserve
Bank of San Francisco (“FRB San
Francisco”) told SIGTARP that the
bank also sought to signal certainty
to markets by publicly stating that
regulators had fully approved a plan
that would allow for an exit from
TARP. However, according to
regulators, only the immediate
portion of a multi-stage repayment
plan could be approved, so the

SIGTARP 11-005

Wells Fargo Proposal 4 (Dec. 10, 2009)
Payments: 2 installments
Sources of capital raise:*
• $2.8 billion common issuance
• $4.5 billion Prudential (private) common
stock issuance
• $1.7 billion employee issuance
• $0.4 billion capital via reduction in publicly
identified, high risk, liquidating portfolios
• $0.8 billion core deposit intangible
amortization
*Wells Fargo also proposed to use $2.8 billion
in retained earnings

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47

institution could not publicly announce that regulators had approved a full
repayment plan or state definitively that it would not be required to raise
additional capital to fund later repayments.
FRB San Francisco officials told SIGTARP that regulators had concerns with the
institution relying on earnings to repay over time, noting, “what if you have a bad
quarter?” and pointing out that the economic outlook was uncertain in late 2009.
The only way for the institution to signal certainty to markets regarding its exit
from TARP was to repay all of Treasury’s $25 billion investment in full.
Moreover, these officials noted, because regulators might not allow the Prudential
transaction to count toward the 1-for-2 provision, its inclusion in future proposals
would also complicate matters and prolong deliberation.
Nonetheless, on December 10, 2009, Wells Fargo submitted a revised proposal
that again listed the Prudential transaction and included earnings as a key source
of funds for repayment. The institution also continued to propose repayment over
two installments – approximately
$14 billion in January 2010 and the
Wells Fargo Proposal 5 (Dec. 11, 2009)
remaining $11 billion by
Payments: 2 installments
March 31, 2010. Wells Fargo pointed
Sources of capital raise:*
to Bank of America’s recent capital
• $5.0 billion common issuance
• $4.5 billion Prudential (private) common
raise, which did not consist entirely of
issuance
newly issued common stock, and stated stock
• $1.7 billion employee issuance
that similar principles should also
• $0.5 billion gain on asset sale
• $0.4 billion capital via reduction in publicly
apply to Wells Fargo. However, given
identified, high risk, liquidating portfolios
its reliance on the Prudential
• $0.8 billion core deposit intangible
transaction, officials from both FRB
amortization
and FDIC considered the proposal
*Wells Fargo also proposed to use
unacceptable.
$2.8 billion in retained earnings
Wells Fargo Proposal 6 (Dec. 11, 2009)
On December 11, 2009, Wells Fargo
submitted a new proposal, almost
Payment: 1 installment
doubling the amount of common stock
Sources of capital raise:
• $5.0 billion common issuance
it proposed to issue, but still including
• $4.5 billion Prudential (private) common
the Prudential transaction and adding
stock issuance
gains on asset sales. While OCC was
• $2.25 billion employee issuance
• $1.5 billion post-tax profit on asset sale
supportive of this proposal, FDIC was
not. Wells Fargo submitted a second
proposal that day, which, among other adjustments, increased the amount of
employee stock it proposed to issue and the amount of proceeds it proposed to
generate from asset sales.

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Agreement Was Reached Soon After Wells Fargo Removed the
Prudential Transaction and Increased the Amount of Common Stock
It Proposed to Issue
On Saturday, December 12, 2009,
Wells Fargo Proposal 7 (Dec. 12, 2009)
after a week of media speculation
Payment: 1 installment
that Citigroup was negotiating
Sources of capital raise:
repayment of TIP, Wells Fargo
• $10.4 billion common issuance (plus
significantly revised its repayment
overallotment option)
• $1.35 billion employee issuance (to go
proposal, more than doubling the
first, if overallotment exercised)
proposed public issuance to
• $1.5 billion post-tax profit on asset sale
$10.4 billion and removing the
Prudential transaction. With the
encouragement of FRB San Francisco, Wells Fargo also included the possibility
of an overallotment option, which could reduce or eliminate the $1.35 billion in
common stock issued to employees. Over the weekend, Wells Fargo and FRB
worked to review the specific assets Wells Fargo proposed to sell and to develop a
proposal that addressed regulators’ preference for first reducing asset sales rather
than the employee stock issuance in the event the overallotment was exercised.
On Monday, December 14, 2009, the
Wells Fargo Proposal 8 (Dec. 14, 2009)
same day that Citigroup announced
its agreement with Treasury and
Payment: 1 installment
Sources of capital raise:
regulators to repay TARP funds
• $10.4 billion common issuance (plus
received through TIP, FDIC agreed
overallotment option)
to Wells Fargo’s proposal as long as
• $1.35 billion employee issuance
• $1.5 billion post-tax profit on asset sales
asset sales would be eliminated first
(to go first, if overallotment exercised)
by the exercise of the overallotment
option. An FDIC official noted,
“We would expect that the green shoe would cover the entire amount of the raise
if demand is sufficient.” Around midday, Wells Fargo submitted its final
proposal to regulators, which conformed to regulators’ expectations regarding
asset sales. That afternoon, FRB approved Wells Fargo’s CPP repayment request,
and the institution announced shortly thereafter that it had reached an agreement
with regulators to repay Treasury and exit TARP.
Wells Fargo CEO Stumpf told SIGTARP that multiple factors were driving the
bank’s timeline to have its TARP repayment approved, including time pressures
to settle the Prudential transaction by early January 2010 and to access equity
markets before the end-of-year holidays. In discussing the decision to repay in
full by the end of 2009, Mr. Stumpf told SIGTARP, “I recall being guided by
what would be best for shareholders – and simply that.” Regulators also noted to
SIGTARP that Wells Fargo shareholders likely held a great deal of influence over
the company’s repayment proposals. Referring to the bank’s shareholders, an
FDIC official commented to SIGTARP, “It’s a very vocal group at Wells Fargo.
They’re legendary.”
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However, encouragement from Treasury may have also contributed to Wells
Fargo’s decision to repay in full through a one-time stock issuance. A letter
attached to Wells Fargo’s November 24, 2009, repayment proposal stated that
Wells Fargo was “asked by the U.S. Treasury to repay TARP.” The former Wells
Fargo CFO who signed the letter told SIGTARP that then-Treasury Assistant
Secretary Herb Allison and Wells Fargo CEO Stumpf discussed Treasury’s desire
to see Wells Fargo repay TARP and Treasury’s concern about the market’s
perception of the institution if it remained in TARP while its peers repaid. Mr.
Stumpf told SIGTARP he had a “couple of conversations” with Assistant
Treasury Secretary Allison, but recalled only discussing warrants and loan
modifications, rather than Wells Fargo’s repayment plans. Secretary Geithner,
however, told SIGTARP that he asked Assistant Secretary Allison to encourage
institutions to repay. According to Secretary Geithner, Treasury believed “the
financial system would be stronger if [TARP institutions] could demonstrate they
could raise private capital. So if you put pressure on firms to seek private capital,
the system becomes stronger.” Assistant Secretary Allison told SIGTARP that he
spoke to most of the remaining SCAP institutions about their TARP repayment
plans and that while it was up to regulators to decide when institutions would be
allowed to repay, “the message was that we want the money back as soon as you
can do this.” He added that firms also wanted to repay “because of executive
compensation and the negative stigma TARP had.”

Wells Fargo Completed a Successful Common Stock Offering and
Exited TARP
On December 14, 2009, Wells Fargo announced its $10.4 billion common stock
offering plus a $1.56 billion overallotment option. The next day, Wells Fargo
priced the $10.65 billion offering at $25 per share and completed its offering by
the end of the day, including fully subscribing the overallotment option. Its total
raise of $12.25 billion eliminated the need for any asset sales and reduced the
amount of shares issued to employees pursuant to the TARP repayment
agreement.
The following week, on December 23, 2009, Wells Fargo wired $25 billion plus
accrued dividends to Treasury, fully repaying the CPP investment and exiting
TARP. It was the same day that Citigroup repaid TIP and terminated its
participation in AGP.

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PNC’s TARP Exit
This section details the events leading to PNC’s repayment of and exit from TARP
in February 2010. PNC’s repayment proposals included counting the sale of a
subsidiary toward the 1-for-2 repayment option, seeking credit for both the profit
and reduction of goodwill from the sale. After PNC received approval for TARP
repayment and commenced its public offering, regulators and PNC realized they
held different understandings of the role of the overallotment in TARP repayment
and PNC’s limited control over whether the overallotment was exercised.
Figure 8 below shows the timeline of key events related to PNC’s repayment and
exit from TARP.
FIGURE 8

KEY TARP REPAYMENT EVENTS FOR THE PNC FINANCIAL SERVICES GROUP (PNC)
Nov 24, 2009
PNC submits plan to repay
in “shareholder friendly
manner” in 2Q 2010

Dec 17, 2009
PNC accelerates
repayment plan to
1Q 2010

Feb 1-2, 2010
PNC submits final proposal;
FRB approves 2/02;
PNC announces offering
> $3.5B ISSUANCE***

Feb 10, 2010
PNC repays $7.6B
and exits TARP

The PNC Financial Services Group (PNC)

SEP 2009

OCT 2009

NOV 2009

DEC 2009

JAN 2010 FEB 2010

Post-Nov 2009 Guidance Repayments

Nov 3, 2009
FRB issues nonpublic revised
guidance with 1-for2 expedited
repayment option

Nov 24, 2009
Deadline for
repayment plans
required by FRB
guidance

Dec 1-2, 2009
BAC submits final proposal;
FRB approves on 12/2; BAC
announces equity offering
> $19.3B ISSUANCE*

Dec 13-14, 2009
C submits final proposal
to repay TIP and
terminate participation in
AGP; FRB approves on
12/14; C announces
offering
> $17.6B ISSUANCE**

Dec 23, 2009
C repays $20B and AGP is
terminated
WFC repays $25B and
exits TARP

Dec 9, 2009
BAC repays $45B and
exits TARP

Note: Issuances occurred after announcement and were completed at a later date
*BAC issued common equivalent securities, which converted to common stock on Feb 24, 2010
**C also issued $3.5B in tangible equity units
***PNC also issued $2B in debt

Dec 14, 2009
WFC submits final proposal
FRB approves; WFC
announces offering
> $12.2B ISSUANCE

Sources: SIGTARP, OFS, FRB, FDIC, PNC, Wells Fargo, Citigroup, and Bank of America.

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PNC Accelerated Its TARP Repayment Plans After Other SCAP
Institutions Repaid in December 2009
PNC, the 12th-largest U.S. bank holding company, was the fourth SCAP
institution to repay TARP in the months immediately following the issuance of
the November 2009 revised repayment guidance. As early as June 2009, PNC’s
CEO James Rohr was publicly quoted as stating that the institution was going to
repay TARP “in a shareholderfriendly manner.” After reviewing the PNC Proposal 1 (Nov. 24, 2009)
November 2009 guidance, PNC
Repay in 2Q10
initially declined to seek expedited
• $1 billion common issuance
• $1.6 billion dividends upstreamed from
repayment through the 1-for-2 option,
bank
instead opting to wait for FRB to
• $2.1 billion asset sale (PNC Global)
complete its review of the institution’s • $3.6 billion debt and/or hybrid
instruments ($0.3 billion for TARP
longer-term capital plan. Its
repayment; $3.3 billion to meet liquidity
November 24, 2009, repayment plan
policy levels)
stated its intent to wait until the
second quarter of 2010 to fully repay
Treasury’s $7.6 billion CPP investment by using various sources of capital,
including proceeds from a $1 billion common stock offering and the sale of its
subsidiary service unit, PNC Global Investment Servicing (“PNC Global”).61
However, on December 17, 2009, just days after Citigroup and Wells Fargo
announced reaching an agreement with regulators to repay TARP, PNC submitted
a revised TARP repayment proposal to the Federal Reserve Bank of Cleveland
(“FRB Cleveland”), proposing to accelerate repayment to the first quarter of 2010
and increase the common stock
PNC Proposal 2 (Dec. 17, 2009)
issuance to $1.6 billion. Though well
short of a 1-for-2 common stock
Repay in 1Q10
• $1.6 billion common issuance
issuance, PNC stated that the terms
• $1.7 billion asset sale (PNC Global)*
were consistent with the expedited
 $0.7 billion post-tax profit
repayment option under the
 $1.1 billion reduction in goodwill
• $0.8 billion other asset sale
assumption that FRB would count the
• $2.4 billion debt
capital benefits generated through the
* Figures do not total due to rounding.
sale of PNC Global toward meeting
the provision.

61

PNC Global was the largest single-source provider to the U.S. mutual fund industry and a servicer of the global
investment industry.

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PNC Requested that Goodwill Reductions from Asset Sales
Be Counted Toward Repayment
Though FRB’s repayment guidance did
Goodwill
not mention the sale of assets, the sale of
PNC Global was a key component of
An intangible asset that, in an acquisition,
PNC’s repayment strategy. By
represents the amount paid for a company
over the fair value of its assets.
November 16, 2009, PNC had already
identified, contacted, and met with five
Goodwill, like other intangible assets, is
potential buyers, receiving preliminary
excluded from regulatory Tier 1 Capital.
The reduction of goodwill associated with
bids from at least three of them. PNC
asset sales – all else equal – increases
estimated the sale price at $2.3 billion,
Tier 1 Capital and Tier 1 Common ratios
which would generate approximately
by reducing the amount of intangibles that
a firm is required to exclude from
$1.6 billion in capital benefits for the
regulatory capital.
firm, of which approximately
$500 million represented PNC’s profit on
the transaction after deducting taxes. The remaining $1.1 billion was generated by
replacing goodwill with cash.
While PNC’s capital ratios would improve from the reduction in goodwill
resulting from the sale of PNC Global, the sale would generate no new common
equity for the institution. Further, no credit for the reduction of goodwill had
previously been given to other institutions seeking an expedited TARP
repayment. However, PNC argued
that because the institution would sell
PNC Proposal 3 (Jan. 15, 2010)
PNC Global at a value that equaled 35
• $2.4 billion common issuance
times the subsidiary’s 2009 earnings,
• From sale of PNC Global:
the sale would generate substantial
 $0.7 billion post-tax profit at 1:2
cash without significantly reducing
OR
 $1.7 billion post-tax profit & goodwill
future earnings. PNC further noted
reduction at 1:1
that the loss absorption capacity of the
• Remainder via other asset sales at 1:1
capital raised through asset sales was
no different than that of capital raised
through the issuance of new common
PNC Proposal 4 (Jan. 22, 2010)
stock.
• $2.5 billion common issuance
• $1.6 billion sale of PNC Global
 $0.5 billion post-tax profit
 $1.1 billion goodwill reduction
• $0.6 billion other future asset sales
• $0.8 billion contingent common (only if
PNC Global fails to close)

On January 15, 2010, PNC proposed
to increase the common stock offering
to $2.4 billion and listed multiple
options for crediting the gains from the
sale of PNC Global, but regulators had
yet to agree on whether the reduction
in intangible assets would receive credit toward the 1-for-2 provision.

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PNC’s next repayment proposal, sent on January 22, 2010, increased the proposed
common stock offering by another $100 million to $2.5 billion, while still
requesting credit for the $1.1 billion in reduction of goodwill. OCC supported
PNC’s proposal and was concerned that requiring more issuance might
incentivize PNC to remain in CPP and repay through earnings over time – an
outcome OCC did not want. However, neither FDIC nor FRB approved of the
proposal, and both regulators suggested the institution submit a proposal that
included a larger common stock offering.

FDIC Consented to a Goodwill Reduction for Asset Sales but
Pushed for a $4 Billion Common Issuance
PNC wanted to announce both the PNC Global sale and the TARP repayment at
the same time on Monday, February 1, 2010. However, on January 28, The Wall
Street Journal published an article
leaking details of the then-secret sale
PNC Proposal 5 (Jan. 30, 2010)
of PNC Global and its connection
• $3.0 billion common issuance
with PNC’s TARP repayment efforts.
• $0.45 billion overallotment option
The next day, FDIC suggested to
(potentially exercised; may reduce
amount of debt issued)
PNC’s CEO Rohr that the bank issue
• $1.8 billion sale of PNC Global
$4 billion in common stock.
• $1.5-2.0 billion debt issuance (to maintain
According to an FDIC email, Mr.
liquidity until sale closes)
Rohr rejected the idea.
Instead, on January 30, 2010, PNC sent FDIC a revised repayment plan, proposing to
issue $3 billion in common stock, along with the sale of PNC Global, but also including
the “potential exercise” of a $450 million overallotment option to supplement the public
offering. In addition, it extended the proposed closing date of the PNC Global
transaction from the second to the third quarter of 2010, and included a $1.5 billion to
$2.0 billion debt issuance. The debt issuance was critical to maintaining PNC’s liquidity
given the timing between the repayment of $7.6 billion of TARP funds in the first quarter
of 2010 and the cash replenishment expected from completing the sale of PNC Global
later in the year.
While staff reviewed PNC’s latest proposal, then-FDIC Chairman Bair requested FRB’s
support for FDIC’s position that PNC issue $4 billion of common stock. The additional
capital raise that FDIC sought to require would have limited the decrease in PNC’s Tier 1
Capital cushion resulting from CPP repayment, reflecting the concern that then-Chairman
Bair expressed to SIGTARP about protecting FDIC’s exposure to TLGP.
Ultimately, regulators, including FDIC, agreed to allow a smaller offering, with
the overallotment option, under the condition that PNC commit to additional asset
sales should key capital ratios fall below minimum levels. PNC agreed to
backstop the maintenance of its regulatory capital ratios – including its Tier 1
Common ratio – until June 30, 2011, with the commitment to sell common equity
or assets as part of its CPP repayment terms.
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PNC Approved for Repayment but Understanding Differed on the
Role of the Overallotment Option
On the evening of February 1, 2010, PNC submitted a revised proposal specifying
that the overallotment option, if exercised, would serve as a backstop to the sale
of PNC Global. FRB and FDIC
PNC Proposal 6 (Feb. 1, 2010)
worked to develop language for the
maintenance of PNC’s regulatory
• $3.0 billion common issuance at 1:2
capital ratios and to ensure a clear
• $1.6 billion sale of PNC Global at 1:1*
 $0.5 billion post-tax profit
understanding of the linkage
 $1.1 billion goodwill reduction
between PNC’s debt issuance and its • $1.5-2.0
billion debt issuance (to maintain
liquidity given the lag between
liquidity)
• Maintain Tier 1 Common, Leverage, or Tier
TARP repayment and the closing of
1 ratios through 6/30/11
PNC Global.
*Backstop to PNC Global sale:
• $0.45 billion overallotment option at 1:2
Early on February 2, 2010, BNY
(potentially exercised)
Mellon announced that it would
OR
acquire PNC Global. That day, an
• Additional equity raise and/or asset sales
at 1:1
FDIC email indicated that thenChairman Bair spoke with Mr. Rohr
and was comfortable with repayment as long as the overallotment option was
filled. Then-Chairman Bair confirmed to SIGTARP that PNC called her and
“personally assured [her] they would exercise” the overallotment option.
According to FRB, similar communications took place between PNC and FRB.
PNC informed SIGTARP that the bank did not intend to suggest that it was in a
position to commit the underwriters to exercise the option. As previously
discussed, the overallotment is an option granted to the underwriter by the
company offering shares. While
PNC Proposal 7 (Feb. 2, 2010)*
the option creates an opportunity
to sell more shares than originally
• $3.0 billion common issuance at 1:2 (plus
overallotment option)
planned, it also serves to protect
• $1.6 billion sale of PNC Global at 1:1 (may be
underwriters by ensuring access to
reduced if overallotment option exercised)
additional shares at the offering
 $0.5 billion post-tax profit
 $1.1 billion goodwill reduction
price in the event that shares are
• $1.5-2.0 billion debt issuance (to maintain
oversold and their price increases.
liquidity)
PNC told SIGTARP that while it
• Sell assets and/or raise equity if Tier 1
Common, Leverage, or Tier 1 ratios fall
expected PNC’s underwriters to
below internal minimums before 6/30/11
exercise the overallotment option,
the decision was ultimately at the
*Includes terms cited in PNC’s Feb. 1 proposal
and Feb. 2 email to regulators
discretion of the underwriter and
thus, never within PNC’s control.

Later on February 2, a PNC executive re-sent the previous day’s written
repayment proposal, and listed in the email among “terms agreed to/confirmed
this morning,” PNC’s agreement to use its “best efforts” to exercise the
overallotment. That afternoon, FRB approved the repayment request, and within

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a few hours, PNC publicly announced that it had reached agreement with
regulators to repay TARP and commenced its public offering priced at $54 per
share. Through discussions with PNC, regulators understood that the
$450 million overallotment would be exercised if demand was sufficient. Despite
a strong initial response allowing PNC to raise $3 billion in common equity and
$2 billion in debt, a drop in PNC’s share price from $54 to $51 over the next few
days caused the underwriters conducting the offering to delay filling the
overallotment option, which they had 30 days to exercise.
At the time, regulators expressed frustration that the overallotment option was not
filled immediately after the offering. However, FRB informed SIGTARP that
there was no requirement that PNC exercise the option prior to redemption. PNC
also told SIGTARP that it made clear to its underwriters that the bank wanted the
overallotment option to be exercised, and encouraged them to exercise the option,
even if doing so somewhat lessened the underwriters’ profit.
On February 10, 2010, PNC notified regulators that it repaid its CPP funds to
Treasury. A few hours later, an FDIC official inquired with PNC about the status
of the overallotment, noting that Mr. Rohr’s commitment to then-Chairman Bair
regarding the overallotment option was crucial to the agency’s support for PNC’s
repayment. FDIC and PNC held a conference call to ensure a common
understanding of the overallotment process and the authority granted to the
underwriter in deciding whether to exercise the overallotment option. The price
of PNC shares gradually rose and starting February 26, 2010, reached daily highs
of at least $54. On March 4, 2010, one day before the overallotment option was
set to expire, PNC’s underwriters exercised the option, allowing PNC to issue an
additional $450 million of common stock. As a result, through the offering and
the exercise of the overallotment option, PNC issued a total of nearly $3.5 billion
in common stock in connection with its $7.6 billion TARP repayment.

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Capital Quality Improved Among Bank of
America, Citigroup, Wells Fargo, and PNC, but
Pressures Remain
The public equity offerings in support of Bank of America’s, Citigroup’s, and
Wells Fargo’s TARP repayments each rank among the 10 largest in U.S. history,
with Bank of America’s and Citigroup’s comprising two of the top three.
Combined, the offerings totaled $49.1 billion in new common stock, including
stock raised through the exercise of overallotment options.
The issuances boosted each institution’s Tier 1 Common ratio – a measure of the
capital that provides the most loss absorption capacity – at the end of 2009. A
few months after Bank of America, Wells Fargo, and Citigroup exited, PNC’s
$3.5 billion common stock issuance in support of its TARP repayment had a
similar effect on the bank’s Tier 1 Common ratio. As of the second quarter of
2011, the capital ratios of Citigroup, Wells Fargo, and PNC have improved to
varying degrees. Citigroup has seen the most improvement to its Tier 1 Common
ratio since first receiving TARP funds in late 2008, aided by the exchange of
preferred shares held by both Treasury and private investors to common stock in
2009, in addition to the common equity Citigroup raised in connection with
TARP repayment later that year.62 However, Bank of America’s Tier 1 Common
ratio has declined recently, reflecting in part losses of about $8.8 billion reported
by the institution during the second quarter of 2011. To date, the same ratio for
Wells Fargo and PNC has maintained a positive trajectory since the institutions
repaid TARP. Figure 9 shows the Tier 1 Common ratios of all four institutions
from the first quarter of 2009 through the second quarter of 2011.

62

Citigroup also sold off a number of non-core businesses through its “Citi Holdings” division, reducing the amount of
assets the institution held by $128 billion in 2010.

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FIGURE 9

TIER 1 COMMON RATIOS OF BANK OF AMERICA, CITIGROUP, WELLS FARGO, AND PNC
Percent
14
12
10
Bank of America

8

Citigroup
Wells Fargo

6

PNC

4
2
0
2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

Source: SIGTARP analysis of Bloomberg data.
Note: Quarterly data reflect the Tier 1 Common equity ratio at the end of each quarter.

While the quality of capital improved with TARP repayment, each institution’s Tier 1
Capital ratio – which includes both preferred and common equity elements – initially
declined as TARP capital was not replaced dollar for dollar. In recent quarters, the Tier 1
Capital ratios of Citigroup, Wells Fargo, and PNC have edged above pre-repayment
levels, though Bank of America’s remains lower. According to FDIC, to varying
degrees, each institution’s capital base remains pressured by mortgage-related costs
associated with credit, servicing, and litigation, along with recent uncertainty in European
markets. Figure 10 on the following page shows the Tier 1 Capital ratios of all four
institutions from the first quarter of 2009 through the second quarter of 2011.

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FIGURE 10

TIER 1 CAPITAL RATIOS OF BANK OF AMERICA, CITIGROUP, WELLS FARGO, AND PNC
Percent
16
14
12
10
Bank of America

8

Citigroup

6

Wells Fargo
PNC

4
2
0
2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

2010 Q2

2010 Q3

2010 Q4

2011 Q1

2011 Q2

Source: SIGTARP analysis of Bloomberg data.
Note: Quarterly data reflect the Tier 1 Capital ratio at the end of each quarter.

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Conclusions
In the first several months of TARP, Treasury invested approximately
$200 billion in financial institutions under terms that, with certain exceptions,
prohibited repayment for three years. Despite the dramatic efforts by the
Government to inject this capital, by early 2009, the market still lacked
confidence in some of the nation’s largest financial institutions and some TARP
banks complained of a TARP stigma. On February 17, 2009, the American
Recovery and Reinvestment Act of 2009 removed the three-year restriction, and
in the following weeks, some TARP recipients proposed to repay Treasury and
exit TARP. With encouragement from Treasury, and in an effort to ramp back
Government ownership in these institutions, Federal banking regulators, including
FRB, FDIC, and OCC, scrambled to develop criteria and guidance to evaluate a
bank’s TARP exit proposal.
On June 1, 2009, FRB issued TARP repayment guidance specific to SCAP
institutions – the large banks subject to the stress tests conducted by regulators in
early 2009. Approximately 80% ($163.5 billion) of all CPP funds went to 17
SCAP banks. The June guidance focused on capital – specifically, the TARP
recipient’s ability to satisfy requirements such as demonstrating access to equity
markets by issuing new common stock. FRB officials told SIGTARP that the
amount of common stock each institution was required to raise was driven in part
by the results of the recently completed stress tests. Based on the June guidance,
the SCAP institutions that met the stress test capital targets became eligible to
repay TARP, and nine did so on June 17, 2009. The remaining eight SCAP
institutions in TARP, which included some of the nation’s largest banks, such as
Bank of America, Citigroup, Wells Fargo, and PNC, were viewed by regulators at
that time as weaker than those that had been permitted to repay in June.
Regulators decided that these remaining SCAP banks in TARP needed to meet
stricter criteria before regulators would consider their TARP exit requests.
Revised guidance issued by FRB and developed in consultation with Treasury and
the other regulators in November 2009 offered the remaining SCAP institutions in
TARP an option for expedited repayment of TARP funds. The November
guidance provided that subject to satisfying SCAP requirements, the remaining
institutions “may be permitted” to repay all or part of Treasury’s TARP capital if
they “issue at least $1 in new common equity for every $2” in TARP repaid,
referred to as the “1-for-2” provision. FRB and FDIC agreed that the 1-for-2 was
a minimum requirement for expedited repayment, and that some institutions, such
as Citigroup, would need to raise additional common stock beyond the 1-for-2.
In developing the 1-for-2 provision, regulators were focused on the ability of the
institution to absorb losses once Government support through TARP was
removed. An FRB official told SIGTARP that this ratio was based upon the
results of the stress tests, which gave FRB insight into the level of capital required
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to buffer the SCAP institutions in the event of particularly adverse market
conditions. FRB Governor Tarullo, Chairman of FRB’s Committee on Bank
Supervision, told SIGTARP that the regulators agreed on a public capital raise
requirement to make sure that post-TARP the institutions were effectively
functioning market intermediaries that could stand up to adverse conditions. He
added that one lesson of the financial crisis was that the markets primarily cared
about common equity, rather than other types of capital, and that FRB would not
allow an institution to repay TARP without it having enough capital to absorb
losses.
Shortly after FRB issued the November 2009 guidance, some of the largest
remaining TARP institutions – Bank of America, Wells Fargo, and PNC – sought
expedited repayment, but balked at meeting the requirement of a 1-for-2 common
stock issuance, seeking instead to combine a smaller common stock issuance with
other methods of raising capital, such as selling assets and issuing employee
stock, that remove sources of future revenue or do not provide market validation.
Citigroup, which was required to issue new common stock beyond the 1-for-2,
also initially submitted proposals that fell short of regulators’ expectations. Bank
of America, Citigroup, and Wells Fargo ultimately repaid TARP investments in
December 2009, followed soon after by PNC. For these institutions, the path to
TARP repayment was far more complex and contentious than it had been for the
institutions that repaid in June 2009, revealing both strengths and weaknesses in
the TARP exit process.
SIGTARP found that interagency sharing of data, vigorous debate among
regulators, and hard-won consensus increased the amount and improved the
quality of the capital that SCAP institutions were required to raise to exit TARP.
FRB was the primary regulator for these institutions and was responsible for
recommending to Treasury whether or not a company should be allowed to repay.
FRB agreed to consult with FDIC and OCC, and often with Treasury, on
repayment proposals. That consultation often generated both conflict and
frustration due to varied and occasionally conflicting policy approaches. FDIC,
exposed through its deposit insurance fund and its emergency lending program,
was by far the most persistent in insisting that banks raise more common stock.
The checks-and-balances that resulted from this interagency coordination helped
to ensure that the nation’s largest financial institutions were better capitalized
upon exiting TARP than prior to TARP. However, three aspects of the TARP exit
process serve as important lessons learned from the financial crisis.
First, Federal banking regulators were prepared to and did relax the revised
repayment criteria only weeks after that criteria had been established, bowing at
least in part to a desire to ramp back the Government’s stake in financial
institutions and to pressure by institutions seeking a swift TARP exit to avoid
executive compensation restrictions and the stigma associated with TARP
participation. The large financial institutions seeking to exit TARP were notably

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persistent in their efforts to resist regulatory demands to issue common stock,
seeking instead more creative, cheaper, and less sturdy alternatives that provide
less short- or long-term loss protection than new common stock. Some SCAP
institutions pushed back against the 1-for-2 common stock provision, seeking to
minimize the dilution to shareholders that would result from a surge of new
common shares and, in at least one case, warning of possible failed public
offerings that might erode market confidence. To varying degrees, regulators
bent to these concerns, relaxing the repayment requirement by allowing banks to
replace some amount of new common stock issuance with other actions such as
asset sales or the issuance of trust preferred securities or employee stock.
Because the regulators failed to adhere to FRB’s clearly and recently established
requirements, the process to review a TARP bank’s exit proposal was ad hoc and
inconsistent.
Second, by not waiting until the banks were in a position to meet the 1-for-2
provision entirely with new common stock, there was arguably a missed
opportunity to further strengthen the quality of each institution’s capital base to
protect against future losses without diminishing future revenues. Despite the fact
that the regulators had established the 1-for-2 minimum weeks before as
necessary for each bank to absorb losses under adverse market conditions, the
discussion quickly switched to analysis of how much each bank could raise in
new common stock during a frenzied period where each of these TARP banks
wanted to exit at that time based in part on news that other large banks were
exiting TARP. Concerned about a lack of market confidence that might result
from being the last large bank to exit TARP, and executive compensation
restrictions, banks argued that the market would not support a 1-for-2 common
stock issuance. Meanwhile, regulators feared that a failed offering would have
devastating consequences.
Rather than wait until the markets could bear a 1-for-2 common stock issuance,
the regulators accepted repayment terms that were based on what the market
could bear at that time. During these discussions, FDIC remained a holdout,
arguing that the 1-for-2 provision had to be met with only new common stock.
For example, regarding Bank of America’s TARP exit, then-FDIC Chairman Bair
told SIGTARP that “the argument [FRB and OCC] used against us – which
frustrated me to no end – is that [Bank of America] can’t use the 2-for-1 because
they’re not strong enough to raise 2-for-1. That just mystified me. The point was
if they’re not strong enough, they shouldn’t have been exiting TARP.” However,
FRB Governor Tarullo told SIGTARP that it was not about Bank of America’s
strength, but instead about how much the market could absorb at that time. ThenFRB Vice Chairman Kohn also stated that FRB wanted to push Bank of America
and Citigroup but was concerned that “if they went out for something and didn’t
get it, it would be a vote of no confidence.” The institutions arguably missed an
opportunity to wait until the market could absorb a 1-for-2 common stock

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issuance, which would have had long lasting consequences in further
strengthening the quality of their capital base.
Third, SIGTARP also found that Treasury encouraged TARP banks to expedite
repayment, opening Treasury to criticism that it put accelerating TARP repayment
ahead of ensuring that institutions exiting TARP were sufficiently strong to do so
safely. Secretary Geithner told SIGTARP that putting pressure on firms to raise
private capital was part of a “forceful strategy of raising capital early” and “We
thought the American economy would be in a better position if [the firms] went
out and raised capital.” Treasury’s involvement was also more extensive than
previously understood publicly. In testimony before Congress, Treasury officials
repeatedly explained that regulators decide when it is appropriate for a bank to
repay Treasury. However, while regulators negotiated the terms of repayment
with individual institutions, Treasury hosted and participated in critical meetings
about the repayment guidance, commented on individual TARP recipient’s
repayment proposals, and in at least one instance urged the bank (Wells Fargo) to
expedite its repayment plan.
The result was nearly simultaneous repayments by Bank of America, Wells
Fargo, and Citigroup in an already fragile market. Bank of America’s offering of
$19.3 billion was the largest ever common stock offering in the United States.
The combined repayments of the three banks involved $49.1 billion in new
common stock offerings in a span of two weeks (with PNC to follow with a
$3.5 billion offering), despite warnings that large equity offerings might be too
much for the market to bear. While none of the offerings failed, Citigroup
exercised only a portion of its overallotment option and later complained that
Wells Fargo’s simultaneous offering sapped demand for Citigroup’s stock.
The lessons of the financial crisis and the events surrounding TARP repayments
and exit demonstrate the importance of implementing strong capital requirements
and holding institutions strictly accountable to those requirements. Some of the
nation’s largest financial institutions had too little capital before the last crisis, a
fact that not only contributed to the crisis itself but also necessitated the
subsequent bailouts. While regulators leveraged TARP repayment requirements
to improve the quality of capital held by the nation’s largest financial institutions
in the wake of the financial crisis, they relaxed those requirements shortly after
establishing them. Whether these institutions exited TARP with a strong and
high-quality capital structure sufficient to absorb their own losses and survive
adverse market conditions without further affecting the broader financial system
remains to be seen.
Federal banking regulators, along with Treasury, bear responsibility for ensuring
that the nation’s largest and systemically important financial institutions hold
enough high-quality capital to absorb future losses and maintain their viability in
the event of a possible future severe shock to the financial system. The Dodd-

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Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”)
includes provisions designed to address the quality of capital held by banks, such
as prohibiting newly issued trust preferred securities from inclusion in Tier 1
Capital calculations. In addition, the Dodd-Frank Act provides that the Financial
Stability Oversight Council has the authority to recommend heightened capital
standards for companies designated as systemically significant and provides for
an orderly liquidation authority.
There will always be tension between the protection of the greater financial
system through robust capital requirements and the desire of individual financial
institutions to maximize profits and shareholder returns. While striking the right
balance is no easy task, regulators must remain vigilant against institutional
demands to relax capital requirements while taking on ever more risk. In a recent
speech, Governor Tarullo acknowledged that regulators had historically approved
“increasingly diluted forms of capital under political pressures,” and warned of
the “slippery slope effect” that results from allowing lower quality capital to
comprise an ever-increasing portion of a bank’s capital structure.
Today, some institutions remain too big, too interconnected, and too essential to
the global financial system such that their failure or severe distress could
potentially trigger serious consequences to the broader economy. Unless and until
such institutions, either on their own accord or through regulatory pressure or
requirements, are restructured, simplified, and maintain adequate capital to absorb
their own losses, they will pose a grave threat to the entire financial system. The
greater financial system’s need for protection against the failure of those
institutions in the next possible downturn is particularly acute.

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Management Comments
In its management response, which is reproduced in full in Appendix G, FRB notes that it carefully and
thoroughly analyzed requests to repay TARP and that it put limits on the extent to which institutions were
allowed to substitute asset sales for common equity issuance. FRB also notes that common stock issued
through an employee stock compensation plan improves an institution’s capital structure in the same way as
a public offering of common stock.
FDIC did not provide a formal response to the report because unless there are recommendations for agency
action or there are factual errors of consequence that FDIC believes require correction, it does not typically
provide a formal written response to an invitation to review a document in advance of its publication.
In its management response, also reproduced in full in Appendix G, OCC agrees with SIGTARP’s overall
conclusion regarding the importance of implementing strong capital requirements and holding institutions
accountable to such requirements. However, OCC strongly disagrees with SIGTARP’s conclusion that the
repayment process was ad hoc and inconsistent because the regulators failed to adhere to FRB’s
requirements, arguing that the flexibility to deviate somewhat from the guidance was pragmatic and
necessary, and produced successful results. OCC also disagrees with SIGTARP’s conclusion that there was
a missed opportunity to further strengthen each institution’s capital base, on the grounds that it believes
waiting for better repayment terms would have been a riskier strategy than moving forward with the equity
issuances.
In its management response, also reproduced in full in Appendix G, Treasury strongly agreed with
SIGTARP’s conclusion that interagency coordination improved the terms of TARP repayment. Treasury
also notes that its involvement in the TARP exit process was motivated by a belief that stabilizing the
financial system depended upon the nation’s largest financial institutions being able to raise private capital
again, and that postponing the common stock offerings associated with repayment could have risked
undermining investor confidence.

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Appendix A – Scope and Methodology
We performed this audit under the authority of Public Law 110-343, as amended, which also incorporates
the duties and responsibilities of inspectors general under the Inspector General Act of 1978, as amended.
SIGTARP undertook this audit to examine the process used by Treasury and regulators to approve the
nation’s largest financial institutions to repay Treasury and exit TARP. Our specific reporting objectives
were to determine Treasury’s role in the TARP repayment process and the extent to which Federal banking
regulators have consistently coordinated and applied TARP repayment criteria for banks exiting TARP. We
performed work at Treasury, FRB, FDIC, OCC, and OTS in Washington, D.C. We also conducted field
interviews with current and former Government officials and bank executives in California, Florida, and
New York. Our audit work was conducted between February 2010 and July 2011. The scope of this audit
covered the 13 TARP repayments completed by December 31, 2010, by bank holding companies stress
tested under SCAP.
To determine the extent to which Federal banking regulators consistently coordinated and applied TARP
repayment criteria, we reviewed the Emergency Economic Stabilization Act of 2008, the American
Recovery and Reinvestment Act of 2009, general securities purchase agreements and term sheets for CPP
investments, Treasury’s TARP transaction reports, TARP repayment guidance issued by Treasury and FRB,
and repayment request evaluation guidance produced by FRB. We reviewed available FRB, FRBNY, FRB
Richmond, FRB San Francisco, FRB Cleveland, FDIC, and OCC documentation, including analyses,
documents, meeting minutes, emails, and repayment approvals for all 13 institutions covered in this audit, as
available. We also reviewed financial institution repayment proposals, board minutes, news releases, and
SEC filings pertaining to TARP repayments. We interviewed FRB Governor Daniel Tarullo, former FRB
Vice Chairman Donald Kohn, former FDIC Chairman Sheila Bair, former Comptroller John Dugan, and
Treasury Secretary Timothy F. Geithner as well as other senior officials at Treasury, FRB, FRB San
Francisco, FDIC, and OCC to understand the process developed by Federal banking regulators and its
implementation. We also spoke with the chief executive officers of Bank of America, Citigroup, and Wells
Fargo, former executives of Bank of America and Wells Fargo, and senior officials of PNC to obtain their
views on the repayment process.
To determine Treasury’s role in the TARP repayment process, we reviewed statements and responses
provided by Secretary Geithner and former Assistant Secretary Herbert Allison to Congress. We
interviewed the Secretary and the former Assistant Secretary, FRB Governor Tarullo, former FRB Vice
Chairman Kohn, former FDIC Chairman Bair, and former Comptroller Dugan as well as senior officials at
Treasury, FRB, FRB San Francisco, FDIC, and OCC to understand the role of Treasury in TARP
repayments. We also spoke with chief executive officers of Bank of America, Citigroup, and Wells Fargo,
former executives of Bank of America and Wells Fargo, and senior officials of PNC to understand the
nature of their contact with Treasury regarding TARP repayment. Additionally, we reviewed available
Treasury, FRB, FDIC, OCC, and financial institution documentation pertaining to Treasury involvement in
the repayment process.
SIGTARP conducted this performance audit in accordance with generally accepted government auditing
standards prescribed by the Comptroller General of the United States. Those standards require that
SIGTARP plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis

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for findings and conclusions based on the audit objectives. SIGTARP believes that the evidence obtained
provides a reasonable basis for the findings and conclusions based on the audit objectives.

Limitations on Data
SIGTARP relied upon Treasury and regulators to identify and provide email communication or documents
related to TARP repayments. It is possible that the documentation provided by agencies did not reflect a
comprehensive response to SIGTARP’s documentation requests, potentially limiting the review.
Additionally, FRB objected to the inclusion of a significant amount of text on the grounds that it was
confidential and that disclosure might, among other things, affect FRB’s ability to maintain open
communication with supervised financial institutions. SIGTARP respectfully disagrees with FRB’s
prediction of harm, but out of an abundance of caution, has removed some of the text, while reaching
agreement with FRB on the inclusion of other portions. The exclusion of certain text somewhat limits the
depth of information included in the report.

Use of Computer-Processed Data
To perform this audit, we used data provided by Treasury to report on TARP transaction amounts and dates.
To assess the extent to which Treasury generated reliable data, we reviewed the November 2010
Government Accountability Office (“GAO”) financial audit of Treasury’s Office of Financial Stability
(“OFS”) financial statements for fiscal years 2010 and 2009. In GAO’s opinion, OFS’ fiscal years 2010 and
2009 financial statements for TARP were fairly presented in all material respects. Therefore, SIGTARP
found nothing material that would impede the use of TARP transaction report data to determine TARP
investment and repayment amounts and dates. We also used data from Bloomberg Professional to analyze
historical public equity offerings and the Tier 1 Common ratios and daily stock prices of select SCAP
institutions. Because it is among the most widely used systems for financial data, we view the information
provided by Bloomberg Professional to be the best available for purposes of our review.

Internal Controls
As part of the overall evaluation of the TARP repayment decision-making process, we examined internal
controls related to the review and approval of TARP repayment requests of SCAP institutions by regulators.

Prior Coverage
Other oversight bodies have reported on the process by which institutions exited CPP. GAO found that the
CPP repayment approval process “lacks adequate transparency,”63 and the Congressional Oversight Panel
(“COP”) noted that the repayment criteria were “opaque.”64 COP also stated that “a lack of clarity
(surrounding the repayment criteria) breeds uncertainty and instability in the financial markets and provides
a disservice to taxpayers as well as investors.”65 In another report on CPP, GAO found that Treasury does
not collect information on or monitor regulators’ repayment decisions, and therefore “has no basis for
determining whether regulators evaluate similar institutions consistently and cannot provide feedback to

63

Government Accountability Office, Report No. 09-658, “Troubled Asset Relief Program: June 2009 Status of Efforts
to Address Transparency and Accountability Issues,” June 17, 2009.
64
Congressional Oversight Panel, “July Oversight Report: Small Banks in the Capital Purchase Program,” July 14, 2010.
65
Congressional Oversight Panel, “January Oversight Report: Exiting TARP and Unwinding Its Impact on the Financial
Markets,” January 13, 2010.

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regulators on the consistency of their decision making.”66 To address this concern, GAO recommended that
Treasury “periodically collect and review information on the analysis supporting regulators’ decisions and
provide feedback for regulators’ consideration on the extent to which they are evaluating similar institutions
consistently.” Treasury replied that it would consider ways to address GAO’s recommendation and noted
that Treasury has facilitated meetings among regulators in the past.

66

Government Accountability Office, Report No. 11-47, “Troubled Asset Relief Program: Opportunities Exist to Apply
Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and to Improve the Repayment
Process,” October 4, 2010.

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Appendix B – Role of Federal Banking Regulators
Federal Reserve Board (“FRB”): FRB administers U.S. monetary policy and has supervisory and
regulatory authority over bank holding companies; state-chartered banks that choose to join the Federal
Reserve System; the U.S. operations of foreign banking organizations; certain U.S. entities that engage in
international banking; and pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”), FRB also has authority to supervise and regulate U.S. and foreign nonbank financial
companies selected by the Financial Stability Oversight Council. The Federal Reserve works with other
Federal and state supervisory authorities to promote the safety and soundness of the banking industry and
fosters the stability of the broader financial system.
Office of the Comptroller of the Currency (“OCC”): OCC, an agency within Treasury, charters,
regulates, and supervises all National Association (“N.A.”) banks. N.A. banks are federally chartered
(organized under the laws of the United States, as opposed to state statutes) and are incorporated under the
National Bank Act. OCC’s nationwide staff of examiners analyze, among other things, a bank’s portfolios,
capital, earnings, liquidity, and compliance with consumer banking laws. As of September 30, 2010, OCC
regulated more than 1,450 national banks with total assets of approximately $8.5 trillion, comprising
approximately 70% of commercial bank assets in the United States.
Federal Deposit Insurance Corporation (“FDIC”): FDIC, an independent agency of the Federal
Government, directly examines and supervises more than 4,900 banks and savings banks that are chartered
by the states and that do not join the Federal Reserve System. To protect insured depositors, FDIC responds
immediately if a bank or thrift institution fails, generally by selling the deposits and loans of the failed
institution to another institution. Pursuant to the Dodd-Frank Act, FDIC also has the authority to liquidate
failing financial companies that pose a significant risk to U.S. financial stability. FDIC also provides
deposit insurance, which guarantees the deposits in member banks, up to $250,000 per depositor.
Office of Thrift Supervision (“OTS”): Established as a bureau of Treasury on August 9, 1989, OTS
charters, examines, supervises, and regulates Federal savings associations insured by FDIC. OTS also
examines, supervises, and regulates state-chartered savings associations insured by FDIC and provides for
the registration, examination, and regulation of savings and loan holding companies and other affiliates.
Effective on July 21, 2011, the Dodd-Frank Act transfers the duties and authorities of OTS to FRB, FDIC,
and OCC, and abolishes OTS 90 days after. All OTS functions relating to Federal savings associations, all
OTS rulemaking authority for Federal and state savings associations, and the majority of OTS employees
will be transferred to OCC. OTS’ supervisory responsibility for state-chartered savings associations and
OTS employees to support these responsibilities will be transferred to FDIC; and OTS’ authority for
consolidated supervision of savings and loan holding companies and their non-depository subsidiaries will
be transferred to FRB.

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Appendix C – Additional FAQs on Capital Purchase Program
Repayment Published by Treasury in May 2009
Q1. What is the policy for returning CPP money?
Under the original terms of the CPP, banks were prohibited from repaying within the first 3 years unless
they completed a qualified equity offering. However, the provisions introduced by the American Recovery
and Reinvestment Act of 2009 indicate that once an institution notifies Treasury that it would like to repay
its CPP investment, Treasury must permit a TARP recipient to repay subject to consultation with the
appropriate Federal Banking Agency.
All institutions seeking to repay CPP will be subject to the existing supervisory procedures for approving
redemption requests for capital instruments. Supervisors will carefully weigh an institution’s desire to
redeem outstanding CPP preferred stock against the contribution of Treasury capital to the institution’s
overall soundness, capital adequacy, and ability to lend, including confirming that the institution has a
comprehensive internal capital assessment process.
The 19 BHCs that were subject to the SCAP process must have a post-repayment capital base at least
consistent with the SCAP buffer, and must be able to demonstrate its financial strength by issuing senior
unsecured debt for a term greater than five years not backed by FDIC guarantees, in amounts sufficient to
demonstrate a capacity to meet funding needs independent of government guarantees.
Q2: What will happen to the warrants that Treasury owns in these banks?
After repaying their CPP preferred stock, institutions also have the right to repurchase the warrants issued to
Treasury for their appraised market value. If an institution chooses not to repurchase the warrants, Treasury
may liquidate registered warrants. The warrants cannot be sold to an investor until the bank has had an
opportunity to repurchase them.
Q3. How will you value the warrants that you own in banks that are repaying CPP investments?
The issuer can repurchase the warrants at “fair market value,” as defined in Section 4.9 of the Securities
Purchase Agreement. Specifically, the bank wishing to repurchase warrants will hire an independent
advisor that will use standard industry practices to value the warrants and will present the offer to Treasury,
which will independently calculate its own determination of fair market value using a robust process which
includes third party input. If those values differ, then Treasury and the bank will follow the process defined
in Section 4.9 to reach a mutually agreed upon fair market value.

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Q4. How will the public know when a firm has repaid its CPP preferred or repurchased Treasury’s
warrants?
Information on CPP preferred repayments and warrant repurchases is made available online and updated
regularly in the TARP Transactions Reports. The reports can be found at
http://www.financialstability.gov/latest/reportsanddocs.html.
Q5: For CPP participants who have used the public institution transaction documents, how is the warrant
exercise price calculated?
Treasury is aware that there is some confusion around this calculation. All warrant exercise prices have
been calculated in a consistent manner, taking the average of the closing prices for the 20 trading days up to
and including the day prior to the date on which the TARP Investment Committee recommends that the
Assistant Secretary for Financial Stability approve the investment. Please note that (i) the recommendation
of the Investment Committee constitutes preliminary approval, but final approval of an investment occurs
only when the transaction documents are executed and delivered by Treasury; and (ii) a trading day is
defined as a day on which where was trading activity in a given name.

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Appendix D – June 2009 and November 2009 TARP Repayment
Guidance to SCAP Institutions

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Appendix E – FRB Redemption Request Decision Memo

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Appendix F – SCAP Institutions’ Exit from CPP
SCAP INSTITUTIONS’ EXIT FROM CPP
Institution

CPP Investment
Amount

Date Exited CPP
(if applicable)

JPMorgan Chase & Co.

$25,000,000,000

6-17-2009

The Goldman Sachs Group, Inc.

$10,000,000,000

6-17-2009

Morgan Stanley

$10,000,000,000

6-17-2009

U.S. Bancorp

$6,599,000,000

6-17-2009

Capital One Financial Corp.

$3,555,199,000

6-17-2009

American Express Co.

$3,388,890,000

6-17-2009

BB&T Corp.

$3,133,640,000

6-17-2009

Bank of New York Mellon Corp.

$3,000,000,000

6-17-2009

State Street Corp.

$2,000,000,000

6-17-2009

Bank of America Corp.

$25,000,000,000

12-09-2009

Wells Fargo & Co.

$25,000,000,000

12-23-2009

$7,579,200,000

2-10-2010

The PNC Financial Services
Group, Inc.
Citigroup Inc.

$25,000,000,000

12-10-2010

Fifth Third Bancorp

$3,408,000,000

2-2-2011

KeyCorp

$2,500,000,000

3-30-2011

Regions Financial Corp.

$3,500,000,000

Has not exited

$4,850,000,000

3-30-2011

SunTrust Banks, Inc.
GMAC (now Ally Financial)

Did not participate in CPP

MetLife

Did not participate in TARP

Source: SIGTARP analysis of Treasury Transactions Report data, 6/22/11.

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Appendix G – Management Comments from FRB, OCC,
and Treasury

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Appendix H – Audit Team Members
This review was conducted and the report was prepared under the direction of Kurt Hyde, Deputy Inspector
General for Audit and Evaluation, and Kimberley A. Caprio, Assistant Deputy Special Inspector General for
Audit and Evaluation, Office of the Special Inspector General for the Troubled Asset Relief Program.
The staff members making significant contributions to this report include Shannon Williams, Daniel
Novillo, Jean Tanaka, and Marc Geller

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SIGTARP Hotline
If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the Troubled
Asset Relief Program, please contact the SIGTARP Hotline.
By Online Form: www.SIGTARP.gov
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By Phone: Call toll free: (877) SIG-2009

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By Fax: (202) 622-4559
By Mail:

Hotline: Office of the Special Inspector General
for the Troubled Asset Relief Program
1801 L Street., NW, 3rd Floor
Washington, D.C. 20220

Press Inquiries
If you have any inquiries,
please contact our Press Office:

Julie Vorman
Acting Director of Communications
Julie.Vorman@treasury.gov
202-927-1310

Legislative Affairs
For Congressional inquiries,
please contact our Legislative Affairs Office:

Lori Hayman
Director of Legislative Affairs
Lori.Hayman@treasury.gov
202-927-8941
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Obtaining Copies of Testimony and Reports
To obtain copies of testimony and reports, please log on to our website at www.SIGTARP.gov.
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