Within weeks of issuing standards for repaying federal bailout funds, bank regulators relaxed those rules in late 2009 as Bank of America, Citigroup, and other large depositories hurriedly pushed to get out from under the government's thumb, according to a watchdog agency's new report.
The 63-page report, issued Friday by the Special Inspector General for the Troubled Asset Relief Program, portrays a mad dash by these banks to exit TARP. Their rush stemmed in part from a desire to escape restrictions on executive compensation, as well as their fear that remaining in the program as competitors left would result in a stigma.
The report also highlights behind-the-scenes disagreements between the Federal Deposit Insurance Corp., which was pushing for stricter repayment terms, and other agencies, including the Treasury Department, which were more eager to see the largest banks repay their TARP money.
Most of the firms cited in the report were, and still are, large players in the residential finance market, a product at the heart of the financial crisis.
Sheila Bair, the FDIC's former chairman, is quoted in the report as saying that she was mystified by arguments made by the Office of the Comptroller of the Currency and the Federal Reserve Board when Bank of America sought to leave TARP in late 2009.
Officials from those agencies argued that according to the rules that the regulators had recently devised, B of A was not strong enough to exit TARP, according to Bair.
"The point was if they're not strong enough, they shouldn't have been exiting Tarp," Bair said.
Ultimately, the FDIC signed off on a plan that allowed B of A to pay back its TARP funds on terms that were more favorable than the Nov. 3, 2009 rules would have allowed, but that were also stricter than several earlier proposals.
The Nov. 3, 2009 rules, which were not publicly disclosed, stated that banks seeking to repay their TARP funds immediately would need to raise $1 in common equity, which is considered the highest quality capital, for every $2 in TARP funds that it wanted to repay. This was known as the 1-for-2 rule.
All four banks discussed in the report -- B of A, Citi, Wells Fargo and PNC — balked at the 1-for-2 rule, though Citi's case was unique because the government had already converted its preferred stake in the bank into common shares. Instead, they sought to combine smaller common stock issuances with other forms of raising capital.
The report includes a great deal of previously undisclosed detail about the private talks between the four banks and their regulators in late 2009 and early 2010, as those banks sought to join JPMorgan Chase, Goldman Sachs, and six other banks that had already repaid their TARP funds.
In B of A's case, the Charlotte-based bank made 11 different proposals for how it would repay its TARP funds.
Because B of A received $45 billion in TARP money, under the 1-for-2 rule, it would have had to issue $22.5 billion in common stock. Officials from OCC and Treasury argued in the report that such a massive offering might have failed, potentially destabilizing the B of A and threatening confidence in the financial system.
In the end, the amount of common stock that B of A agreed to issue was more than twice as much as it initially proposed, according to the report.
Former B of A Chief Executive Kenneth Lewis said in the report that "each proposal Bank of America submitted was a 'reasonable proposal' and that the institution was not 'low-balling' as a tactic in negotiations," according to the report.
But FDIC officials said 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."
