Regulators bent TARP rules

Federal regulators bent the rules to allow Bank of America Corp., Wells Fargo & Co. and PNC Financial Services Group Inc. to repay their bailout money early, missing a chance to force them into further bolstering their finances.

The banks pushed for the repayment requirements to be eased in part because they wanted to avoid tough executive compensation restrictions attached to the Troubled Asset Relief Program, according to an audit released Thursday by the special inspector general monitoring the bailout fund.

The Treasury Department, which oversaw the $700-billion TARP, bowed to requests for quick exits from the bailout program, raising questions about whether government officials put repayment ahead of ensuring that the banks were financially strong enough to survive on their own, the report said.

“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,” said the report from the special inspector general, known as SIGTARP, “they relaxed those requirements shortly after establishing them.”


The report offered a window into the behind-the-scenes maneuvering by banks eager to leave the unpopular bailout program and federal officials seeking to recover taxpayers’ money while at the same time keeping the financial system stable.

Bank executives were “notably persistent” and “to varying degrees, regulators bent to these concerns,” the report said. Overall, “the process to review a TARP bank’s exit proposal was ad hoc and inconsistent.”

Regulators defended their actions, saying they bent the rules out of concern that the guidelines were too tough for market conditions at the time.

The “flexibility to deviate somewhat” from the rules “was pragmatic and necessary,” said John Walsh, acting comptroller of the currency, in a written response to the findings.

Walsh also said the actions did not result in financial problems for the banks.

Most banks have repaid their TARP money. As of Aug. 31, the Treasury had received $183 billion of the $205 billion distributed to financial institutions. The Treasury also got $26 billion from dividends, interest and stock, resulting in a slight profit for the program.

TARP was created by Congress during the financial crisis in 2008 to buy toxic mortgage-backed securities from banks. But with some large financial firms on the brink of failure, the Bush administration focused the fund on direct injections of money to stabilize bank balance sheets.

Under the original TARP law, banks were not allowed to repay and leave the program for three years.

But with the public and lawmakers beginning to clamor for repayment, the waiting period was eliminated in February 2009. Banks were allowed to repay after consulting with regulators.

Nine of the banks, including JPMorgan Chase and Goldman Sachs, were allowed to repay in June 2009. But regulators didn’t give the go-ahead to the eight remaining banks, including Bank of America, Wells Fargo, PNC and Citigroup Inc., viewing them as weaker financially after conducting special stress tests.

Still, in the fall of 2009, some of those banks “began communicating to Treasury and the Federal banking regulators their desire to repay and exit TARP,” the report said. In November 2009, regulators issued new guidelines, including a provision to allow the banks to leave the program after they issued at least $1 in new common equity for each $2 of TARP money repaid.

Bank of America, Wells Fargo and PNC balked at the requirement, the report said. And within weeks, regulators relaxed the guidelines.

The report went on to say that the banks wanted to exit the program “to avoid executive compensation restrictions and the stigma associated with TARP participation.”

Bank of America, Wells Fargo and Citigroup were allowed to repay their TARP money in December 2009, and PNC in February 2010. Only Citigroup fulfilled the $1-for-$2 requirement, the report said.