Troubled Asset Relief Program - Participation Criteria

Participation Criteria

The Act's criterion for participation states that "financial institutions" will be included in TARP if they are "established and regulated" under the laws of the United States and if they have "significant operations" in the United States. The Treasury will need to define what institutions will be included under the term "financial institution" and what will constitute "significant operations." Companies that sell their bad assets to the government must provide warrants so that taxpayers will benefit from future growth of the companies. Certain institutions seem to be guaranteed participation. These include: U.S. banks, U.S. branches of a foreign bank, U.S. savings banks or credit unions, U.S. broker-dealers, U.S. insurance companies, U.S. mutual funds or other U.S. registered investment companies, tax-qualified U.S. employee retirement plans, and bank holding companies.

The President is to submit a law to cover taxpayer losses on the fund, using "a small, broad-based fee on all financial institutions." To participate in the bailout program, "...companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits 'golden parachutes' and requires that unearned bonuses be returned." The fund has an Oversight Board so that the U.S. Treasury cannot act in an arbitrary manner. There is also an inspector general to protect against waste, fraud and abuse.

CAMELS ratings (US supervisory ratings used to classify the nation's 8,500 banks) are being used by the United States government in response to the global financial crisis of 2008 to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008. It is being used to classify the nation's 8,500 banks into five categories, where a ranking of 1 means they are most likely to be helped and a 5 most likely to not be helped. Regulators are applying a short list of criteria based on a secret ratings system they use to gauge this.

The New York Times states: "The criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive" because the criteria appears to favor the financially best off banks and banks too big to let fail. Some lawmakers are upset that the capitalization program will end up culling banks in their districts. However, The Wall Street Journal suggested that some lawmakers are actively using TARP to funnel money to weak regional banks in their districts. Academic studies have found that banks and credit unions located in the districts of key Congress members have been more likely to win TARP money.

Known aspects of the capitalization program "suggest that the government may be loosely defining what constitutes healthy institutions. that have been profitable over the last year are the most likely to receive capital. Banks that have lost money over the last year, however, must pass additional tests. They are also asking if a bank has enough capital and reserves to withstand severe losses to its construction loan portfolio, nonperforming loans and other troubled assets." Some banks received capital with the understanding the banks would try to find a merger partner. To receive capital under the program banks are also "required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital."

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Famous quotes containing the word criteria:

    We should have learnt by now that laws and court decisions can only point the way. They can establish criteria of right and wrong. And they can provide a basis for rooting out the evils of bigotry and racism. But they cannot wipe away centuries of oppression and injustice—however much we might desire it.
    Hubert H. Humphrey (1911–1978)