Treasury secretary Tim Geithner said again today that he plans on imposing conditions on banks that want to wriggle free of government control by repaying bailout funds. As we explained yesterday, this seems to fly in the face of a provision of the stimulus bill signed into law earlier this year which specifically prohibits the government from imposing conditions.
What makes Geithner think he can impose conditions in violation of this law? The blog DearJohnThain points to the TARP Purchase Agreement, the contract banks signed in October when they agreed to take bailout funds in exchange for granting preferred shares and warrants to the goverment. The contract says that redemption of the preferred shares is “subject to the approval of the Appropriate Federal Banking Agency.” (Click here to download a PDF of Goldman’s Purchase Agreement and here for JPM’s agreement.)
It goes on to describe a specific requirement that the repayment can only be made with the proceeds from a “Qualified Equity Offering,” which is defined as selling perpetual perferred or common stock that can be counted as Tier 1 Capital.
“So, it seems pretty clear that there are conditions,” DJT concludes.
We’re not sure that’s clear at all. First of all, there’s nothing in the contract that authorizes Geithner to prohibit a redemption until he is satisfied with the overall health of the financial system. That condition seems to have been created out of the air by the Treasury Secretary. We don’t think the words “subject to the approval of the Appropriate Federal Banking Agency” creates a blank check for the Treasury Secretary to impose whatever conditions he wants.
Second, Tim Geithner is not the “Appropraite Federal Banking Agency” for either Goldman Sachs or JP Morgan. Neither is the Treasury Department. That term refers to an agency designated by the Federal Deposit Insurance Act, which says that the Board of Governors of the Federal Reserve is the appropriate agency. So if anyone is empowered to put conditions on the repayment, it is the Fed. And last we heard, the Fed doesn’t answer to the Treasury.
What’s more, it’s unclear whether this condition is still applicable. Goldman Sachs seems to believe it is applicable. It went out and raised capital in a way that would count as a “Qualified Equity Offering.” JP Morgan, however, has taken the opposite view, saying it would pay back the TARP without raising capital. CEO Jamie Dimon said he doesn’t see any need to raise new capital and didn’t see why Goldman did it either.
Why would the condition no longer apply? Because the stimulus bill–or, more formally, the American Recovery and Reinvestment Act of 2009–was passed after the contract was signed. So the prohibition on putting impediments to TARP replayment would seem to nullify the contractual provision. We think that it’s possible that the government cannot legally enforce the requirement for new equity.
So the quetion become whether or not Goldman or JP Morgan would risk defying Geithner by paying back the TARP without his permission? And also: how did this provision wind up in the stimulus bill?