By Shahien Nasiripour in New York
US regulators moved too quickly to allow Bank of America and Citigroup to repay their troubled asset relief programme bail-outs, according to a new government audit.
The financial institutions pressured regulators to quickly approve their exit schemes, largely due to restrictions at the time on executive pay, said the report released on Friday by the special inspector general for Tarp.
Policymakers at the Treasury department also sought to allow the banks a rapid exit, at one point approving a BofA proposal that ultimately was rejected because it allowed the company to leave the assistance programme by issuing $4.8bn less common equity capital than was required.
Shortly after so-called ?stress tests? in 2009 revealed capital shortfalls in the largest US banks, regulators developed a benchmark designed to guide Tarp exit procedures. For every $2 in Tarp aid reimbursed, banks were to raise $1 in new common equity. The assessment was based in part on banks? capital needs.
Just a few weeks later, that benchmark was tossed aside, resulting in an ?ad hoc? and ?inconsistent? process, Sigtarp said.
?They bowed to pressure,? said Christy Romero, Sigtarp?s acting chief. Ms Romero reckons that the Treasury was pressing regulators to approve repayment plans in part due to its desire to scale back government aid to large US banks.
After submitting 11 proposals, BofA was finally allowed to repay taxpayers their $45bn by issuing $18.8bn in common equity, $1.7bn in stock to employees and shedding $4bn in assets.
At one point, the bank requested it be allowed to repay the part of its rescue package that would have ended restrictions on executive pay, an indication it was principally concerned with the issue, Ms Romero said. Regulators balked.
The Federal Deposit Insurance Corp, then led by Sheila Bair, insisted that the bank had to raise more common equity to meet benchmarks, as opposed to meeting capital levels through ?gimmicks,? like employee stock issuances and asset sales. Treasury approved BofA?s seventh proposal, which called for reduced common equity and greater asset sales.
A senior Treasury official said the 2-for-1 capital proposal was a standard that was applied ?practically?. He added that had banks like BofA been forced to stay in Tarp for longer, they could have lost the confidence of investors.
The Treasury official said he had ?no regrets? over allowing BofA to exit Tarp when it did. ?I think you have to judge what regulators did at the time based on the information they had at the time,? he said.
BofA exited Tarp on December 9 2009, when its share price closed at $15.39. It has since plunged about 60 per cent. It closed at $6.35 on Thursday.
Ms Romero said the government missed an opportunity to force the banks to raise enough capital to mollify concerns over future taxpayer-financed bail-outs.
? The Financial Times Limited 2011
