Banks And Financial Firms Say No To FDIC Temporary Loan Guarantee Program (TLGP)
Since March, many banks and financial firms have seen the value of their stocks soar as investors’ perception of the overall health of the banking industry improved. Based on the better equity market environment, many banks were able to raise private capital without the need for an FDIC guarantee on debt issuance. In addition, many banks have become reluctant to accept government assistance from either the TARP program or the Temporary Loan Guarantee Program (TLGP) based on their belief that the government aid came with too many restrictions. Until recently, many banks and financial firms have taken advantage of the TLGP and the most recent numbers from the FDIC show $335 billion in debt was issued that is fully guaranteed by the FDIC.
The FDIC had the following comments when publishing the TLGP Opt-Out List:
As required by the Final Rule implementing the Temporary Liquidity Guarantee Program (the TLG Program), the FDIC is publishing on its Web site two lists – (1) a list of the eligible entities that have opted out of the Debt Guarantee Program and (2) a list of the eligible insured depository institutions that have opted out of the Transaction Account Guarantee Program.
Please note that there are many valid reasons why an entity may have chosen to opt out of the TLG Program. Entities must make individual decisions based upon their business needs, including the costs of the Program as well as the benefits of participation. The decision to opt out in no way signals anything, either positively or negatively, about the financial health of the entity. Depositors and investors may ask any of the entities on either of these lists for a further explanation concerning the entity’s decision to opt out of the TLG Program.
Expected Losses On TLGP Program Not Addressed
In addition, the FDIC noted that they had collected total fees under the TLGP debt program of $7.6 billion since its inception during the fourth quarter of 2008. During Senate testimony this month, Sheila Bair stated that “The TLGP program has been a moneymaker for us. We’ve collected over $7 billion in payments from it and we’ve had no losses”. Ms. Bair also noted that the FDIC is looking forward to winding down the TLGP program by the end of October this year.
It would have been of interest to see an FDIC estimate of losses, if any, that they expect to incur under this program. If the TLGP debt issued by a bank is defaulted on, the FDIC must cover any losses to the investors that purchased the bank debt. With the large amount of banks on the unofficial Problem Bank List, it would seem likely that there will be some debt defaults by banks covered under the TLGP.