What were the specific conditions that the Federal Reserve attached to the capital injections forced upon the major Wall St. banks during the Great Recession? How and why do they differ from normally legal and binding regulations?


1 Answer 1


First, two clarifying points:

  1. The capital injection program, known as the Capital Purchase Program (CPP), was authorized by Congress as a part of the Troubled Asset Relief Program, and run by the US Treasury, not the Federal Reserve. However, the Federal Reserve Board and in particular the Federal Reserve Bank of New York (FRBNY, primary regulator of the major dealer banks) were both involved in the design of the program.

  2. The program was voluntary, not mandatory, though the heads of the nine largest institutions were certainly strongly encouraged to participate, as described by Timothy Geithner, then-President of the FRBNY, in Stress Test:

    As we developed our scripts, I pushed hard to make the capital investments sound as close to mandatory as possible. We couldn't force participation, but we could make it sound inevitable. I expected some firms to resist taking new capital with government strings attached. But in a financial crisis, no firm is ever as well capitalized as it thinks. Lehman thought it had plenty of capital until it didn't.

Having made that clear, we can turn to your question, which is about the "government strings" that Geithner mentions. These took three primary forms:

  1. Dividends and warrants. These were in the authorizing law. Quoting the Treasury's CPP page:

    Most financial institutions participating in the CPP pay Treasury a five percent dividend on preferred shares for the first five years and a nine percent rate thereafter. In addition, Treasury received warrants to purchase common shares or other securities from the banks at the time of the CPP investment. The purpose of the additional securities was to enable taxpayers to reap additional returns on their investments as banks recover.

  2. The ability to nominate up to two members to the board of directors of a participating institution, should the institution miss six quarterly payments to the Treasury, per the CPP contracts.

  3. Limits on executive compensation. These were in the authorizing law that Congress passed (titled the "Emergency Economic Stabilization Act of 2008"), and they're well-described on the law's Wikipedia page:

    If the Treasury purchases assets directly from a company, and also receives a meaningful equity or debt position in that company, the company is not allowed to offer incentives that encourage "unnecessary and excessive risks" to its senior executives (that is, the top five executives). Also, the company is prohibited from making golden parachute payments to a senior executive. Both of these prohibitions expire when the Treasury no longer holds an equity or debt position in that company. The company also is given "clawback" permission; that is, the opportunity to recover senior executive bonus or incentive pay based on earnings, gains, or other data that proves to be inaccurate.

    If the Treasury purchases assets via auction, and that purchase exceeds $300 million, any new employment contract for a senior officer may not include a golden parachute provision in the case of involuntary termination, bankruptcy filing, insolvency, or receivership. This prohibition only applies to future contracts; golden parachutes already in place will remain unaffected. In either scenario, no limits are placed on executive salary, and existing golden parachutes will not be altered.


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