TARP Index Gets Stress Test Boost; Down $146.2 Billion Overall as of May 8

According to the Ethisphere TARP Index, when markets closed on Friday, May 8, 2009, the government’s Troubled Asset Relief Program (TARP) investment was down approximately $146.2 billion. Created by the Ethisphere Institute, a non-partisan research think tank, the Ethisphere TARP Index tracks the U.S. Federal Government’s return on its $727.1 billion of investments under the capital purchase portion of TARP and the government’s accompanying loan guarantees provided to Bank of America and Citigroup. To date, each taxpaying household has lost $1,285.

“The stress tests gave the banks a boost in the stock market this past week, and that also helped slightly improve the value of the Ethisphere TARP Index,” said Stefan Linssen, Managing Editor of Ethisphere Magazine and one of the lead research analysts behind the Ethisphere TARP Index. “We’re skeptical, however, that some of the larger banks are as well off as reported. Because of lingering uncertainty around the asset guarantees in particular, this week’s index was not able to increase at a level proportionate to the stock markets’ reactions.”

What is the Ethisphere TARP Index?

The Ethisphere TARP Index measures performance of financial institutions participating in the U.S. Treasury’s Troubled Asset Relief Program (TARP). The Index takes into account the value of the Treasury’s shares for both public and private companies, as well as interest accrued from participating companies.

What is the objective of the Ethisphere TARP Index?

The TARP Index was created by the Ethisphere Institute to help TARP companies, the federal government and the public become aware of the Treasury’s investment performance. While the investment as a whole has quickly depreciated in value since the program began, not all companies participating in the TARP program are performing poorly on the market. Rather, a select few are in fact enjoying steady gains. Ethisphere would like to call out these gains through the Ethisphere TARP Index.

Additionally, the mission of the Ethisphere Institute is to promote best practices in corporate ethics and compliance, and demonstrate that a commitment to ethical business practices can serve both as a competitive advantage and profit driver. Through this Index, the Institute hopes to encourage those companies that participate in the U.S. Treasury’s Troubled Asset Relief Program to promote transparency, accountability and ethical business practices related to the TARP funds.

About the Ethisphere Institute

The research-based Ethisphere Institute is a leading international think-tank dedicated to the creation, advancement and sharing of best practices in business ethics, corporate social responsibility, anti-corruption and sustainability. The Institute’s associated membership group, the Ethisphere Council, is a forum for business ethics that includes over 200 leading corporations, universities and institutions. The Ethisphere Council is dedicated to the development and advancement of individuals on its membership council through increased efficiency, innovation, tools, mentoring, advice, and unique career opportunities. Ethisphere Magazine, which publishes the globally recognized World’s Most Ethical Companies Ranking™, is the quarterly publication of the Institute.

“Ethisphere is an informative, comprehensive, and even entertaining publication occupying an important space in the business ethics sphere. I find it thought-provoking and a valued addition to my professional reading list.” Charles Elson. Weinberg Center for Corporate Governance, University of Delaware

1. Please note the “Calamity Investments” for the purposes of this report are Bank of America, Citigroup, JP Morgan, Wells Fargo and AIG.
2. To compile the index, Ethisphere used the following ticker symbols for publicly traded companies participating in the TARP program: ABCB ABCW ALNC ANNB ASBC ASRV AXP BAC BANR BARI BBNK BCSB BHB BHLB BK BKOR BKYF BMRC BOCH BPFH BPOP BTC BTFG BYFC C CADE CART CARV CASB CATY CBAN CBKN CEBK CFBK CFFC CFFI CIT CJBK CLBH CLFC CMA CNBC COBZ COF COLB CPBC CPF CRBC CRFN CRRB CSBC CSFL CTBC CVBF CVBK CVCY CVLY CWBC CYN CZFC CZNC CZWI DNBF EBTX ECBE EFSC EGBN ESBK EVBS EWBC FBC FBMI FBMS FBNC FCAL FCBC FCCO FCCY FCFL FCZA FDEF FFBC FFCH FFFD FFIC FFKT FFKY FHN FISI FITB FMBI FMER FNB FNBN FNFG FPBI FPTB FSBI FSGI FULT FUNC GFED GRNB GS GSBC HBAN HBNC HFBC HFFC HFWA HMNF HMPR HOMB HTBK HTLF HWBK IBCA IBKC IBOC INCB INDB JPM KEY LBAI LEGC LION LNBB LSBX MBFI MBHI MBRG MCBF MCBI MFSF MI MNRK MPB MS MSDXP MSFG MSL MTB NARA NBBC NBN NHTB NPBC OCFC OKSB OLBK ONB OSBC OZRK PBIB PBKS PCBC PEBK PEBO PGC PKBK PLBC PNBC PNC PNFP PRK PRWT PULB PVSA PVTB QCRH RF SASR SBCF SBIB SBNY SCBT SCMF SHBI SIVB SMBC SNBC SNV SOMH SRCE SSBI SSFN STBA STBC STEL STI STL STSA STT SUPR SUSQ SVBI TAYC TBBK TCB TCBI TDBK TIBB TNCC TOWN TRMK TRUE TSBK TSFG UBCP UBSH UCBH UCBI UMPQ UNTY USB VCBI VIST VLY VYFC WABC WAIN WAL WBCO WBS WFC WFSL WIBC WL WSBC WSFS WTBA WTFC WTNY YAVY ZION
3. To calculate the U.S. Treasury’s strike price of publicly traded companies, Ethisphere used the mean of the 20-day trailing average for each company’s stock price.
4. The Institute acknowledges that the calculating the value of the Preferred Shares is difficult due to a lack of public disclosure for the original terms of investment, including terms about Liquidation Preference and Conversion Rate. As more information is forthcoming about the TARP investment terms, the methodologies used by the Institute will be updated accordingly. In terms of Liquidation Preference, it has been assumed that the Preferred Shareholders have preference all common shares in a liquidation or equity realization event, but are subordinate to all other financial obligations of the bank. Should any of the invested financial institutions go bankrupt, there is a high likelihood that the entire Preferred Shares investment in such institution is lost as the liabilities of the institution may not exceed the assets of the institution, thereby limited the amount if any that may be paid to Preferred Shareholders. The Ethisphere Institute carries investments at “par” until the equity price of the institution begins to trade at less than 50% of the original investment price under TARP. At this point, the Institute begins to apply a gradual discount to “par” to “mark to market” the increased risk and likelihood of loss of each specific investment. This methodology has held up well under real-world analysis in that The Ethisphere Institute was the first organization to heavily discount down the TARP investment in Citigroup, with a mark-on of nearly 80% by mid-February 2009. When the U.S. Treasury announced a conversion of its preferred holdings into common equity scantly two weeks later, the Ethisphere Institute’s valuation methodology was proven to be most accurate.
5. To calculate the movement of the U.S. Treasury’s investment in private companies, Ethisphere tracked the movement of the NASDAQ Bank Index and the S&P Banking Index. The two indices were averaged together at a weighting ratio of 65 percent for NASDAQ and 35 percent for S&P. That percent change was applied to the amount of money the U.S. Treasury gained or lost on initial investments of each private financial institution. We assumed that the U.S. Treasury did not receive an industry standard 20 percent illiquidity discount on the cost of private companies.
6. While compiling the index, Ethisphere noted the Congressional Oversight Panel’s February 6, 2009 report describing U.S. Treasury losses of over $78 billion due to overpayment. Ethisphere did not factor these numbers into the index. Rather, this index looks at the gains and losses based on the price paid by the U.S. Treasury, it does not factor in whether or not Treasury under or over paid market prices.
7. Interest rates for TARP-participating institutions were five percent for the first five years and 9 percent for the remaining 15. Ethisphere compounded the interest on a quarterly basis for the index.
8. To calculate the value of warrants, Ethisphere assumed 20 percent warrants were offered at 15 percent of the strike price.
9. Ethisphere noted the recent estimated budget released by the Obama administration in which it estimated approximately $120 billion in losses to date from its TARP investments.
10. Ethisphere wrote down the value of preferred shares invested in automotive companies by 90 percent.