By Todd, Editor - Javafiend.com

03/06/2008 - U.S. bank board members and executives who accepted money under the terms of the United States Treasury’s Trouble Asset Relief Program (TARP) are all itching to pay the bill and get out from under the regulatory thumb of the Treasury as soon as it is safe for them to do so. The problem is this: no one knows exactly when it will be safe to cut and run.

During a shareholder conference call on Monday, 3/2/2009, Jim Rohr, CEO of PNC Bank Corporation (NYSE:PNC), stated that, “There is a cloud around how and when you can get out of TARP.” In answer to investor questions, Rohr explained that when the TARP was issued, it increased many bank  Tier 1 capital ratios from around the 6%-8% range to the 9%-10% range. T1 cap ratios above 9 are considered by many to be quite high. In general, this means that these banks sitting with T1 above 8% have the cash to write new loans without impacting their underlying share value on common equity.

Rohr went on to say that though the current quarter is in-line with expectations for PNC, they cut the dividend “so we can get there from here.” PNC does not want to issue new common stock, but at the same time, they want to repay their TARP loan (of about $7 Billion) before the interest rate they pay to the Treasury goes up to 9%.

Can PNC raise the dividend again before they are out from under the TARP? Does PNC have to wait until the recession is over before raising the dividend again? In today’s volatile market, PNC - and likely many other banks - must answer the following question:

Do they use the cash they are saving by cutting their dividends, slashing costs, and, hopefully, increasing revenue to repay their TARP obligations early?

“There is a cloud around how and when you can get out of TARP.” - Jim Rohr, CEO, PNC Bank

Rohr stated that the answer was far from clear. He said that the rules under which PNC manages the use of and repayment of TARP funds change so frequently that it was almost impossible to forecast the right time to get out of the TARP. He said that TARP funds were “really a protection for the depositor.” The intention - or part of the intention of the Fed/Treasury - in issuing these funds was to stabilize confidence of depositors in the banks. Arguably, that, along with the FDIC insurance cap being raised to $250,000, achieved that goal for at least the short term. However, Rohr said that even though they could pay-off the TARP debt, doing so too soon would reduce their T1 capital ratio back down to around 6%. The question on any banker’s mind would be, “Do I want to be the first to voluntarily reduce confidence in my bank by doing what seems prudent, paying the TARP back, but in doing so reduce my T1 cap?”

Rohr and the other executives on the call said that even though delinquencies are up last quarter on their market-exposed portfolio - mostly on RMBS (Residential Mortgage Backed Securities, i.e., ‘toxic assets’, though they didn’t use that term), they haven’t seen an increasing deterioration in that portfolio.

Large unresolved OCI (Other Comprehensive Income*) can tend to drag on T1 capital, too. However, Rohr repeated that he did not envision PNC issuing new common equity or converting any of the preferred shares/bonds that the Treasury holds as collateral for the TARP funds (i.e., Citi) into common stock to build T1. He said that he has heard nothing one way or the other from the Treasury on that issue.

PNC and many other banks in the United States and around the world were not out of the woods yet by any stretch as of 3/5/09. They didn’t know when or even if they should get out of the TARP. The stock market gave back the gains from 3/4/09 and with GM openly talking about the likelihood of it’s own demise, everyone was still looking for the mucky bottom of the well but still unable to see it.

*From http://www.ventureline.com/glossary_O.asp - OTHER COMPREHENSIVE INCOME (OCI) is part of total comprehensive income but is generally excluded from net income. Prior to SFAS 130 (See FASB website), these three items—foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains or losses on available-for-sale investments—were disclosed as separate components of stockholders’ equity on the balance sheet. Under SFAS 130, they are to be reported as OCI. Furthermore, they must be reported separately, as FASB decided that information about each component is more important than information about the aggregate. Later, net unrealized losses on SFAS 133 derivatives were also included in the definition of OCI. The intent of SFAS 130 was that “if used with related disclosures and other information in financial statements, the information provided by reporting comprehensive income would assist investors, creditors, and other financial statement users in assessing an enterprise’s economic activities and its timing and magnitude of future cash flows.”

As the housing bubble burst and trillions of dollars’ worth of toxic mortgages began to go bad in 2007, fear spread through the massive firms that form the heart of Wall Street. By the spring of 2008, burdened by billions of dollars of bad mortgages, the investment bank Bear Stearns was the subject of rumors that it would soon fail.

“Rumors are such that they can just plain put you out of business,” Bear Stearns’ former CEO Alan “Ace” Greenberg tells FRONTLINE.

The company’s stock had dropped from $171 to $57 a share, and it was hours from declaring bankruptcy. Federal Reserve Chairman Ben Bernanke acted. “It was clear that this had to be contained. There was no doubt in his mind,” says Bernanke’s colleague, economist Mark Gertler.

Bernanke, a former economics professor from Princeton, specialized in studying the Great Depression. “He more than anybody else appreciated what would happen if it got out of control,” Gertler explains.

To stabilize the markets, Bernanke engineered a shotgun marriage between Bear Sterns and the commercial bank JPMorgan, with a promise that the federal government would use $30 billion to cover Bear Stearns’ questionable assets tied to toxic mortgages. It was an unprecedented effort to stop the contagion of fear that seemed to be threatening the rest of Wall Street.

While publicly supportive of the deal, Treasury Secretary Henry Paulson, a former Wall Street executive with Goldman Sachs, was uncomfortable with government interference in the markets. That summer, he issued a warning to his former colleagues not to expect future government bailouts, saying he was concerned about a legal concept known as moral hazard.

Within months, however, Paulson would witness the virtual collapse of the giant mortgage companies Fannie Mae and Freddie Mac and preside over their takeover by the federal government.

The episode sent shockwaves through the economy as confidence in Wall Street began to evaporate. Within days, in September 2008, another investment bank, Lehman Brothers, was on the brink of collapse. Once again, there were calls for Bernanke and Paulson to bail out the Wall Street giant. But Paulson was under intense political pressure from conservative Republicans in Washington to invoke moral hazard and let the company fail.

“You had a conservative secretary of the Treasury and conservative administration. There was right-wing criticism over Bear Stearns,” says Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Paulson pushed Lehman’s CEO Dick Fuld to find a buyer for his ailing company. But no company would buy Lehman unless the government offered a deal similar to the one Bear Stearns had received. Paulson refused, and Lehman Brothers declared bankruptcy.

FRONTLINE then chronicles the disaster that followed. Within 24 hours, the stock market crashed, and credit markets around the world froze. “We’re no longer talking about mortgages,” says economist Gertler. “We’re talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading.”

“I think that the secretary of the Treasury could not fully comprehend what that linkage was and the extent to which this would materialize into problems,” says former Lehman board member Henry Kaufman.

Paulson was thunderstruck. “This is the utter nightmare of an economic policy-maker,” Nobel Prize-winning economist Paul Krugman tells FRONTLINE. “You may have just made the decision that destroyed the world. Absolutely terrifying moment.”

In response, Paulson and Bernanke would propose — and Congress would eventually pass — a $700 billion bailout plan. FRONTLINE goes inside the deliberations surrounding the passage of the legislation and examines its unsuccessful implementation.

“Many Americans still don’t understand what has happened to the economy,” FRONTLINE producer/director Michael Kirk says. “How did it all go so bad so quickly? Who is responsible? How effective has the response from Washington and Wall Street been? Those are the questions at the heart of Inside the Meltdown.”

posted february 17, 2009