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Capital Purchase Program (CPP)

Capital Purchase Program (CPP)

What Is the Capital Purchase Program (CPP)?

The Capital Purchase Program (CPP) was a U.S. Treasury program intended to give new capital to banks, permitting them to loan more money to organizations and consequently invigorate the economy. Under this program, the U.S. Treasury announced it would purchase up to $250 billion of senior preferred shares of qualifying U.S. banks and savings institutions. Buying in banks must sell an amount of stock equivalent to 1-3% of their risk-weighted assets.

Understanding the Capital Purchase Program (CPP)

The Capital Purchase Program was offered to the financial community on Oct. 14, 2008. To participate in the program, banks and savings institutions needed to answer by Nov. 14, 2008. The shares paid a dividend of 5% each year for the initial five years, then, at that point, reset to 9% each year from there on.

As per a Government Accountability Office, CPP — which was part of the [Troubled Assets Relief Program](/troubled-resource relief-program-tarp) (TARP), was initially made by the Emergency Economic Stabilization Act of 2008, with the primary focal point of purchasing mortgage-backed securities and whole loans. Notwithstanding, in something like fourteen days of enactment, it moved concentration to the preferred stock model, eventually giving capital to 707 financial institutions, across 48 states. Initially notwithstanding, the accompanying nine major financial institutions received funds prior to Oct. 29, 2008:

  • Bank of America Corporation
  • Bank of New York Mellon Corporation
  • Citigroup Incorporated
  • Goldman Sachs Group Incorporated
  • JPMorgan Chase and Company
  • Morgan Stanley
  • State Street Corporation
  • Wells Fargo and Company
  • Merrill Lynch

What Has Happened Since

Part of the TARP legislation administering the CPP ordered the severe monitoring of the program's outcomes, and the creation of annual reports by the Office of Management and Budget (OMB) on the program's costs. The law additionally requires the Congressional Budget Office (CBO) to prepare its own reports in something like 45 days of the OMB's reports, every year. A few key discoveries from the CBO's March 2020 report are as per the following:

  • As of Jan. 31, 2020, about $20 million of that stock stayed outstanding.
  • The CBO gauges a net gain to the government of $16 billion from the CPP as dividends, interest, and different gains.

The financial institutions that stay in the program are consistently subject to severe limitations on the compensation they can give to executives, as well as the dividends they might pay out to shareholders, as well as the amount of common stock they might repurchase.