Capital Purchase Program

The Capital Purchase Program or CPP is a and equity warrant purchase program conducted by the US Treasury's Office of Financial Stability as part of Troubled Asset Relief Program (aka, TARP). According to the first congressionally mandated oversight report published by GAO, "[TARP's] primary focus was expected to be the purchase of mortgage-backed securities (MBS) and whole loans... [but] within 2 weeks of enactment... the Treasury announced that it would make $250 billion of the $700 billion available to U.S. financial institutions through purchases of preferred stock." This followed a model initiated by the United Kingdom bank rescue package announced on October 8, 2008.

Because preferred stock is similar to debt in that it gets paid before , some economists have questioned whether the buying of by the CPP will be effective in getting banks to lend. Other economist have argued that the capital purchases represent a taxpayer subsidy of unsecured creditors. A review of investor presentations and conference calls by executives of some two dozen US-based banks by the New York Times found that "few [banks] cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future." In a letter to Congress the Director-designate of the National Economic Council Larry Summers said that the Obama administration would place tighter controls on how CPP funds could be used. In particular, the second $350 billion would include restrictions on the payment of dividends and executive compensation. Professor Summers also promised greater disclosure and more attempts to tie the funds to foreclosure mitigation efforts.

On January 16, 2009 the Congressional Budget Office estimated that of the first $247 billion of securities purchased represented 26 percent ($64 billion) subsidy to the banks receiving funds. In his speech on February 10, 2009, the new Secretary of the Treasury Timothy Geithner announced the Capital Assistance Program. This signaled an end to the capital purchase program.

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