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Treasury Secretary Unveils New Plan

February 11, 2009

On Tuesday, February 10, 2009, U.S. Treasury Secretary, Timothy Geithner, unveiled a new plan ("Plan") designed to address the U.S. credit crisis and restore stability to the nation's financial system. While many details are still to be released, the Plan will deliver as much as $2 trillion to the U.S. financial markets through the following four key elements:

  • Public-Private Investment Fund ("Fund"). As we understand it, the Fund will have the task of purchasing troubled or illiquid assets from insured depository institutions. Initially, the Fund will be capitalized with public funds; however, the goal of the Fund is eventually to rely upon private investors for much of its funding. The Fund will allow private investors to negotiate and set the price of assets with the selling banks. It is anticipated that the Fund will have up to $500 billion in assets, with the potential to expand its holdings to as much as $1 trillion in assets.
  • Capital Assistance Program ("CAP").  Through the CAP, Treasury will provide capital to banks in the form of preferred shares convertible into the issuer's common stock. This capital, which is being termed a "capital buffer," will help absorb losses and serve as a bridge to private capital investments. Only institutions that have undergone a new "stress test" — which will be given by the institution's primary Federal regulator and which is required for all institutions with at least $100 billion in assets — will be allowed to participate in the CAP. Details of the "stress test" have yet to be determined. Institutions with less than $100 billion in assets may be eligible to receive capital through the CAP after a supervisory review, which would be used to determine which institutions need more capital from the government. It is unclear what action, if any, the government will take with respect to banks that are deemed nearly insolvent by the tests. Additionally, all capital investments will be placed in a separate trust, which will be designed to manage the government's investments in U.S. financial institutions.
  • Consumer and Business Lending Initiative. This initiative expands the resources of the Federal Reserve System's ("Fed") Term Asset-Backed Liquidity Facility ("TALF"), which is designed to provide financing to private investors to "unfreeze" consumer credit and to reduce interest rates for auto, small business, consumer and business credit. This initiative will use $100 billion to leverage purchases of up to $1 trillion in AAA-rated, newly-packaged, asset-backed securities backed by consumer and business loans, and it will increase the guarantee for SBA loans to 90 percent (from 75 percent). Under this initiative, eligible investments will be expanded to include commercial mortgage-backed securities. 
  • Mortgage Loan Modification Program and Foreclosure Prevention. Treasury and the Fed will implement guidelines for loan modification programs that will reduce monthly payments for mortgages of owner-occupied homes. Treasury and the Fed have committed $50 billion to prevent "avoidable" foreclosures. All institutions that receive funds under the Plan will be required to participate in the foreclosure mitigation efforts. According to Treasury, details of this program will not be released for a few weeks; however, House Financial Services Committee Chairman, Barney Frank (D-MA), recently called "on institutions that hold or service mortgages to delay and stop any foreclosure proceedings" until this program is unveiled. 

General Conditions (not retroactive):

Participating Institutions receiving government assistance through any of these new programs will be subject to the following additional general requirements:

Participating Institutions must show how government assistance will expand its ability to lend and how new capital will generate new lending compared to the amount of lending that would have been possible without new capital.

Participating Institutions must, during the application process to participate in any of the new programs, disclose the intended use of the government funds, and upon completion of the investment, the intended use must be disclosed to the public. Additionally, monthly reports to Treasury will be required, and public companies will have to file applicable SEC reports.

Participating Institutions must (i) restrict quarterly dividends above $0.01, (ii) restrict the repurchasing of privately-held shares, and (iii) refrain from acquisitions of "healthy" institutions, until the government investment is repaid.

Participating Institutions must comply with the new executive compensation restrictions announced on February 4, 2009, which include limits on pay, "say-on-pay" shareholder votes, and disclosures of luxury expenditures. 

Other Actions:

In conjunction with the implementation of the Plan, the Federal Deposit Insurance Corporation announced that it will extend, for an additional premium, the Temporary Liquidity Guarantee Program through October 2009.

Information disclosed or reported to Treasury by recipients of government assistance pursuant to the conditions and requirements under the Plan will be posted on www.FinancialStability.gov, a new website designed to promote transparency in the markets.