The Global Financial Crisis - Latest Responses by the US Government by DLAPiper

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NEWS & INSIGHTS
Publications
4 DEC 2008

The Global Financial Crisis: Latest Responses by the US Government
ARTICLE CORPORATE AND SECURITIES ALERT

The United States government continues its efforts to ameliorate the global credit crisis and the economic conditions prevailing in the international financial system. Events have moved ahead across several fronts in recent days. These developments include the following: The Office of the Comptroller of the Currency (OCC) adopts a novel type of national bank “shelfcharter” to facilitate new equity investments in troubled depository institutions: With this innovative procedure, the OCC grants investors preliminary approval for purposes of obtaining a national bank charter. The charter remains inactive, or “on the shelf,” until the investor group is in a position to acquire a troubled institution. The OCC developed this new procedure as a result of the conditional approval extended to the Ford Group Bank, National Association, an entity formed to assume liabilities and to purchase assets from the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver of a depository institution. Click here to see the OCC’s informative press release about the first “shelf-charter.” It should be noted that additional approvals are required if any further organizers, executive officers or directors are appointed to the applicant’s management group. Another requirement: the first time the FDIC accepts a bid from such a group to acquire a failed institution, the OCC must give its final approval. The process involves the following steps: The OCC reviews the application for a shelf-charter, evaluating the qualifications of the proposed management team, the sources and amount of capital that would be available to invest in the troubled bank, and a streamlined business plan concerning the operation of the bank; If the review is positive, the OCC provides conditional preliminary approval of a national bank charter,

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subject to more formal and detailed operating plans being prepared once a specific institution is targeted for acquisition; The pre-approved investor group is cleared to view the list of failing or troubled institutions maintained by the FDIC; the group is entitled to submit bids for those institutions; If a bid is submitted and found to be acceptable, the FDIC then acts to approve the bid; once approval is granted, the bank would thereafter be acquired pursuant to the terms of the proposal; The charter remains “on the shelf” for a period of up to 18 months; the charter may be used for multiple bids during that time period. The OCC’s unprecedented action, which provides such a flexible conditional shelf process, may reflect concerns about the extent to which significant numbers of nationally chartered and other banks may be facing insolvency or liquidation absent their acquisition by well-capitalized investor groups. The OCC may also have concluded that existing financial institutions may not be the only purchasers able or ready to acquire these troubled banks; the new procedures make more possible the involvement of potential acquirors that may not have made previous investments in the banking field. The FDIC implements a modified bidder qualification process: The streamlined procedures adopted by the OCC and described above are complemented and supported by recently adopted procedures issued by the FDIC, whereby interested parties that do not currently have a bank charter will be allowed to participate in the bid process through which failing depository institutions are restructured and their assets conveyed to designated purchasers. These provisions may echo concerns at the OCC about the financial viability of a major segment of the insured depository institution population, and the importance of opening up the bidding process to nontraditional investor groups that may not have been previously active in the banking field. To support this procedure: The FDIC will market the deposits and assets of a failing institution to known, qualified and interested potential bidders; The FDIC will consider abbreviated information submissions and applications, and may issue conditional approval for deposit insurance, in order to qualify interested parties for the FDIC’s failing institution bidders list; Investors interested in acquiring the deposits of failing institutions must have conditional approval for a charter from the responsible agency (such as the OCC) and meet the bid criteria established by the FDIC; In certain cases it would also be necessary to obtain conditional approval to establish a bank or thrift holding company; Critical aspects of the process include submitting a business plan compliant with the Community Reinvestment Act, proving the existence of readily available capital, and having in place an identified management team subject to financial and biographical review. Creation of the Term Asset-Backed Securities Loan Facility (TALF) to help market participants meet credit needs by supporting the issuance of asset-backed securities (ABS):

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Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a nonrecourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. Such loans include student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration. The FBRNY will lend an amount equal to the market value of the ABS, less a deduction reflecting revised valuations for said assets, and will be secured at all times by the ABS; The US Treasury will provide $20 billion of funds made available under TARP to the FRBNY to support TALF; The Treasury funds made available under TARP will back-stop any initial amount of losses experienced by the Federal Reserve in connection with the loan program established under TALF. We await additional guidance from the Federal Reserve on the operation of this program. TALF is of potential significance in expressly extending the relief provided by this Federal Reserve facility to loans originated by institutions other than banking entities. TALF focuses on providing liquidity in the context of new issuances of highly rated asset-backed securities. However, it does not address the investment community’s concerns about strengthening investors’ ability to sell these securities in secondary market transactions on terms and conditions that are viable. A purchase facility addresses the obligations of housing-related government-sponsored enterprises (GSEs): The Federal Reserve also announced that it would purchase the direct obligations of GSEs, such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks, as well as mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac and Ginnie Mae: Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions; Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end; The program is designed to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally. Extending the Temporary Guarantee Program for Money Market Funds: The Treasury has announced an extension of its program that temporarily guarantees investments made by money market funds (that is, mutual funds organized in accordance with the requirements of Rule 2a7 of the Investment Company Act): All money market funds that currently participate in this guarantee program and meet the extension requirements are eligible to participate; This program will provide coverage to shareholders up to amounts that they held in participating money market funds on the close of business on September 19, 2008; Funds must make program extension payments and submit an extension notice by December 5; For funds with a market-based net asset value greater than or equal to 99.75 percent of their stable

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share price, the payment will be 1.5 basis points multiplied by the number of shares outstanding on September 19; For funds under this 99.75 percent threshold, but greater than or equal to 99.50 percent of their stable share price, the payment will be 2.2 basis points, multiplied by the number of shares outstanding on September 19; The program currently covers over $3 trillion of assets, and will expire, unless extended again, on April 30, 2009. The Treasury and the FDIC Provide Assistance to Citigroup: The Treasury and the FDIC announced in late November that they would provide protection against the possibility of unusually large losses on an asset pool maintained by Citigroup of approximately $306 billion of loans and securities backed by residential and commercial real estate and related investments, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup agreed to issue preferred stock to the Treasury and the FDIC. In addition, the Treasury committed to invest $20 billion in Citigroup from available TARP funds in exchange for additional preferred stock paying an eight percent dividend to the Treasury: Each specific asset subject to this arrangement will be identified and “ring-fenced” on the books of Citigroup; Guarantee by the FDIC will remain in place for ten years for residential assets, five years for nonresidential assets; Citigroup will absorb initial losses in portfolio up to $29 billion; losses exceeding that sum will be shared 90 percent by the US government (that is, Treasury and FDIC), 10 percent by Citigroup; Citigroup will issue $7 billion of preferred stock with an eight percent dividend rate, with $4 billion of the preferred being issued to the Treasury and $3 billion to the FDIC; Citigroup is prohibited from paying common stock dividends in excess of $.01 per share for three years without the consent of the Treasury, the FDIC and the Federal Reserve; An executive compensation plan for Citigroup, including bonus arrangements, rewarding long-term performance and profitability, with appropriate limitations, must also be approved by these agencies; An additional $20 billion of preferred stock will be issued under TARP to the Treasury, paying eight percent per annum; The preferred stock shall be non-voting , except for certain class voting rights in the event of merger, exchange or amendment of the stock terms; in the event that dividends on the preferred stock are not paid, the right is given the holder to elect two directors; A warrant will also be issued to the Treasury for an aggregate exercise value equal to ten percent of the total preferred issued to the US government (Treasury and FDIC), exercisable over ten years at a strike price equal to the 20-day trailing average for the stock price in question. Using the FDIC Temporary Liquidity Guarantee Program: Press reports indicate that a new asset class is quickly creating a niche for itself among investors: bonds issued by banks in reliance on the Temporary Liquidity Guarantee Program announced by the FDIC. These bonds, which receive the guarantee of the FDIC, have resulted in investor interest that appears to

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be quite significant. Approximately $17 billion of these bonds were sold just within one two-day period in November. Demonstrating the apparent benefits of their recent qualification as bank holding companies and their resulting eligibility for the benefits of this FDIC program, Goldman Sachs Group sold approximately $5 billion of these instruments, while Morgan Stanley issued approximately $5.75 billion of such securities. JP Morgan Chase sold approximately $6 billion of these securities--$5 billion of three-year maturity fixed rate notes and $1 billion of two-year maturity floating rate notes. Goldman Sachs's new three-year guaranteed bonds were priced with a yield of 3.367 percent, Morgan Stanley's sold with a yield of 3.262 percent and JP Morgan's notes yielded 3.147 percent. We will continue to monitor developments in each of these areas and advise on matters of specific importance as further information and guidance becomes available.

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