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The Treasury Department has released the necessary forms and documents for a financial institution wishing to take part in the Capital Purchase Program as part of the $700 billion Troubled Asset Relief Program ("TARP") under the Emergency Economic Stabilization Act of 2008 (the "Act"). Click here for the new documents just provided by the Treasury Department.

On Wednesday, November 12 and Tuesday, November 18 the House Financial Services Committee will examine the $700 billion Troubled Asset Relief Program ("TARP") under the Emergency Economic Stabilization Act of 2008 (the "Act"). Although the Committee has not yet released a witness list, the hearings will look closely at how the Treasury Department is coordinating with both the Federal Reserve and the FDIC under TARP and the Act. Specifically, the hearings will focus on bank recapitalization, market volatility and foreclosure reduction.

Click here for the Committee's press release, and continue to monitor this web page for the latest updates on the Committee's witnesses and all other news on the Act.

The Treasury Department has revealed the amount currently authorized to be invested in bank capital purchases for each financial institution taking part in the $700 billion Troubled Asset Relief Program ("TARP") under the Emergency Economic Stabilization Act of 2008 (the "Act"). The amounts authorized to be invested in senior preferred shares and warrants range from $25 billion each for Citigroup, JPMorgan Chase and Wells Fargo to $2 billion for State Street. Meanwhile, Bank of America, Bank of New York, Goldman Sachs, Morgan Stanley and Merrill Lynch all fall between the $15 billion to $3 billion range.

The Treasury Department has previously announced that under TARP it would place up to $250 billion into certain U.S. financial institutions and their holding companies. Click here for today's report, which is sure to be followed by others given Treasury's commitment to transparency and disclosure under the Act. Bookmark this website for all the latest news regarding both the Act and TARP.

Upon first blush, the application for the Treasury Capital Purchase Program (CPP) under the Troubled Assets Relief Program (TARP) looks straightforward. The form itself is only two pages. Moreover, companies in addition to the first nine applicants have been receiving funding. Is the process really a slam-dunk?

As described in our earlier Client Alert, on October 14, 2008 the FDIC adopted the Temporary Liquidity Guarantee Program. On October 23, 2008 the FDIC issued its interim rule for the program and requested comment on the rule. This alert fleshes out additional details regarding this program that are addressed by the interim rule but were not included in the earlier FDIC press releases. We encourage you to consider commenting on any aspect of the rule that you believe needs reformation. Comments are due no later than 15 days after the interim rule is published in the Federal Register. Accordingly, comments may be due as early as November 7, 2008.

The two elements of the program are the senior unsecured debt guarantee and the additional insurance on noninterest-bearing transaction deposit accounts. This Client Alert summarizes the interim rule and focuses on the additional details and clarifications presented by the rule. The two most significant developments presented by the interim rule both relate to the debt guarantee program.

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program. The program has two elements. The first consists of an FDIC guarantee of certain new senior unsecured debt issued by participating institutions on or after October 14, 2008 through June 30, 2009. The second part provides for an unlimited guarantee by the FDIC of funds held by an insured depository institution in non-interest-bearing transaction deposit accounts through December 31, 2009.

General Terms

Eligible Entities
All FDIC-insured financial institutions and domestic bank holding companies, financial holding companies and savings and loan holding companies that engage only in activities that are permissible for financial holding companies under section 4(k) of the Bank Holding Company Act (this would exclude “unitary thrift holding companies”) are eligible to participate in the senior unsecured debt guarantee program. All FDIC-insured financial institutions are eligible for continued participation in the transaction account guarantee part of the program.

Participation
All eligible entities will be covered under the program for the first 30 days at no cost. Prior to the end of this period, institutions may opt out of one or both parts of the program; otherwise fees will apply for future participation. Eligible entities may not opt out after November 12, 2008. There will be a form made available on the FDIC website (see below) for opting out of either part of the program. The form will also be available through FDICconnect.

The FDIC has strongly urged all eligible entities to participate in the program. If an insured depository institution does not continue to participate, the name of the institution will be posted on the FDIC’s website as having opted out of the program.

It is tempting to look at Treasury’s Troubled Assets Relief Program (“TARP”) only as a positive event. Obviously, 5% is cheap capital compared to current market alternatives. There are certain pre-conditions of TARP, however, that are worth considering.

Background
Treasury announced on October 13, 2008, that it would place up to $250 billion into U.S. financial institutions and their holding companies. Each investment would be no less than 1% nor more than 3% of risk-weighted assets subject to a cap of $25 billion. The investment would be in the form of preferred stock (“Senior Preferred”). The Senior Preferred will be deemed to count as Tier I capital.

Terms of the Preferred Stock
The Senior Preferred will have a priority greater than common stock and equal to or greater than any other preferred stock other than preferred stock that by its terms currently are junior to existing preferred stock.

The Senior Preferred would pay cumulative dividends of 5% per year until the fifth year, at which point the dividend rate would increase to 9%. For financial institutions without holding companies, the dividends would be noncumulative. The preferred stock may not be redeemed for three years absent a “Qualified Equity Offering” (an issuance of noncumulative perpetual preferred stock or common stock). There are other qualifications on the redemption.

Morning Briefing

This morning, before the Institute of International Bankers, the Treasury Department announced its schedule for naming three financial institutions as managers that will implement the Treasury Department’s $700 billion Troubled Asset Relief Program (“TARP”).

Hunton & Williams attended the morning session with Interim Assistant Secretary for Financial Stability, Neel Kashkari, and can report that he plans to make key announcements in the next few days, including one in the next 24 hours.

Schedule of Appointments

In the next 24 hours, the Treasury Department will reveal a “Master Custodian Firm,” essentially a prime contractor for the TARP, that will provide infrastructure services related to the holding and tracking of assets purchased by the Treasury and to the management of, and reporting on, the auction mechanisms employed by the Treasury.

In the next few days the Treasury will also announce a “Securities Asset Manager” that will oversee and sell the mortgage-backed securities bought by the Treasury.

The Treasury further expects to name a “Whole Loan Asset Manager” in the next few days, that will both manage and sell the whole mortgage loans purchased by the Treasury.

For your convenience we have provided a link to Mr. Kashkari’s remarks.

The Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”) was signed into law on Friday, October 3, 2008, in substantially the same form as discussed in our prior alert, with the most notable addition being an increase until December 31, 2009 of the cap on federal deposit insurance coverage from $100,000 to $250,000 per depositor. Our focus now turns to how the Treasury Department will implement its powers under the Stabilization Act.

Rapid Treasury Implementation

On Monday, October 6, 2008, Treasury Secretary Henry Paulson took an initial step toward implementing his powers under the Stabilization Act by appointing Neel Kashkari Interim Assistant Secretary of the Treasury for Financial Stability to direct the Troubled Asset Relief Program (“TARP”). Mr. Kashkari will oversee a portfolio of up to $700 billion worth of mortgage-related and other financial assets under TARP. Several questions will need to be addressed promptly, including the Treasury’s method for selection of assets for purchase and the means and timing of valuation and disposition of those assets.

Late Sunday afternoon, Congressional leaders circulated the Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”), compromise legislation to enact with substantial modification Treasury Secretary Henry Paulson’s original proposal for intervention into the United States financial system. The Stabilization Act now includes both elements of Senator Christopher Dodd’s counterproposal to the Paulson plan (which we addressed in a Client Alert last Tuesday) and additional taxpayer protections that emerged from the House of Representatives over the weekend. The Stabilization Act not only proposes a modified version of Treasury’s mortgage-related and other financial asset purchase plan (the “Asset Purchase Program”), but also limits executive compensation, allows for the modification of accounting standards and bank reserve ratios, mandates foreclosure mitigation and provides taxpayers additional relief from tax on cancellation of indebtedness income.

Asset Purchase Program/Insurance Program

The Stabilization Act would authorize the Secretary to borrow and spend up to $700 billion purchasing, managing, and reselling the mortgage-related and other financial assets described therein (“Troubled Assets”); however, the fundamental structure of the Paulson plan has been altered significantly to provide for Congressional constraint, oversight and protection for the taxpayers’ investment. The Stabilization Act would constrain Treasury by granting graduated spending authority: The Secretary would be authorized (i) immediately to purchase $250 billion of Troubled Assets, (ii) to purchase an additional $100 billion of Troubled Assets only after Presidential certification of need to Congress and (iii) to purchase up to an additional $350 billion of Troubled Assets only after receipt by Congress of a report from the President that details the plan to exercise the remaining authority (which final tranche Congress may vote to disapprove). The Asset Purchase Program would be overseen by Congress, the Comptroller General, an oversight board and an independent Inspector General. In order to provide taxpayers with a greater potential recovery of their investment, the Stabilization Act would require Treasury to take an equity or senior debt position in all direct purchase-participating financial institutions.

The Current Situation

On Monday evening, leaders in Congress emerged from a briefing by some of the nation’s leading economists convinced that the United States faces economic peril grave enough to justify an unprecedented intervention in the nation’s financial system, which is consistent with the position advanced by the Administration over the weekend. At the same time, many in Congress stand opposed to any such intervention. At this time a wide gap remains between Treasury Secretary Henry Paulson’s plan and a competing proposal based upon a draft circulated Monday morning by Senator Christopher Dodd. Below is a brief summary of the current key features of each proposal. Additional Client Alerts will follow as the proposals evolve and consensus emerges.

Coming Days

Today at 9:30am, Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke appear before the Senate Banking Committee. Wednesday at 2:30pm, the two will appear before the House Committee on Financial Services.

At present, despite the speed urged by Treasury, it is unclear whether a bill will pass this week. Some in Congressional leadership have indicated they recognize the need to move as quickly as possible without sacrificing due diligence. The situation on Capitol Hill is extremely fluid and dependent on financial market conditions; consequently, no reliable forecast of Congressional action can be made at this time.

On October 3, 2008, the House passed H.R. 1424, the “Emergency Economic Stabilization Act of 2008” (the “Bill”) by a vote of 263-171. A copy of the Bill is available here. The Senate previously passed the Bill on October 1, 2008, by a vote of 74-25. Thus, the Bill will now be sent to the President for signature and the White House has issued two Statements of Administration Policy indicating that the President will sign the Bill. Statements of Administration Policies are available here, October 1 and October 3, 2008.

The energy tax provisions are contained in the “Energy Improvement and Extension Act of 2008” division of the Bill that is referenced as Division B. These provisions are identical to those contained in the Senate-passed version of H.R. 6049, and were described in detail in a prior alert.