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As we reported in a previous alert, the FDIC published an interim rule in July of last year that addressed the treatment of deposit accounts, including sweep accounts, in bank failures. That rule has now been made final. It establishes the FDIC’s practices for determining deposit account balances for insurance coverage purposes at a failed financial institution. The rule also requires banks and thrifts to notify their sweep account customers of the nature of their swept funds and how they would be treated if the institution were to fail. The rule will be effective 30 days after publication in the Federal Register, except for the disclosure to sweep account customers requirement, which will be effective July 1, 2009.
 

The Federal Reserve Board announced two final rules for the Asset Backed Commercial Paper Money Market Fund Liquidity Facility.  Banking organizations may receive loans through this facility for the purchase of asset-backed commercial paper from money market mutual funds.  Although today's two final rules are subject to various conditions, the first rule allows a temporary limited exception from leverage and risk-based capital rules for banking holding companies and state member banks.  Additionally, a second rule allows for a temporary limited exception from certain restrictions and requirements for transactions between a bank and its affiliates (Federal Reserve Act Sections 23A and 23B).  Click here for today's press release, click here for the first rule, and click here for the second rule.

The Federal Reserve Board also announced a third final rule, in this case allowing for all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market (an another exception to Federal Reserve Act Section 23A).  Click here for the rule.

The Treasury Department will now post TARP contracts within five to 10 business days of execution.  Citing the the need for transparency, the Treasury Department took the first step by posting the first completed transaction contracts under the Capital Purchase Program (CPP), the Significant Failing Institutions program (SSFI), the Targeted Investment Program (TIP) and the Automotive Industry Financing Program (AIFP).  Other completed transaction contracts will be posted on a rolling basis and individual institutions' proprietary information will be redacted.  Click here for today's press release, and click here for the posted completed transaction contracts.

The Treasury Department today issued new rules designed to limit lobbyist influence on the Emergency Economic Stabilization Act's recovery programs.  The new rules include: 1) limiting Treasury Department contacts with lobbyists regarding applying for, and disbursing recovery programs funds, 2) requiring the Office of Financial Stability to certify to Congress that each Treasury Department investment "is based only on investment criteria," 3) publishing a detailed description of banking regulators' investment review process, and 4) requiring a primary banking regulator to determine a bank's eligibility for Treasury Department capital investment.  Click here for today's press release.

Additionally, the Treasury Department released details of another round of Capital Purchase Program transactions totaling $386 billion for 23 banks.  The Capital Purchase Program allows qualified financial institutions to receive a capital injection from the Treasury Department in return for preferred stock and warrants.  Today's report discloses investments ranging from approximately $1 million to $111 million.  The Treasury Department's aggregate investments under the Capital Purchase Program now total $194.1 billion.  Click here for the Treasury Department's press release, and click here for all Capital Purchase Program transactions to date.

The Treasury Department released details of a new round of Capital Purchase Program transactions,  totaling $1.5 billion for 39 banks.  The Capital Purchase Program allows qualified financial institutions to receive a capital injection from the Treasury Department in return for preferred stock and warrants.  Today's report discloses investments ranging from approximately $1.7 million to $400 million.  The Treasury Department's aggregate investments under the Capital Purchase Program now total $193.8 billion.  Click here for the Treasury Department's press release, and click here for all Capital Purchase Program transactions to date.

The Treasury Department published an Interim Final Rule providing further guidance on the executive compensation and corporate governance provisions applicable to financial institutions from which the Treasury is purchasing troubled assets through direct purchases.  The interim final rule provides one technical amendment and two clarifications to the Interim Final Rule issued in October and provides reporting and recordkeeping requirements related to the executive compensation and corporate governance provisions.  The Interim Final Rule now includes requirements of annual certifications from the CEO that the financial institution and its compensation committee have complied with the new and existing TARP executive compensation rules and that the compensation committee has reviewed senior executives' incentive compensation packages with the senior risk officers to ensure they do not encourage unnecessary risk taking.  

Click here for the Interim Final Rule, click here for the Treasury's notice to participating financial institutions, and click here for frequently asked questions.

A special purpose entity created by Chrysler Financial will receive a $1.5 billion Treasury Department loan through TARP's Automotive Industry Financing Program in order to finance the extension of new consumer auto loans.  Chrysler Holding will serve as a guarantor for certain covenants of Chrysler Financial, and the loan will be secured by the Treasury Department's senior secured interest in a pool of newly originated automotive loans.  The loan also requires Chrysler Financial to adhere to certain executive compensation and corporate governance requirements of the Emergency Economic Stabilization Act.  Interest on the five-year loan will accrue at an annual rate of one month LIBOR + 100 basis points during the first year, with the spread increasing to 150 basis points in years two through five.  Additionally, the new Chrysler Financial special purpose entity will issue warrants to the Treasury Department.  Click here for further details contained in the term sheet, and click here for today's press release.

The Treasury Department, the Federal Reserve and the FDIC have finalized terms of a guarantee agreement with Citigroup to cover the "possibility of unusually large losses on an asset pool of approximately $301 billion," which will remain on Citigroup's balance sheet.  The guarantee agreement, originally announced on November 23, 2008, provides protection for an asset pool which includes loans and securities backed by residential and commercial real estate, as well as other assets. Click here for today's press release, and click here for the term sheet released on November 23, 2008.

Bank of America will receive a new financial assistance package from the Treasury Department, the Federal Reserve and the FDIC.  Specifically, the Treasury Department and the FDIC will provide guarantees for a $118 billion asset pool of loans, securities back by residential and commercial real estate loans, and other assets, the majority of which Bank of America assumed during the Merrill Lynch acquisition.  In return, Bank of America will issue preferred shares to both the Treasury Department and the FDIC.  Additionally, the Federal Reserve has agreed to issue a non-recourse loan to Bank of America if needed.

The Treasury Department will also inject $20 billion in capital into Bank of America in exchange for preferred stock, an action taken through the Targeted Investment Program, which is part of TARP.  Lastly, the FDIC announced it will propose a Temporary Liquidity Guarantee Program rule change to extend the guarantees' maturity from three to ten years in cases where the debt is  backed  by collateral and the transaction aids new consumer lending.  Click here for the press release, and click here for the term sheet.

On January 14, 2009, the United States Department of Treasury (“Treasury”) issued its much anticipated Summary Term Sheet detailing the terms for participation in Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (“CPP”) by bank and bank holding companies that have elected to be taxed under Subchapter S of Chapter 1 of the U. S. Internal Revenue Code (the “Code”). Subchapter S banks and bank holding companies interested in participating in the CPP must file their applications by February 13, 2009. Similar to the private (non-Subchapter S) and public company programs, Treasury will determine eligibility and allocation for applicants after consultation with their appropriate federal banking agency. As of January 14, 2009, Treasury has invested a total $189 billion in 257 banks in 42 states and Puerto Rico. The largest investment was $25 billion and the smallest investment was $1 million.

The Treasury Department released today both a term sheet and answers to frequently asked questions of Subchapter S corporations applying to the Capital Purchase Program.  The term sheet provides for a qualified financial institution definition applicable to Subchapter S corporations.  The deadline for Subchapter S corporations to apply to the Capital Purchase Program is February 13, 2009.  Click here for the Treasury Department's term sheet, and click here for answers to frequently asked questions.

On January 9, 2009, Congressman Barney Frank introduced legislation entitled the “TARP Reform and Accountability Act of 2009” (the “Accountability Act”). The use of the word “accountability” speaks volumes regarding Congressman Frank’s view that financial institutions should now answer for the enduring economic problems. Washington’s favorite sport, searching for villains, has begun.

The Treasury Department released details of the most recent round of Capital Purchase Program transactions,  totaling $14.77 billion for 43 banks.  The Capital Purchase Program allows qualified financial institutions to receive a capital injection from the Treasury Department in return for preferred stock and warrants.  Today's report discloses investments ranging from approximately $1 million to $10 billion.  The Treasury Department's aggregate investments under the Capital Purchase Program now total $192 billion.  Click here for the Treasury Department's most recent Capital Purchase Program transactions, and click here for all Capital Purchase Program transactions to date.

The second half of TARP funds, the remaining $350 billion, has been requested on behalf of President-elect Barack Obama according to Interim Assistant Treasury Secretary Neel Kashkari in a speech this morning.  Also notable in Mr. Kashkari's speech is his report that the Capital Purchase Program currently has thousands of applicants seeking capital injections in return for offering the Treasury Department stock or warrants.  In a  separate speech, Federal Reserve Board Chairman Ben Bernanke said that more such capital injections may be required to stabilize the economy along with a host of other measures.  Chairman Bernanke pointedly supported a stimulus package but noted that a number of measures must work together including "a substantial expansion of guarantees for bank liabilities by the Federal Deposit Insurance Corporation" in order to strengthen the financial system.  Click here for Assistant Secretary Kashkari's speech and click here for Chairman Bernanke's speech.

Rep. Barney Frank, Chairman of the House Financial Services Committee, today issued an outline of a bill that would amend the TARP provisions of the Stabilization Act.  The bill, which Chairman Frank hopes to bring to the House floor by next week, would require Treasury “to develop a program, outside of the TARP, to stimulate demand for home purchases and clear inventory of properties.”  The proposed legislation would require the Treasury to develop its foreclosure mitigation plan by March 15 (for implementation by April 1) and condition the release of the final $350 billion of TARP funds on the use of at least $50 billion for foreclosure mitigation.  The bill also would require recipients to use TARP funds for lending and to agree to stronger limits on executive compensation.  Insured depository institutions also would be subject to new reporting, monitoring and accountably requirements.  The House Financial Services Committee has scheduled a hearing on the use of TARP funds for Tuesday, January 13.  Click here for the House Financial Services Committee's outline of the proposed bill, and click here for the entire bill. 

The Treasury Department released its fourth TARP tranche report to Congress today as required under the Emergency Economic Stabilization Act. Today's report covers all transactions for the Capital Purchase Program, the Automotive Industry Financing Program and the Targeted Investment Program since the last tranche report, submitted to Congress on December 2, 2008. The report notes that although the Treasury Department's total TARP commitment level has reached $266.9 billion, it has effectively allocated the first $350 billion under TARP. Allocations in excess of the commitment level represent undisbursed funds still subject to regulatory and shareholder approval. Click here for the report, and click here for the report's appendix.

Over the last 15 years, the relatively high valuations in banking, coupled with leverage limitations and other regulatory restrictions, discouraged private equity investments in financial institutions. The credit crunch and subsequent recession have marked a new era. The resulting decline in bank stock prices has sparked new interest in financials by private equity funds. The challenge is to make such investments while avoiding regulatory land mines.

Most private equity firms’ investments across industries have been made to acquire control of the target. In banking, however, most transactions involve the acquisition of a minority interest to avoid the ramifications of “control” of a financial institution. Set forth below are the regulatory issues that must be addressed if a company is in “control” of a financial institution, the definitions of control, and then some circumstances that have allowed ownership and influence without a finding of control for regulatory purposes.

The Federal Reserve Board has announced two changes to the Money Market Investor Funding Facility (MMIFF), which is designed to serve as a source of liquidity to money market mutual funds and other eligible investment vehicles.  Today's first change expands the set of institutions eligible to participate in the MMIFF, such as U.S. based securities-lending cash-collateral reinvestment funds, portfolios, and accounts.  The second change adjusts the MMIFF's economic parameters, including the minimum yield on assets eligible to be sold to the MMIFF.  Click here for the Federal Reserve Board's press release.  Click here for the MMIFF terms and conditions, and click here for frequently asked questions.

Treasury Secretary Henry M. Paulson today outlined his thoughts on the role of Government Sponsored Enterprises Fannie Mae and Freddie Mac in the nation's housing recovery. Speaking before the Economic Club of Washington, Treasury Secretary Paulson noted that the GSEs are providing a critical function of maintaining mortgage availability in the current market, but acknowledged that more may need to be done to clarify and simplify their structure and to increase their effectiveness. Secretary Paulson noted that policymakers ultimately will need to decide the role that government should play in supporting home ownership and that any restructuring of the GSEs should be designed to satisfy the following objectives: (1) there must be no ambiguity as to government backing (it must be explicit or non-existent), (2) there must be a clear means of managing the conflict between public support and private profit and (3) there must be strong regulatory oversight of the resulting institutions. Click here for the Treasury Secretary's entire remarks.

Today the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision jointly published new and revised "Interagency Questions and Answers Regarding Community Reinvestment."  The "Questions and Answers" interpret the agencies' Community Reinvestment Act regulations, encourage financial institutions to take steps to prevent mortgage foreclosure and otherwise provide guidance to financial institutions and the public.  Click here for the joint press release, and click here for the "Interagency Questions and Answers Regarding Community Reinvestment."

Today the Treasury Department released its second TARP report to Congress.  The report covers transactions made from December 1, 2008 through December 31, 2008, including actions taken under the Capital Purchase Program, the Asset Guarantee Program, the Targeted Investment Program, and the Automotive Industry Financing Program.  The Emergency Economic Stabilization Act requires the Treasury Department to provide Congress with detailed reports for actions taken through TARP.  Click here for today's report, and click here for the first report sent to Congress on December 5, 2008.

The Treasury Department has released details of a $15 billion investment in seven banks through TARP's Capital Purchase Program. To date the Treasury Department has committed to invest $177.5 billion in financial institutions in exchange for stock and warrants under the Capital Purchase Program. Click here for the Treasury Department's press release, and click here for the transaction details.

Today the Treasury Department released guidelines and a description for the Targeted Investment Program used for the Treasury Department's investment in Citigroup on November 23, 2008.  Although there is no deadline for participation in the Targeted Investment Program, and inclusion is on a case-by-case basis for Financial Institutions as defined in the Emergency Economic Stabilization Act, the guidelines do provide eligibility considerations for the Treasury Department. Those considerations include, but are not limited to, the extent to which destabilization of such a Financial Institution could threaten the viability of creditors and counterparties exposed to the Financial Institution. Also, like the Treasury Department's Capital Purchase Program, the Targeted Investment Program requires that the Treasury Department receive warrants for shares, or another form of consideration, in return for the investment. Click here for the Targeted Investment Program's details and click here for Hunton & Williams' prior posting on the Treasury Department's investment in Citigroup.
 
The Treasury Department also released a report today outlining to Congress how it is considering using of the Asset Guarantee Program, created under the Emergency Economic Stabilization Act, to fulfill the guarantee provisions of the Treasury Department's November, 23, 2008 agreement with Citigroup.  Under the Asset Guarantee Program the Treasury Department assumes a loss position on certain insured assets held by "systemically significant financial institutions", according to the Treasury Department.  However, the report notes to Congress the Asset Guarantee Program would be used with "extreme discretion," on a case-by-case basis, and it is "not anticipated that the program will be made widely available." Click here for the Treasury Department's press release, and click here for the full report.

The FDIC announced today it that its Board of Directors has approved a $13.9 billion sale of the banking operations of IndyMac Federal Bank, FSB to a thrift holding company controlled by IMB Management Holdings LP.  After IndyMac Federal's failure on July 11, 2008, the FDIC introduced a streamlined loan modification program for the bank. Continuation of the loan modification program is a condition to the FDIC's provision of any type of loss-sharing on the IndyMac Federal's assets.

Click here to read the FDIC's press release and click here to read the FDIC's fact sheet on the sale.