FDIC Approves Safe Harbor Protection Extension for Securitizations

Today the FDIC approved an extension of safe harbor protections for certain transactions involving the transfer of financial assets by a depository institution performing the transfer in a connection with a securitization or participation.  The move directly relates to changes made by the Financial Accounting Standards Board that went into effect on November 12, 2009.  Today's extension creates a safe harbor for certain types of transactions through September 30, 2010.

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FDIC Asset Sale Safe Harbor Proposal and Regulatory Capital Rule

On December 15, 2009 FDIC undertook a couple of rulemaking matters of importance to securitizations by regulated institutions.

1. FDIC Safe Harbor for Sales of Assets in Securitizations. In 2000, the FDIC adopted a legal isolation safe harbor providing that the FDIC would not use its contract repudiation powers to “unwind” or otherwise challenge the integrity of securitizations satisfying the criteria for treatment as sales under generally accepted accounting principles in the event of the insolvency or receivership of the sponsoring bank. Earlier this year, the Financial Standards Accounting Board adopted revised criteria for sales under GAAP (FAS 166 and 167), under which most securitizations would not qualify as sales for GAAP accounting purposes. If the FDIC were not to respect the integrity of such securitizations, the rating agencies would not be able to provide the requisite ratings that make securitizations by banks viable.

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FDIC Proposed Rule Would Require Banks to Prepay Quarterly Risk Assessments Through 2012

A rule proposed today by the the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") would require banks to prepay their estimated quarterly risk-based assessments beginning with the fourth quarter of 2009 through 2012. The prepaid assessments would total approximately $45 billion, according to today's press release.  Additionally, the FDIC voted to adopt an increase in the assessment rate starting January 1, 2001 by a uniform three-basis points.  Today's proposed rule is designed to bolster the Deposit Insurance Fund. 

Click here for today's press release, click here for the FDIC's Notice of Proposed Rulemaking, and click here for the Deposit Insurance Fund Restoration Plan. 

Retreat but Not Reversal by FDIC on Private Equity

On August 26, 2009, the Federal Deposit Insurance Corporation (“FDIC”) issued its Final Statement of Policy on Qualifications for Failed Bank Acquisitions (“Final Rules”). The Final Rules signal a retreat, but not a reversal, of the disparate treatment afforded private equity backed bids on failed bank transactions, as compared to bids from strategic acquirors.

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FDIC Approves Policy on the Acquisition of Failed Depository Institutions

Today the Federal Deposit Insurance Corporation (FDIC) approved a final statement of policy on the acquisition of failed insured depository institutions.  The FDIC's press release states that the "policy statement provides guidance to investors interested in acquiring or investing in the deposit liabilities of failed banks or thrifts about the standards they will be expected to meet in order to qualify to bid on a failed institution."

Click here for today's press release, and click here for the actual policy statement. 

Public-Private Investment Program Fund Managers Announced

Nine fund managers were named for the Legacy Securities Public-Private Investment Program (commonly referred to as "PPIP"), according to today's joint press release by the Treasury Department, the Federal Reserve, and Federal Deposit Insurance Corporation.  PPIP is "initially" designed to "participate in the market for commercial mortgage-backed securities and non-agency residential mortgage-backed securities," by enabling the Treasury Department to "invest up to $30 billion of equity and debt in PPIFs [PPIP funds] established with private sector fund managers and private investors for the purpose of purchasing legacy securities," according to today's press release.  The press release further details both how PPIP works and the qualification criteria for the securities. 

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FDIC Proposes Policy Statement on Qualifications for Failed Bank Acquisitions by Private Investors

On July 2, 2009, the Federal Deposit Insurance Corporation (FDIC) issued its proposed Statement of Policy on Qualifications for Failed Bank Acquisitions (Policy Statement). The Policy Statement is designed to provide guidance to private investors who are interested in acquiring failed depository institutions with financial assistance from the FDIC. The Policy Statement acknowledges the interest of private investors in failed depository institutions, but also expresses the FDIC’s stated concern that some private investment structures present potential safety and soundness issues and risks to the deposit insurance fund (DIF), as well as other important issues. Public comments on the proposal are due in 30 days.

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Regulatory Developments in Banking

Stock Buybacks, Going-private Transactions and Other Opportunities
Throughout this client alert I stress the need for margin-of-error capital. Nonetheless, financial institutions with capital to spare (or even borrowing capacity) should consider the opportunities associated with stock buybacks. Bank stock currently is trading at levels that we have not seen in a generation. Shareholders have shown a willingness to accept tender offers at current pricing. Such offers provide an opportunity to monetize shares in privately held companies. Financial institutions may also wish to consider mandatory transactions in order to effect Subchapter S elections or going-private transactions.  This environment can provide dramatic opportunities for tax savings (Subchapter S) or accounting, legal and compliance cost savings (going-private transactions at a reasonable capital cost).

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Bank "Stress-Test" Results Released Thursday, May 7, 2009 at 5 p.m. ET

The results of the Supervisory Capital Assessment Program, commonly referred to as "stress tests," for 19 U.S. bank holding companies will be released Thursday, May 7, 2009 at 5 p.m. ET, according to a joint statement by Treasury Department Secretary Timothy Geithner, Federal Reserve Board Chairman Ben Bernanke, Federal Deposit Insurance Corporation Chairwoman Sheila Bair, and Comptroller of the Currency John Dugan.  The  Supervisory Capital Assessment Program examined all U.S. bank holding companies with year-end 2008 assets exceeding $100 billion.  Today's joint statement notes that if any of the examined U.S. bank holding companies  needs to augment its capital buffer, it  will have until June 8, 2009 to develop a capital plan and until November 9, 2009 to implement that capital plan.

Click here for today's joint statement.

Navigating the Public-Private Partnership Investment Program

On March 23, 2009 the U.S. Department of Treasury (“Treasury”), in conjunction with the Federal Deposit Insurance Company (the “FDIC”) and the Federal Reserve (the “Fed”), announced the latest piece of its Financial Stability Plan: the Public-Private Partnership Investment Program for Legacy Assets (the “Program”). The Program consists of two separate plans, addressing two distinct asset groups: the Legacy Loan Program and the Legacy Securities Program. Treasury explained that the exact requirements and structure of the Loan Program will be subject to notice and comment rulemaking, but announced no timetable. On the other hand, the Securities Program requires any interested asset manager to submit by April 10th, an extensive application to serve as a Fund Manager under the Securities Program. Treasury is expected to select five Fund Managers by May 1st. In addition, Treasury expanded the Term Asset-Backed Securities Loan Facility (“TALF”) program to include Legacy Securities.

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FDIC Increases Previously Announced Changes in Assessment Rates

The FDIC has revised its October 7, 2008 Notice of Proposed Rulemaking (“NPR”) to increase deposit assessment rates for all categories of institutions in a Final Rule adopted on February 27, 2009 (the “Final Rule”). The anticipated deposit assessment rate increase has grown materially and has attracted significantly more attention and outrage due to its concurrent release with an interim rule proposing a one-time 20 basis point emergency special assessment. The emergency assessment will be imposed on deposits as of June 30, 2009, which assessment will be collected on September 30, 2009, concurrent with the first assessment collected under the Final Rule. 


Prompt Corrective Action

For over a decade, up through 2007, bank failures were few and far between. There were more than enough buyers for even troubled banks. A couple of years ago, I represented a CAMELS-5 rated bank that was sold when the FDIC Division of Resolutions was in the process of putting together bid packages. Even that bank sold for two times book value. Now the environment is different. The market for troubled banks is much more limited. Bailout capital is scarce and regulatory pressure is more extreme. As a result, the number of bank failures in this “crisis” seems to be heading inexorably toward 100. Bankers need to understand what the regulatory ramifications are if the bank begins to experience problems.


Interest Rate Restrictions on Institutions That Are Less Than Well-Capitalized

On February 3, 2009, the FDIC published a Notice of Proposed Rulemaking (“Proposed Rule”) to implement new interest rate restrictions on depository institutions that are not well-capitalized. The Proposed Rule would limit the interest rate paid by such institutions to a national rate, as derived from the interest rate average of all institutions. If an institution could provide evidence that its local rate is higher, it would be permitted to offer the higher local rate plus 75 basis points. However, the ability of an institution to succeed in establishing evidence of a higher local rate appears to be very difficult under the Proposed Rule.

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Capital Assistance Program Stress Tests Start February 25

Financial institutions with assets in excess of $100 billion seeking government assistance will undergo "stress tests" starting February 25, according to a joint statement released today by the Treasury Department, the FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve.  "Stress tests" are defined as "a forward looking assessment of what banks need to keep lending even through a severe economic downturn" by the Financial Stability Plan's Capital Assistance Program previously announced February 10, 2009.  The Capital Assistance Program creates a "capital buffer" by giving financial institutions a preferred security investment from the Treasury Department in convertible securities which can be converted into common equity if needed due to a "worse-than-expected economic environment."  Click here for today's joint statement.  

FDIC Issues Final Rule on Treatment of Sweep Accounts in Bank Failures and Disclosure Requirements

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.

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U.S. Government Finalizes Terms of Citigroup Guarantee

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.

U.S. Government Provides Assistance Package to Bank of America

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.

Foreclosure Prevention Sought Through Community Reinvestment Act

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."

IndyMac Federal's Sale Approved by FDIC's Board

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.

Congressional TARP Panel Issues Report and FDIC Reiterates Deposit Insurance Pledge

The Congressional Oversight Panel issued its first report to Congress today on the Treasury Department's use of funds under TARP (click here for the full report).  Among the report's questions is whether the Treasury Department has received the same terms under the Capital Purchase Program when investing in financial institutions as Warren Buffett and the Abu Dhabi Investment Authority.  The Panel, created when Congress passed the Emergency Economic Stabilization Act, testified before the House Financial Services Committee today along with Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari, who focused his remarks on oversight and measuring TARP's results (click here for Mr. Kashkari's remarks).
Meanwhile, the FDIC reiterated its guarantee of Federal Deposit Insurance for accounts in federally insured financial institutions up to $250,000 per account.  The previously raised limit of $250,000 does not return to $100,000 until January 1, 2010.  The FDIC issued its assurance after a CNBC/Portfolio.com survey showed that about a third of those questioned about their confidence level as to the safety of money held in federally insured bank accounts answered only somewhat confident, or not confident (click here for the FDIC's press release).

Holding Company Participation in FDIC Guarantee Program

The FDIC altered significantly the specifications for holding company participation in the Temporary Liquidity Guarantee Program. The main impetus for the change was the strong support the Federal Reserve Board gave to expanding the FDIC guarantee of holding company leverage as a means to increase bank liquidity.

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Hunton & Williams Represents First "Shelf Charter" Banks

With the number of banks failing in the U.S. rising sharply this year, the Federal Deposit Insurance Corporation (FDIC) is once again building its approved “bidder’s list.” This list is the tool used by the FDIC to contact potential buyers when a bank will soon fail. If your name is not on the list, you probably won’t be contacted by the FDIC to bid on a failed bank.

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FDIC Expands Bidder List for Troubled Institutions

The FDIC is expanding the pool of those qualified to bid on the deposits and assets of failing depository institutions.  Previously only institutions with a bank charter could participate, but today that standard has been modified.  Click here for more information on the qualification process.

FDIC Implements Liquidity Guarantee Program to Improve Credit Markets

The FDIC has taken the final step necessary to implement the Temporary Liquidity Guarantee Program in order to bolster bank lending.  The Program is a two pronged approach consisting of both a debt guarantee program (a guarantee of newly issued senior unsecured debt of banks, thrifts and certain holding companies) and a transaction account guarantee program (providing coverage for non-interest bearing deposit transaction accounts such as payroll accounts).  Click here for all the details.

FDIC Issues Final Rule Under Temporary Liquidity Guarantee Program

The FDIC issued its final rule on the Temporary Liquidity Guarantee Program on Friday, November 21, 2008.  Details follow...

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FDIC Provides IndyMac Loan Modification Model Information

The FDIC has provided information related to the terms of its loan modification program plan at IndyMac Federal Bank. The FDIC "Mod in a Box" Program Guide provides a framework and tools to assist servicers and investors in developing similar loan modification programs, including workout guidelines and sample documents to determine modification parameters and loan modification reporting.  Click here for all of the documents and tools on the FDIC website.

FDIC Proposes Loss Sharing Plan to Promote Mortgage Modifications

The FDIC's proposed mortgage modification plan targets both home owners and mortgage servicers.  Mortgage servicers would be paid $1,000 per modified loan and, if the modified loan later defaults, the FDIC would cover up to 50% of the losses.   The modification plan only applies to mortgages for owner-occupied properties, but those home owners could have their mortgage payments modified to 31% of their monthly income. Click here for all the details of the FDIC's new proposal.  

FDIC Closed-Bank Rules Yield Surprises for Sweep Accounts

In July 2008, the FDIC published an interim rule that generally was effective upon publication. This rule primarily addressed the treatment of sweep accounts in connection with bank failures.

Just a few short months ago it seemed that the FDIC was confident that it could address the number of problem banks without any rash of bank failures. Instead, economic conditions deteriorated. As a result, the U.S. Department of the Treasury promulgated the capital purchase program under the Troubled Assets Relief Program and the FDIC Temporary Liquidity Guarantee Program. What has seemed to escape notice by many bankers is the interrelationship between the FDIC’s process for closure of a failed bank and the Liquidity Guarantee Program.

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FDIC Worksheet

When the FDIC is concerned with the asset quality of an applicant under the Capital Purchase Program, it is asking the applicant to complete the attached spreadsheet indicating a bank's current and pro forma condition on certain key ratios.  Click here to view.

FDIC Extends Opt-Out Window for the Temporary Liquidity Guarantee Program

The Federal Deposit Insurance Corporation ("FDIC") has extended the opt-out deadline for the Temporary Liquidity Guarantee Program (the "Program") from November 12, 2008 to December 5, 2008.  Program eligible institutions remaining in the Program after December 5, 2008 must pay related assessments.  Click here for further details on the Program.