TARP Initiative for Small Businesses Detailed

Today the Obama Administration detailed revised terms for a program designed to foster lending to small businesses in underserved communities through the Troubled Asset Relief Program (TARP).  Originally announced in October 2009, the program provided lower-cost capital to Community Development Financial Institutions (CDFIs), such as community banks, thrifts and credit unions, which then provide loans to small businesses in underserved communities.  The newly announced rules increase the amount of capital available to CDFIs, from 2 percent of risk weighted assets to 5 percent, and expands the number of institutions who qualify as a CDFI.  

Click here for the Department of Treasury's key terms and enhancements to the TARP initiative.

TARP Executive Compensation Special Master Issues First Rulings

Special Master for TARP Executive Compensation Kenneth R. Feinberg announced his compensation package determinations for top executives at firms receiving significant TARP assistance. The announcement impacts the five most senior executive officers and the next twenty most highly compensated employees at each of the following: American International Group, Inc. (AIG); Citigroup Inc.; Bank of America Corporation; Chrysler Group, LLC; General Motors Company; General Motors Acceptance Corporation Financial Services (GMAC) and Chrysler Financial.

Click here for the press release detailing the determinations, and click here for the letters sent by the Treasury Department to each of the firms.

Treasury Requires TARP Recipients to Adopt Excessive or Luxury Expenditures Policy

On June 15, 2009, the U.S. Department of the Treasury (“Treasury”) announced an interim final rule regarding standards for executive compensation and corporate governance practices for those entities receiving financial assistance under the Troubled Asset Relief Program (“TARP”). Although the interim final rule contains many new standards for TARP recipients, the focus of this article is the requirement that TARP recipients adopt an “excessive or luxury expenditures policy.”

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It's Not Too Late for TARP -- What To Do Now That The Capital Purchase Program Has Reopened?

In October 2008, we prepared an article entitled “A Look at TARP — What to do now?” Since the date of that article, more than 600 financial institutions, ranging in size from several billion dollars down to a few million dollars, have elected to participate in the Capital Purchase Program (“CPP”) established under the Department of the Treasury’s (the “Treasury”) Troubled Asset Relief Program (“TARP”). The Treasury has issued terms sheets for publicly traded financial institutions, privately held financial institutions and Subchapter S financial institutions. Since October 2008, several hundred financial institutions have elected to participate in the CPP.

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Treasury Dept. Names Special Master for TARP Executive Compensation

The Treasury Department published an interim final rule today providing further guidance on the executive compensation and corporate governance provisions applicable to financial institutions receiving TARP funds.  As part of today's rule the Treasury Department announced the appointment of  Kenneth Feinberg as the Special Master for TARP Executive Compensation.  According to today's press release, Mr. Feinberg "will review payments and compensation plans for the executives and the 100 most highly compensated employees of TARP recipients that have received exceptional assistance to ensure that compensation is structured in a way that gives those employees incentives to maximize long-term shareholder value and protect taxpayer interests."   

For the rest of the rules published today, either click here for the Treasury Department's press release, or click here for the published interim final rule in its entirety.

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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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Federal Reserve Outlines TARP Repayment Rules

The Federal Reserve Board outlined the criteria it will use to evaluate applications to redeem U.S. Treasury capital from the 19 U.S. bank holding companies that participated in the Supervisory Capital Assessment Program (referred to as "SCAP", or commonly called the "stress tests"), according to today's press release.  The  Supervisory Capital Assessment Program examined all U.S. bank holding companies with year-end 2008 assets exceeding $100 billion.  The federal government had previously given U.S. bank holding companies in need of capital buffer augmentation until June 8, 2009 to develop a capital plan and until November 9, 2009 to implement that capital plan.  Today's press release notes that redemption approvals for an initial set of U.S. bank holding companies are expected to be announced during the week of June 8, 2009. 

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Public-Private Investment Program Oversight Legislation Enacted

On May 19, 2009, the House of Representatives approved S.896 (the “Helping Families Save Their Homes Act of 2009”) by a margin of 367–54 and, on May 20, 2009, President Obama signed the bill into law. The bill includes legislation known as the “Public-Private Investment Program Improvement and Oversight Act of 2009” (the “Act”), which will impose significant duties on fund managers under the Public-Private Investment Program (“PPIP”) announced by the U.S. Department of the Treasury (“Treasury”). These provisions may limit managers’ interest in participating in the PPIP. A copy of S.896 is available here.

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Public-Private Investment Program Oversight Legislation Passed by Senate

On May 6, 2009, the Senate approved S. 896, the “Helping Families Save Their Homes Act of 2009” by a margin of 95–1. The legislation includes amendments by Senators Barbara Boxer (D-CA) and John Ensign (R-NV) (collectively, the “Amendments”) to provide additional oversight over the Public-Private Investment Program (“PPIP”) announced by the U.S. Department of the Treasury (“Treasury”). The Amendments impose significant duties on PPIP fund managers, including an obligation to acknowledge fiduciary duties to investors, which may limit managers’ interest in participating in the PPIP. A copy of S.896 is available here.

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Business Tax Provisions Under the Stimulus Bill

The American Recovery and Reinvestment Act of 2009 (the “Act”) was signed into law by President Barack Obama on February 17, 2009. Known informally as the “Stimulus Bill,” the Act is intended to preserve and create jobs, stimulate investment in infrastructure and assist the unemployed. The main tax provisions of the Act that are expected to have the greatest impact on corporations and closely held businesses, excluding the energy incentives, are summarized below.

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The State of Banking 2009

We have issued literally dozens of client alerts since the crisis in banking became acute toward the middle and fall of 2008. Despite the torrent of information that we have provided to our clients, there are a number of issues that have flown underneath the radar or which need further defining.  I have attempted to tackle certain of these issues below.

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Will TALF's New Terms and Conditions Stimulate Securitizations?

This past Friday, February 6, 2009, the Federal Reserve Board released the terms and conditions of the Term Asset-Backed Securities Loan Facility (TALF), which was first announced on November 25, 2008. Through the TALF, the Fed intends to increase credit availability for consumers and small businesses, generate liquidity for banks, stimulate an otherwise anemic asset-backed securities (ABS) market and reduce interest rate spreads on AAA-rated tranches to more normal levels. Another benefit of the TALF is that it will assist entities that have received TARP funds to meet political and regulatory pressures to demonstrate new lending even if they are struggling with liquidity concerns.

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Regulatory Consequences for Banks Participating in the TARP CPP

On January 3, 2009, John F. Bovenzi, deputy to the chairman of the FDIC, in an appearance before the Committee on Financial Services of the U.S. House of Representatives, stated that the FDIC will measure and assess in examination ratings how banks that have received government assistance have utilized these funds to meet the purposes of the U.S. Department of the Treasury’s Capital Purchase Program (CPP), implemented as part of the Emergency Economic Stabilization Act’s (EESA) Troubled Asset Relief Program (TARP).

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Treasury Department Posts Completed TARP Contracts

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.

Executive Compensation and Corporate Governance Interim Final Rule for Issued

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.

$1.5 Billion TARP Loan Made to Chrysler Financial

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.

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.

TARP Capital Purchase Program -- Subchapter S Corporation 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.

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Loan Now or Else: Congress Proposes to "Fix" TARP

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.

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Second Half of TARP Funds Requested, Federal Reserve Supports Stimulus Package

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.

Chairman Frank Seeks to Amend TARP

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. 

Treasury Department Sends TARP Tranche Report to Congress

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.

Treasury Department Releases Congressional TARP Report

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.

Treasury Department Responds to Congressional Oversight Panel Report

The Treasury Department released today responses to questions raised by the Congressional Oversight Panel's first report to Congress on December 10, 2008 regarding the implementation of the Emergency Economic Stabilization Act. The Congressional Oversight Panel, created when Congress passed the Emergency Economic Stabilization Act, is charged with reporting to Congress on the use of TARP funds. The Treasury Department responds to questions relating to, among other things, their strategy to stabilize financial markets and its decisions regarding which institutions receive TARP funds. Click here for the Treasury Department's answers, and click here for Hunton & Williams' prior posting on the Congressional Oversight Panel's report on December 10, 2008.

Treasury Invests in GMAC and Lends to GM

The Treasury Department announced that it will purchase $5 billion in senior preferred equity from GMAC as part of a broader program to assist the domestic automotive industry.  The Treasury requires that GMAC comply with the executive compensation and corporate governance requirements of the Stabilization Act as a condition to the Treasury's investment.
 
Additionally, the Treasury has agreed to lend up to $1 billion to General Motors so that GM can participate in a rights offering in support of GMAC's reorganization as a bank holding company. This commitment is in addition to the assistance previously announced for GM on December 19. The level of funding under this facility will be depend on the level of current investor participation in the rights offering, and the loan is exchangeable, at the Treasury's option, for GMAC equity interests acquired by GM in the rights offering.  The preferred stock purchase and the loan to support GMAC's rights offering are part of an auto industry-focused TARP program that will include the $17.4 billion in assistance for domestic automakers announced earlier this month.

$170 Billion Spent Through the Capital Purchase Program, According to Latest Report

The Treasury Department has released the latest transaction report for the Capital Purchase Program under TARP. Over $170 billion has now been spent providing financial institutions liquidity in exchange for shares held by the Treasury Department since the first purchases on October 28, 2008.  The report provides information on transactions made by the Treasury Department on December 19, 2008.  The latest purchases range from $967 million for shares in Synovus Financial Corp., in Columbus, Georgia to $1.8 million for shares in Monadnock Bancorp, Inc. in Peterborough, New Hampshire, according to today's Treasury Department report.
 
Click here for the latest Capital Purchase Program transaction report.

TARP Funds Used For GM and Chrysler

The Treasury Department announced today that by creating a $17.4 billion loan program for both Chrysler and General Motors it had allocated the first half of the $700 billion TARP fund.  A formal request must now be made to Congress to access the remaining $350 billion in TARP funds.  Click here to read the Treasury Department's term sheet for Chrysler, and click here for the General Motors' term sheet.  To read all of Treasury Secretary Paulson statement on the use of TARP funds to stabilize the automotive industry, click here.

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).

Treasury Department Sends TARP Report to Congress

Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari today addressed the TARP oversight concerns outlined by the GAO last week. Today's speech addressed the Treasury Department's actions taken since the inception of TARP to bring the program and program participants into compliance (Click here to read the entire speech). Specifically, the Emergency Economic Stabilization Act requires the Treasury Department to provide Congress with a detailed report within 60 days of the Treasury Department's first action under TARP. The report was delivered to Congress on Friday, December 5, 2008, and you can click here to read it. The report includes a complete list of transactions under the Capital Purchase Program, which provides financial institutions liquidity in exchange for shares held by the Treasury Department, from October 28, 2008 through November 25, 2008.

Click here for Hunton & William's prior posting on the GAO Report.

GAO Report Calls for More TARP Safeguards

The GAO has released a report calling for more TARP oversight.  Although the GAO acknowledged that TARP is less than 60 days old, it singled out the Capital Purchase Program as lacking the necessary mechanisms to monitor compliance on such issues as executive compensation and dividend payments.  The GAO released both a full report and a two page summary, which contains a useful timeline detailing key Treasury activities related to TARP.  See below for links to both the GAO summary, including the timeline, and the full report. 

GAO TARP Summary/Timeline
GAO Full TARP Report

TARP Capital Purchase Program -- Term Sheet for Privately Held Companies

On November 17, 2008, the United States Department of the Treasury (“Treasury”) issued its much-anticipated Summary Term Sheet detailing the terms for participation by nonpublicly traded banks and bank holding companies in the Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (“CPP”). In addition, the Treasury also issued a related Private Bank Program Q&A (“Q&A”). Privately held banks and bank holding companies interested in participating in the CPP must file their applications by December 8, 2008. The Treasury will determine eligibility and allocation for applicants after consultation with their appropriate federal banking agency.

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TARP Continues to Focus on Capital Purchase Program Rather than Asset Purchases

The Treasury Department announced today the government's $700 billion economic rescue package will continue to focus on capital purchase programs in the near term, rather than buying and selling distressed assets, which was the plan's original aim.  The Treasury Department revealed that it is considering both broadening the Capital Purchase Program to include smaller specialty finance firms and to require newcomers to the program to raise matching funds.  For further details click here to read Treasury Secretary Henry Paulson's entire statement.
 
Meanwhile, financial regulators released an interagency statement encouraging lenders to meet the needs of creditworthy borrowers, both business and consumers.  The interagency statement warned against tightening underwriting standards "excessively."  Click here for the entire statement.

House Financial Services Committee Schedules Oversight Hearings to Examine the Emergency Economic Stabilization Act's Troubled Asset Relief Program

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.

Treasury Department Releases Amount To Be Invested In Bank Capital Purchases - Which Banks And How Much

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.

A Look at TARP -- What to Do Now

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.

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