11/19/08

Client Alert: Financial Crisis Update 6

Related Practices

Treasury Department Updates

On Monday, November 17, 2008, the Treasury Department issued a term sheet and FAQ for non-public institution participation in the Capital Purchase Program (the “CPP”).  Applications must be filed by December 8, 2008.  This program is not available to S-Corporations or mutual depository institutions; a program for them is still under consideration.

The term sheet and FAQ can be found on the Treasury Department website: http://www.treas.gov/press/releases/hp1277.htm

Eligible Institutions

Any non-public bank holding company, savings and loan holding company, and any U.S. non-public stock bank or savings association without a holding company that is not publicly traded is eligible to apply for participation.  A company is considered to be “public” or “publicly traded” if its securities are traded on a national securities exchange and it is required to file periodic reports with the Securities and Exchange Commission or its primary federal bank regulator.

Key Differences for Non-Public Institutions

Many of the terms of the CPP for non-public institutions are identical to the terms previously issued for public institutions, including terms regarding size of investments (1% to 3% of risk-weighted assets), preferred term dividends (5% for the first five years and 9% thereafter), redemption provisions and executive compensation requirements.  The application is subject to a condensed timeline, much like the application for public institutions.  The following are key differences in the CPP requirements as applied to non-public institutions:

Policy Shift: From TARP to CPP

On November 12, 2008, Secretary Paulson announced the Troubled Asset Relief Program would not be implemented as originally imagined.  Paulson’s statement was a public recognition of the shift from the TARP to the Capital Purchase Program, a shift that occurred in October when the CPP was announced.

This statement likely came in response to criticism about the use of CPP funds, specifically, participating institutions’ use of Treasury capital injections to purchase healthy banks.  In his statement, Paulson encouraged banks to continue lending, but as of now, the Treasury has not created any penalties regarding how the funds must be used.  Paulson also said the Treasury Department was examining extending the program to non-bank financial institutions not eligible for the current capital program. 

The Treasury Department has not announced how the remaining funds will be used, but  Paulson suggested Treasury may retain the remaining $60 billion for emergencies.  Federal Deposit Insurance Corporation has proposed a foreclosure mitigation plan, but Paulson stated that the Treasury would rather invest the money, and not spend it outright.

Senate Majority Leader Harry Reid plans to introduce legislation contributing aid to the auto industry, but it is unlikely the bill will pass before Congress adjourns for the year.  Paulson has already said that the remaining TARP money will not be spent on an automaker bailout and reaffirmed his stance in the Tuesday hearings before the House Financial Services Committee.

This communication is for general information purposes only and does not constitute a full legal analysis of the subject matter discussed herein. The information in this email should not be relied upon as specific legal advice.