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TLGP Updated FAQ

TLGP Updated FAQ

December 3, 2008

Authored by: Robert Klingler

On December 2, 2008, the FDIC added several questions and answers to its TLGP FAQ.  We have highlighted some of these clarifications below.

  • Credit unions are not eligible to participate in any aspect of the TLGP.
  • Fed funds purchased can be covered under the Debt Guarantee Program, so long as the term of the debt exceeds 30 days.
  • CDs owed to an insured depository instutiton through the CDARS network are not considered senior unsecured debt, and therefore not eligible to be guaranteed.  Under the Debt Guarantee Program, certificates of deposit owed to an insured depository instituion are considered senior unsecured debt (and eligible for an FDIC guarantee) only if they are owed to the institution solely in that bank’s own capacity and not as an agent.
  • Negotiable (or transferable) CDs are excluded from the definition of senior unsecured debt for purposes of the Debt Guarantee Program.
  • The FDIC will calculate the 2 percent of liabilities debt guarantee limit using Call Report Schedule RC, Item 21 (total liabilities).
  • Interbank CDs will not be assessed under the Debt Guarantee Program to the extent the CDs are otherwise insured on the date the CD is issued.  Whether a CD is otherwise insured will be determined by first applying deposit insurance to all existing deposits owed to the holder of the CD in the same right and capacity.  Institutions will be required to provide the FDIC with a good faith estimate of the amount of interbank CDs that are uninsured.
  • The Fee for the Debt Guarantee Program is based on the amount and type of debt issued.  If a participating entity opts into the program, but never issues senior unsecured debt, no fee will be assessed.
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Treasury and the Federal Reserve Announce the Term Asset-Backed Securities Loan Facility

On November 25, 2008, Treasury and the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (“TALF”).  The intent of TALF is to assist the credit markets in meeting the needs of consumers and small businesses by facilitating the issuance of, and improving the market for, asset-backed securities (“ABS”).  To fulfill this intent, the Federal Reserve Bank of New York (“FRBNY”) will provide up to $200 billion for non-recourse loans that are fully secured by eligible ABS.  Treasury will use funds from TARP to provide $20 billion in credit protection to the FRBNY.

Collateral eligible for a TALF loan includes dollar-denominated, ABS that not only must receive the highest possible long-term investment rating from at least two nationally recognized ratings agencies but also cannot be rated by any rating agency below the highest possible long-term rating.  Newly or recently originated auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration must comprise all or substantially all of the credit exposure underlying the ABS. The underlying credit exposure cannot include exposures that are themselves cash or synthetic ABS.

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FDIC Expands Bidder List for Troubled Institutions

On November 26, 2008, the FDIC issued a press release outlining a new plan to allow parties that do not have a bank charter to bid on failing institutions.  We will keep you up to date as additional details emerge on this new plan.  Below is the complete text of the FDIC’s press release.

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Impact of Latest Tax Rules on Bank M&A Activity

One of the consequences of the TARP Capital program is that some banks will use some of the capital infusion to acquire other banks.  We believe that the “winners” in the TARP race will also attract additional private capital as investors decide who the long-term survivors are.  The Internal Revenue Service recently released two notices intended to provide relief to banks and other financial institutions that are looking to raise capital from the tax rules limiting the use of losses after there has been an ownership change in the stock of a corporation.  We believe that once it is widely understood by banks it will add momentum to the merger activity.

Generally, a corporation that has a taxable loss (i.e., tax deductions in excess of taxable income and gains) for federal income tax purposes during a taxable year generally may carry that loss back to each of the two (2) preceding years (to recoup federal income taxes paid in those years) and then forward to each of the following twenty (20) taxable years.  There are special rules, however, that limit the use of a tax loss (commonly referred to as a net operating loss or “NOL”) carryforward that arose prior to the time when the corporation underwent an ownership change with respect to its stock.

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Round 3 of TARP Capital Infusion

Round 3 of TARP Capital Infusion

November 25, 2008

Authored by: Robert Klingler

On November 25, 2008, the Treasury announced the completion of the third round of TARP Capital infusions.  The Treasury purchased a total of $2.9 billion in preferred stock from 23 financial institutions on Friday, November 21, and has now invested a total of $161.5 billion under the $250 billion TARP Capital program.

Consistent with the guidance previously provided by the Treasury, all 23 financial institutions are listed on a national securities exchange.

The largest investment in the third round was $525 million with Associated Banc-Corp out of Green Bay, Wisconsin, while the smallest was $11.4 million with First Community Corporation out of Lexington, SC.

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New Proxy Statement Guidance

New Proxy Statement Guidance

November 25, 2008

Authored by: Robert Klingler

On November 24, 2008, the SEC and RiskMetrics Group (previously ISS) each published new guidance for public companies seeking authorization of blank check preferred stock.

SEC Guidance

The SEC Guidance is based on the staff’s review of a number of preliminary proxy statements filed by institutions seeking to participate in the TARP Capital program.  (We have provided a list of a number of such proxy statements.)  The SEC guidance is designed to aid financial institutions in preparing proxy statements and provides actual comments the staff has issued in its filing reviews.  For those that have not yet filed, a close review of these comments may reduce the risk of comments in the preliminary proxy process.

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Another Day, Another $20 Billion

November 25, 2008

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Another Day, Another $20 Billion

November 25, 2008

Authored by: Robert Klingler

On November 25, 2008, the Treasury announced it will allocate $20 billion under the Troubled Asset Relief Program (TARP) to back the Federal Reserve Bank of New York’s new lending facility for consumer asset-backed securities.  The Federal Reserve Bank of New York is creating this Term Asset-Backed Securities Loan Facility (TALF) to assist the credit markets in accommodating the credit needs of consumers and small business by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally.  Our summary of the TALF term sheet is available here.

When combined with the previously announced TARP programs, the Treasury has $15 billion left under TARP that it can invest or otherwise use without Congressional approval (in addition to the amounts that remain available under the TARP Capital Purchase Program).

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Public vs. Private, Round 2

Public vs. Private, Round 2

November 24, 2008

Authored by: Robert Klingler

As we’ve previously noted here, here and here, we’re not big fans of the Treasury’s definition of what constitutes a publicly traded company under the TARP Capital program.  The Treasury’s definition provides two tests, one of which is a subset of the other, and doesn’t specify whether both tests or either test must be met.

Non-Exchange-Listed Companies = Private

While speaking to an official with the Federal Reserve Bank of Atlanta today, we were told that: (i) both tests have to be met; (ii) the Over-the-Counter Bulletin Board and Pinksheets were NOT considered “national exchanges,” and therefore companies listed on such would be considered private; and (iii) they believe that all applications filed by companies which have asserted public status with an Over-the-Counter Bulletin Board or Pinksheets listing have been sent back to be reconsidered as private companies.

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Nuggets from the Second Tranche Report to Congress

November 24, 2008

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On November 24, 2008, the Treasury published its Second Tranche Report to Congress, for the period through November 14.  The appendices to the report are available here.  These reports are required under Section 105(b) of the Emergency Economic Stabilization Act of 2008, and are published on the Treasury’s website.

The Report confirms that the purchase of $40 billion in preferred shares from AIG was under the Systemically Significant Failing Institutions Program (SSFI) rather than the TARP Capital Purchase Program (TARP Capital).  The total committed under the TARP Capital program was $158.5 billion as of November 14, 2008.  This confirms our previous analysis.

The Report states that all commitments thus far under the TARP Capital program have been with financial institutions whose stock is traded on national securities exchanges.  As we’ve previously discussed, this is not true, as one of the recipients of the November 14 TARP Capital infusions is traded on the Over-the-Counter Bulletin Board.

The Report indicates that Treasury has established a streamlined evaluation procedure that has resulted in the federal banking agencies using a standardized process to review all applications to ensure consistency.  Treasury states that gives considerable weight to the recommendations of the federal banking agencies.

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Happy Thanksgiving Week

November 23, 2008

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Happy Thanksgiving Week

November 23, 2008

Authored by: Bryan Cave

First, a couple new jokes:

Q. What giant beasts are currently stalking the financial markets?
A. TARPosaurus and T-Reas.

Q. What is their favorite meal?
A. Lame duck.

Q. What’s the next car coming off the U.S. assembly line?
A. The new GMC TARP…gets one mile per 25 billion gallons.

And just in time for Thanksgiving—a simple potluck dish that’s easy to make and feeds billions.

TARP Casserole

  1. Mix 1% to 3% of everything you own in a large bowl.
  2. Sift contents through regulatory strainer.
  3. Deduct up to 500,000 cups of executive compensation.
  4. Whip thousands of bankers, lawyers and analysts into a frenzy and blend in.
  5. Garnish with shredded cash.
  6. Bake at 250 billion degrees to desired degree of doneness.

Makes enough to lend to your neighbors.  Goes great with Warrant Surprise.

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