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Treasury's Financial Stability Plan

The new Financial Stability Plan announced Feb. 10, 2009, by Treasury Secretary Geithner has four key elements. The announcement did not have many details (left to be worked out in the following days), but no new appropriations are currently expected (though President Obama has not ruled them out). The biggest concern for bankers may be the terms and conditions attached to participation in these programs. ABA will provide additional information in the following days as more details become available

The Four Key Elements

 

I.       Public Private Investment Fund.  This is essentially structured as a government sponsored enterprise, with the mission to purchase troubled assets from banks (although Treasury prefers not to call this a "bad bank"). It will have some government money to help with the initial capitalization but will rely upon private investors for much of its funding.  The Fund will negotiate the price of assets with the selling banks.  Plans are for this Fund to have up to $500 billion in assets, with the potential to expand to as much as $1 trillion in assets. Treasury is still working on the details.

 

II.     Capital Assistance Program (CAP).  Treasury will be prepared to purchase additional bank capital in the form of preferred shares (convertible to common). Envisioned as a "capital buffer" as a bridge to the resumption of private capital investment, this federal investment is available only for banks that have undergone a new stress test given by their regulator. All banks with at least $100 billion in assets will be required to take the stress test. Other banks may apply to participate in the program after a supervisory review.

 

III.    Consumer & Business Lending Initiative.  An expansion of the Federal Reserve's Term Asset-backed Liquidity Facility, the Facility will purchase up to $1 trillion in AAA-rated asset-backed securities backed by consumer and small business loans.  Eligible investments will be expanded to include commercial mortgage-backed securities. Further expansion to include non-Agency residential mortgage backed securities and corporate debt will be studied.

 

IV.   Mortgage Loan Modification Program.  The Treasury and the Federal Reserve will establish guidelines for loan modification programs to reduce monthly payments for owner-occupied homes. About $50 billion in federal funds are targeted for this program.  All Firms receiving federal funds will be subject to new uniform foreclosure mitigation guidelines.

 

General Terms and Requirements

 

Banks receiving federal assistance through any of these new programs (not the Capital Purchase Program) will be subject to the following additional general requirements.  These are not retroactive.

 

·         Banks must show how government assistance will expand lending and how they intend to use taxpayer dollars. Monthly follow-on reports will be required, and public companies will have to file corresponding SEC reports.  These reports and all related documents will be made public. 

·         Restrict quarterly dividends to $0.01, prohibit stock repurchases, and ban acquisitions of healthy banks, until the federal investment is paid back to Treasury.

·         Limit executive compensation in accordance with the standards announced by President Obama on February 4, which include pay caps, "say on pay" shareholder votes, and "luxury expenditure" disclosures.

Additional Resources

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For more information on the specific programs announced today, contact the following ABA Experts on Call:

Capital Assistance Program: Mark Tenhundfeld
Public-Private Investment Fund: Rob Strand
Mortgage Loan Modification Program: Bob Davis
Executive Compensation Restrictions: Sally Miller