On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 (Senate Bill 896). Among other things, the Act:
- extended the $250,000 deposit insurance limit through December 31, 2013;
- extended the length of time the FDIC has to restore the Deposit Insurance Fund from five to eight years;
- increased the FDIC’s borrowing authority with the Treasury Department from $30 billion to $100 billion;
- increased the SIGTARP’s authority vis-a-vis public-private investment funds under PPIP (including the implementation of conflict of interest requirements, quarterly reporting obligations, coordination with the TALF program); and
- removed the requirement, implemented by the American Recovery and Reinvestment Act of 2009, for the Treasury to liquidate warrants of companies that redeemed TARP Capital Purchase Program preferred investments. The Treasury is now permitted to liquidate such warrants at current market values, but is not required to do so.
This extension does not affect the Transaction Account Guarantee provided by the FDIC’s Temporary Liquidity Guarantee. The Transaction Account Guarantee, which provides an unlimited guarantee of funds held in noninterest bearing transaction accounts, is still scheduled to expire on December 31, 2009.
As we have previously discussed, the Term Asset-backed-securities Loan Facility (“TALF”) program of the Federal Reserve and US Treasury has piqued the interest of investors world-wide. We are receiving multiple inquiries every week about how best to position our clients to benefit from the government program. If you’re reading this, you likely already know that the TALF program was intended to create an artificial market to replace the “shadow market” of securitized loans that had fueled the US economy for the past decade, and which was largely responsible for its crash.
Since the other similar, and more recently announced PPIP program, has yet to gain any traction and which still raises far more questions than answers, investors seem more ready and willing to test the TALF waters. It has been reported that the six TALF-eligible transactions announced for the May auction have been six to twelve times oversubscribed — roughly double the rate reported for the previous month’s auction.
As we have seen with TARP, the federal government has not been shy in changing the rules of its games in mid-play. The potential benefits of the TALF program, namely risk limited leverage in the form of non-recourse 88%-95% financing, and attractive potential returns, which many estimate to be in the 15%-30% range, are seen by many to outweigh the risks that the uncertain parameters of the program pose.
On March 23, 2009, the U.S. Treasury Department (“Treasury”) announced the details of the Public-Private Investment Program (“PPIP”). The program is designed to purchase mortgage backed securities and certain troubled loans from U.S. banks. PPIP is part of the broader “Financial Stability Plan” introduced by President Obama. The goal of PPIP is to cleanse the balance sheets of U.S. banks of troubled assets as part of the Troubled Asset Relief Program (“TARP”) and to create access to liquidity for banks and other financial institutions in order to cause the extension of new credit. PPIP is broken up into two key components – the Legacy Loans Program and the Legacy Securities Program.
Legacy Loans Program
The Legacy Loans Program will be launched by Treasury and the Federal Deposit Insurance Corporation (“FDIC”). The intent of this joint program is to combine (i) private capital, (ii) equity co-investment from Treasury and (iii) FDIC debt guarantees in order to assist market priced sales of distressed assets and improve the private demand for distressed assets. The FDIC will supervise the formation, funding and operation of a series of Public-Private Investment Funds (“PPIFs”) which will purchase assets from U.S. banks. Each PPIF will be comprised of a joint venture between private investors and the Treasury. Treasury will manage its investment in the PPIF to ensure that the interest of the public is protected and preserved. However, private investors will retain control of the asset management subject to “rigorous supervision” of the FDIC.
Private investors in the Legacy Loans Program are expected to include but are not limited to financial institutions, individuals, insurance companies, mutual funds, publicly managed investment funds, pension funds, foreign investors with a headquarters in the United States, private equity funds, hedge funds and other long-term real estate investors. U.S. banks of all sizes will be eligible to participate in the program. U.S. banks participating in the program will consult with the FDIC, banking regulators and Treasury to identify assets that they propose to sell. Eligible assets are required to be predominately situated in the United States. The FDIC will hire third party valuation consultants to analyze the assets and determine the level of debt that the FDIC will be willing to guarantee on such properties. The debt guaranteed by the FDIC will not exceed a 6 to 1 debt-to-equity ratio. The FDIC will receive an annual fee for providing the guaranty and such guaranty will be collateralized by the pool of assets purchased.
On March 31, 2009, the Government Accountability Office released its March 2009 report on TARP, as well as an accompanying statement. Highlights of the report include almost 2,000 applications still being processes for the TARP Capital Purchase Program, another breakdown of how Treasury is spending the TARP funds (including an apparent 45% reduction in TALF), and a little more guidance on the applicable executive compensation limits.
TARP Capital Recipients and Applications
As of March 27, 2009, 272 publicly held institutions, 248 privately held institutions and 12 community development financial institutions had received TARP Capital Purchase Program funding. Treasury was still in the process of reviewing approval recommendations for 1,190 qualified financial institutions, and more than 750 applicants were still being viewed by the federal bank regulators. More than 250 financial institutions have withdrawn applications, and no applications have been formally denied by Treasury.
On March 31, 2009, the Treasury Department unveiled a completely updated site for the Financial Stability Plan programs (FinancialStability.gov). Besides requiring visitors to learn an entirely new navigation system to find documents on the site, the new site contains a number of new features that may be of interest to BankBryanCave.com readers:
- a map showing the local impact of the TARP Capital Purchase Program (larger view). Like BankBryanCave.com, the Treasury also provides a Google Map of TARP Recipients. Unfortunately, the Treasury’s Google Map suffers from a “feature” of Google Maps that limits the number of pins shown on the map; as a result, only the first 100 or so recipients (alphabetically) are included on the map. The BankBryanCave.com Map of TARP Capital Infusions shows all TARP Capital Purchase Program recipients, and also differentiates between recipients based on when the TARP Capital funds were received. (For comparison purposes, the Treasury’s map was created on March 11, 2009 and, as of March 31, 2009, has been viewed 265 times. Our map was created on November 25, 2008 and has been viewed over 11,294 times.)
- simplified economic data, which may help citizens (and bank customers) understand and monitor the need and impact of TARP.
- a secret decoder ring* to help translate the various terms and acronyms used under TARP. ABS, AGP, CAP, CPP, EESA, MBS, SSFI, TIP and TARP are all included.
*It’s not actually a decoder ring, but is called the “Decoder.”
The website appears to still be actively being developed and revised, as links to various documents from the previous website have appeared while this post was being edited.
As of February 11, 2009, those banks qualifying as “primary dealers” were:
- BNP Paribas Securities Corp.
- Bank of America Securities LLC
- Barclays Capital Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Securities America Inc.
- Deutsche Bank Securities Inc.
- Dresdner Kleinwort Securities LLC.
- Goldman, Sachs & Co.
- Greenwich Capital Markets Inc.
- HSBC Securities (USA) Inc.
- J. P. Morgan Securities Inc.
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- UBS Securities LLC.
Since the collapse of Wall Street in October, 2008, and the immediate and severe deleveraging of available capital, the life-blood of the US economy has contracted from a torrent to a trickle. The so-called “shadow market” that funded the crippled investment banks are no longer able to leverage their assets at a 40:1 ratio. Many of the very large national banks are reeling, seeing their share prices drop from 50% to 90% in the last six months. We have often heard questions from those outside of the banking industry asking us “what do the bankers want?” The answer is simple. Banks want borrowers that can repay loans. It’s that simple and that difficult. If only there was an influx of credit-worthy borrowers. If only there were purchasers of the consumer loans. These exact issues were raised during Chairman Bernake’s 60 Minutes appearance on Sunday, March 15, 2009.
In stepped the Federal Reserve. As opportunity funds and hedge funds across the country and across the world begin to digest the parameters, requirements, and restrictions relating to the Fed’s $1 Trillion lending initiative known as TALF (Term Asset-Backed Securities Loan Facility) attempting to revitalize the stagnant credit markets, several issues have begun to emerge.
The most important criterion for many of our clients is eligibility. TALF was announced in November as an attempt to create a market for small business loans. It has been enlarged to include equipment financing, auto paper, and other consumer credit.