• 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.

The FDIC has not revised the official FDIC Insurance sign, which still speaks of insurance limits of up to $100,000.  However, if a financial institution has previously posted a notice of the increase to $250,000 through December 31, 2009, it should update that notice.  As stated by the FDIC, a financial institution may post the following statement next to the official FDIC sign:

The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor.

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.

Our most frequent inquiry involves sophisticated private equity firms seeking to pool large funds to acquire the TALF assets for its members.  For sophisticated investors with ready capital, an understanding of asset-backed securities, an ability to manage funds and pools, and a stomach for cutting edge investments, investment in TALF is emerging as a very attractive opportunity relative to the dearth of other viable investment options.  The announcement on May 19, 2009 that the Federal Reserve will include certain CMBS in TALF should only expand the universe of interested investors.

• TALF Legacy CMBS Terms and Conditions
• TALF Legacy FAQs
• TALF Terms and Conditions
• TALF FAQs

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.

Private investors that are pre-qualified with the FDIC will bid for the assets in an auction conducted by the FDIC.  Each bidder will be required to post a deposit equal to 5% of its bid value which will be refunded if such bid is not accepted.  In an effort to maintain fairness, private investors will be prohibited from cooperating with one another once the auction process is commenced.  The equity contribution together with the amount of debt previously agreed to be guaranteed by the FDIC will comprise the purchase price of the assets.  The U.S. bank selling such assets will then be permitted to decide whether or not to accept the offer price.

If the bid is accepted by the bank selling the assets, the private investors that won the bid will contribute 50% of the equity to the PPIF, and Treasury will contribute the remaining 50%.  However, private investors may be permitted to accept a smaller equity contribution from Treasury subject to a minimum equity contribution yet to be determined.  In accordance with the Emergency Economic Stabilization Act of 2008 (the “EESA”), Treasury will also receive warrants in the PPIF for its equity contributions.  The terms of such warrants have yet to be disclosed by Treasury.  The debt issued by a PPIF in connection with the purchase of a pool of assets is expected to be initially placed at the bank that sold such pool of assets.  The selling bank will be able to resell the debt into the market.  It is contemplated that the credit-enhancement of the FDIC guaranty will make the debt more attractive to potential buyers in the market.

The executive compensation restrictions that currently apply to TARP will not apply to a “passive private investor” in this program.  At this stage it is unclear whether or not the entities that manage the PPIF will be impacted by the executive compensation restrictions.  The exact structure of the Legacy Loans Program will be subject to the standard comment and rulemaking procedures of the FDIC.  The FDIC is currently in the process of accepting public comments until April 10, 2009.

Legacy Securities Program

The Legacy Securities Program, which will be administered by Treasury, is designed to provide both equity and debt financing to make it possible to acquire legacy securities that will initially include residential and commercial mortgage backed securities.  The Legacy Securities Program consists of two components.  The first component involves the selection of approximately five (5) fund managers (each an “FM”) by Treasury with which Treasury will co-invest in PPIFs to acquire legacy securities.  The other component is the expansion of the Term Asset-Backed Securities Loan Facility (“TALF”) to provide non-recourse loans to investors to be utilized in the purchase of legacy security assets.

Legacy Securities PPIFs

The Legacy Securities PPIFs component of the program will provide each of the FMs a limited period of time to raise at least $500 million in private equity capital through a private investment vehicle.  Private investors will be prohibited from withdrawing any money invested in the private investment vehicle for three years after the private investment vehicle’s first investment in a legacy security.  ERISA plans will be permitted to invest in the private investment vehicles, but the amounts of such investments will be left to the FM to determine.  Once the FM raises at least $500 million, the FM would contribute the private equity capital raised by it to a PPIF.  Treasury would invest TARP funds in the newly created PPIF matching the funds raised by the FM dollar-for-dollar.  One major concern that FMs need to be aware of is that Treasury maintains the right, in its sole discretion, to refuse to fund any committed but undrawn Treasury equity capital and debt financing (described below) at any time.  In addition to Treasury’s equity interest in the PPIF, Treasury will receive warrants in accordance with the EESA for its investment in the PPIF.  The terms of such warrants have yet to be disclosed by Treasury.

Provided that the structure of the PPIF meets certain guidelines yet to be determined, the FMs will have the opportunity to apply for senior debt from Treasury in amount up to 50% of the PPIF’s total equity capital, but Treasury will consider requests for up to 100% of the PPIF’s equity capital subject to asset level leverage, redemption rights, disposition priorities and any other factors deemed relevant by Treasury.  Treasury intends this debt to have the same duration as the underlying fund and such debt shall be repaid on a pro-rata basis as proceeds are realized by the PPIF.  The loans described above will be structurally subordinated to any loans made by the New York Federal Reserve under TALF.

Treasury expects the PPIFs to initially target commercial mortgaged back securities and residential mortgaged backed securities that received an AAA rating or an equivalent rating by at least two nationally recognized ratings organizations which are secured directly by the actual mortgage loans, leases and other assets.  Nevertheless, each FM will control the asset selection, pricing, liquidation, trading and disposition of such assets.  The PPIFs will be prohibited from purchasing legacy securities from (i) affiliates of its FM,  (ii) 10%-or-larger private investors invested in the PPIF or (iii) any other FM or such FM’s affiliates.  FMs will be permitted to charge a fixed management fee to Treasury and private investors based on a percentage of equity capital invested by such party.  All fees and expenses paid by Treasury in connection with the PPIF will be paid out of the equity contributions made by Treasury to the PPIF.

Treasury plans to make its preliminary selections of FMs by May 1, 2009.  Fund managers interested in participating in the Legacy Securities Program have until April 10, 2009 to submit an application to Treasury.  Per Treasury, each candidate must (i) be able to raise at least $500 million of private equity capital, (ii) have experience and a track record investing in comparable assets, (iii) have $10 billion of comparable assets under management and (iv) demonstrate the capacity to manage the PPIF in accordance with guidelines established by Treasury.

TALF Expansion

The second component of the Legacy Securities Program deals with the expansion of TALF eligible assets to include certain non-agency commercial and residential mortgaged back securities that were originally AAA rated.  TALF is currently governed by the New York Federal Reserve.  Although the interest rates, minimum loan size and term of TALF loans for this program have not been established, Treasury has indicated that it is working with the New York Federal Reserve to modify the current structure of TALF loans so that TALF can accommodate this new class of eligible assets.  Borrowers will need to meet certain criteria in order to be eligible for TALF funds, but this criteria has yet to be established.  As stated earlier, all TALF loans will be structurally senior to any Treasury loans made under the Legacy Securities Program because of certain requirements of the New York Federal Reserve.  Many additional questions regarding the expansion of the TALF program will hopefully be addressed when program specifics are disseminated by the New York Federal Reserve and Treasury.

Conclusion

Treasury plans to initially invest an aggregate of $75 to $100 billion of TARP funds between both the Legacy Loans Program and the Legacy Securities Program.  This investment, together with the capital invested by private investors, will produce $500 billion in purchasing power with the ability to expand to $1 trillion over time to help improve the health of financial institutions and unlock the credit markets.

Resources:

• Public-Private Investment Program Fact Sheet, March 23, 2009
• Public-Private Investment Program Press Release, March 23, 2009
• Public-Private Investment Program White Paper, March 23, 2009
• Legacy Loans Program Term Sheet, March 23, 2009
• Legacy Loans Program Frequently Asked Questions, March 23, 2009
• Legacy Securities Program Term Sheet, March 23, 2009
• Legacy Securities Program Frequently Asked Questions, March 23, 2009
• Application for Private Asset Managers under Legacy Securities Program, March 23, 2009

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.

Dividend Payments (and Non-payments)

The Treasury had received almost $2.9 billion in dividend payments through March 20, 2009 (which probably explains the $2.9 billion discrepancy in TARP funds remaining).  AIG did not declare or pay the $733 million due on its preferred stock, however the dividends are cumulative and AIG and Treasury are working on a broader restructuring of AIG’s assistance.  In addition, eight banks did not pay dividends under their TARP preferred stock.  For stand-alone banks, unlike bank holding companies, the TARP Capital Purchase Program investment is in the form of non-cumulative dividends.  As a result, the only impact of not making the dividend payments is a prohibition on paying dividends on any junior stock (such as the common stock) and, if no dividends are made for six quarters, the holder of the preferred securities have the right to appoint two directors.  The eight banks have informed Treasury officials that they did not have the necessary regulatory or shareholder approval to declare dividends on their preferred stock, although six of the banks have stated their intent to seek the necessary approvals.

Treasury’s Use of TARP Funds

The report also provides the Treasury’s calculations of how the TARP funds have been, and will be, used.

In contrast to our prior estimates, the Treasury estimate: (a) assumes a total of $218 billion to be spent under the TARP Capital Purchase Program; (b) includes $7.5 billion in asset guarantees provided to Bank of America; and (c) reduces the total TALF investment to $55 billion from $100 billion.  No further explanation is made as to the apparent 45% reduction in TALF investment, and the report still states that Treasury may provide up to $100 billion in TARP funds to support up to $1 tillion in purhase of consumer and business lending.  (The discussion also notes that Fannie Mae and Freddie Mac will be contributing a total of $25 billion to the Making Home Affordable program, thus raising the total program to $75 billion.)  Factoring in $25 billion in anticipated TARP CPP redemptions, Treasury would have approximately $134.6 billion remaining under TARP.

Executive Compensation Guidelines

According to the report, Treasury is planning to implement its guidelines as announced in its February 4, 2009 press release and the provisions of the American Recovery and Reinvestment Act of 2009.

• 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.

• 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.

Four notable changes to the list have occurred in the past year.  Countrywide Securities Corporation was removed on July 15, 2008, due to its acquisition by Bank of America.  Lehman Brothers Inc. was removed on September 22, 2008, due to bankruptcy.  Bear Stearns & Co. Inc. was removed from the list on October 1, 2008, due to its acquisition by J.P. Morgan Chase.  Merrill Lynch Government Securities Inc. was removed from the list on February 11, 2009, due to its acquisition by Bank of America.

Contact information for Primary Dealers for TALF.

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.

The initial key for hopeful participants will be establishing the primary dealer relationship, as described in the FAQ.

How does an entity participate in the TALF program?

An eligible borrower must be a customer of a primary dealer and must have executed a customer agreement authorizing the primary dealer, among other things, to execute the master loan and security agreement (MLSA) as agent for the borrower and to perform all actions required on their behalf. The MLSA will provide further details on the requirements that will apply to the entities seeking to borrow from the FRBNY under the TALF.

Important Links:

• Federal Reserve FAQ
• Federal Reserve Terms and Conditions
• Federal Reserve White Paper