On February 10, 2009, Treasury Secretary Geithner laid out the preliminary aspects of how the Obama administration intends to move forward with the Troubled Asset Relief Program. As outlined by the Treasury’s Fact Sheet, there are six elements to the new “Financial Stability Plan.”
1. New Capital Investments – The Treasury will invest an indeterminate amount of preferred stock, to be held in a newly formed “Financial Stability Trust,” to provide a “capital buffer” to help absorb losses and serve as a bridge to private capital. The terms of the preferred stock were generally not announced, but will be convertible at a discount to the institution’s stock price as of February 9, 2009. It appears the capital plan, and the required “comprehensive stress test” is designed primarily for the largest institutions, however the Treasury states that the banking institutions with less than $100 billion “will also be eligible.” Recipients will be subject to the new additional restrictions addressed below.
2. A Public-Private “Bad Bank” – The Treasury plans to leverage public funds with private capital to form a bad bank to purchase “toxic assets.” Pricing, how assets will be chosen, and the structure of the private capital partnership have not been detailed.