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When Chrysler and GM Became Financial Institutions

December 23, 2008

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On December 19, 2008, the Treasury announced that it would be supporting General Motors and Chrysler using the authority provided by the Troubled Asset Relief Program.  As a result, the Treasury has allocated effectively all of the first $350 billion, and will need to seek approval from Congress to allocate additional funds.

However, as noted by the Treasury, the actual disbursement of the first $350 billion remains subject to the approval of TARP Capital applications submitted by banks, many of which remain with the regulators and are not expected to reach the Treasury for review until the first quarter of 2009.

The first $350 billion under TARP has been allocated as follows:

  • TARP Capital Purchase Program – $250 billion;
  • Systemically Significant Failing Institutions Program – $40 billion (all of which was used to purchase senior preferred stock in AIG)
  • Term Asset-Backed Securities Loan Facility (TALF) – $20 billion;
  • Citigroup Financial Assistance Package – $25 billion ($20 billion in preferred stock and $5 billion in loss absorption);
  • Chrysler – Up to $4 billion loan;
  • General Motors – Up to $9.4 billion loan (plus an additional $4.0 billion conditioned on Congress releasing the second $350 billion).

In total, $348.4 billion has been allocated.  (Note: while much of the commentary states that Treasury is “out of money” pending Congressional approval to release the remaining TARP funds, the Treasury still has $1,600,000,000 that it can disperse at its discretion.)

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Round 6 of TARP Capital Infusions

Round 6 of TARP Capital Infusions

December 23, 2008

Authored by: Bryan Cave

On December 23, 2008, the Treasury announced the completion of the sixth round of TARP Capital infusions.  The Treasury purchased a total of approximately $2.8 billion in securities from 49 financial institutions on Friday, December 19, and has now invested in 165 institutions, totaling $170.6 billion.  This leaves approximately $80 billion for the Treasury to invest under the TARP Capital program.

Round six marked the first time that funds were invested in institutions participating under the Treasury’s Non-Public terms.  These “non-public” institutions issued to the Treasury warrants, which the Treasury immediately exercised.  One institution, OneUnited Bank, of Boston, Massachusetts, qualified as a Community Development Financial Institution (a CDFI), eliminating the requirement to issue warrants to the Treasury.

Synovus Financial Corporation of Columbus, Georgia, received the largest infusion of the round, $967.9 million, while Monadnock Bancorp of Petersborough, New Hampshire, received the smallest infusion of the round, $1.8 million.

This round saw five new states, Colorado, Idaho, Iowa, New Hampshire, and Rhode Island,  join the ranks of states whose institutions have received funds under the TARP Capital program.  In total, 41 states and 1 U.S. territory are home to institutions that have received TARP Capital infusions.

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FDIC Clarifies Use of Guaranteed Debt to Provide Capital

We have previously posted on the possibility of bank holding companies using the TLGP Debt Guarantee to provide capital to subsidiary banks.  In that post, we commented on the odds of success and noted that the FDIC had not taken a formal position.  Today, the FDIC updated its TLGP FAQ and confirmed that the odds of success are in fact very low.

The FDIC’s revised answer states:

Can guaranteed debt issued by the parent company be put in a subsidiary bank as capital?

The FDIC envisions few if any circumstances under which it would approve holding company applications to establish a cap or to increase a cap where the proceeds from the resulting guaranteed debt issuance would be injected as capital into a subsidiary bank.  The Temporary Liquidity Guarantee Program was not intended to be a capital enhancement program.  The Treasury Department’s TARP program has been set up for that purpose.  The purpose of the Temporary Liquidity Guarantee Program is to restore liquidity to the intermediate term debt market.

As a reminder, the TLGP’s alternative guarantee cap of 2% of liabilities only applies to depository institutions.  Bank holding companies are not entitled to use the 2% of liabilities test and are only eligible to issue 125% of the amount of senior unsecured debt that was outstanding as of September 30, 2008.  As a result, we believe most community bank holding companies will be required to seek FDIC approval to establish a cap or to increase a cap in order to issue FDIC guaranteed debt.  Based on the FDIC’s updated analysis, this approval seems highly unlikely.

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Impact of Wall Street Deleveraging

December 18, 2008

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Impact of Wall Street Deleveraging

December 18, 2008

Authored by: Robert Klingler

In the BT Capital Partners Fourth Quarter 2008 Newsletter, Jim Wheeler explores the impact that the deleveraging of Wall Street will have on the ability of banks to provide liquidity to main street.

An equally important factor that has not received much press is the paradigm shift in lending caused by the deleveraging of Wall Street. With all of the large Wall Street investment banks now conspicuously absent from the landscape, we have lost all of those major lenders who leveraged their assets 40:1 and who were willing to aggressively price car loans, credit card receivables, and home mortgages, based on their model of packaging them and selling them, without regard to credit quality, since they were backed with credit default guarantees. Those packages and re-sales are no longer viable. All of the capital that was available just months ago is no longer available, and most eyes are turning to the banks who are lining up to receive the TARP capital payments as the likely suspects for injecting capital into our economy.

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Round 5 of TARP Capital Infusions

Round 5 of TARP Capital Infusions

December 16, 2008

Authored by: Bryan Cave

On December 16, 2008, the Treasury announced the completion of the fifth round of TARP Capital infusions.  The Treasury purchased a total of approximately $2.5 billion in preferred stock from 28 financial institutions on Friday, December 12, and has now invested a total of $167.8 billion of the $250 billion to be invested under the  TARP Capital program.

Wilmington Trust Corporation of Wilmington, Delaware, received the largest infusion of the round, $330 million, while Northeast Bancorp of Lewiston, Maine, received the smallest infusion of the round, $4.2 million.

This round saw five new states, Arkansas, Delaware, Indiana, Maine, and Michigan,  join the ranks of states whose institutions have received funds under the TARP Capital program.  In total, 36 states and 1 U.S. territory are home to institutions that have recieved TARP Capital infusions.

We have updated our TARP Map to display the locations of the institutions that received infusions in the fifth round. 

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NPR Interview with Congressional Oversight Chair

On December 10, 2008, the Congressional Oversight Panel for Economic Stabilization issued its first report on the Treasury’s implementation of the Troubled Assets Relief Program. On December 11, 2008, the Chair of the Oversight Panel, Harvard Law Professor Elizabeth Warren, sat down with Terry Gross on NPR’s Fresh Air to discuss how taxpayer money is being spent in the financial bailout program.  The report and interview give insight into how the political process surrounding the TARP program may affect the program going forward.

The Congressional Oversight Panel has presented ten questions for analyzing the TARP program.

  1. What is Treasury’s Strategy?
  2. Is the Strategy Working to Stabilize Markets?
  3. Is the Strategy Helping to Reduce Foreclosures?
  4. What Have Financial Institutions Done with the Taxpayers’ Money Received So Far?
  5. Is the Public Receiving a Fair Deal?
  6. What is Treasury Doing to Help the American Family?
  7. Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?
  8. How is Treasury Deciding Which Institutions Receive the Money?
  9. What is the Scope of Treasury’s Statutory Authority?
  10. Is Treasury Looking Ahead?
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TARP Capital Investment Agreements for Private Companies

On December 11, 2008, the Treasury published the investment agreements for privately held companies that are approved to receive TARP Capital infusions.

The Treasury has used the same basic structure as adopted for publicly traded companies: a uniform securities purchase agreement, form of warrant and certificate of designations for preferred stock, along with a personalized letter agreement providing the details for each particular investment.

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TLGP Opt-Out Lists

TLGP Opt-Out Lists

December 12, 2008

Authored by: Robert Klingler

On December 10, 2008, the FDIC published preliminary lists of financial institutions that have elected to opt-out of either the Debt or Transaction Account Guarantees under the Temporary Liquidity Guarantee Program.  As noted by the FDIC,  the decision to opt-out should not be read as a signal, either positive or negative, about the financial health of the entity.  The FDIC recommends that depositors and investors with questions ask the entities on either of these lists for a further explanation concerning the entity’s decision to opt-out of the TLGP.

As of December 12, 2008, 863 banks elected to opt-out of the Transaction Account Guarantee, while 3,116 entities (which includes affiliated bank holding companies) elected to opt-out of the Debt Guarantee.  Looking specifically at Georgia, 16 banks elected to opt-out of the Transaction Account Guarantee, while 54 entities elected to opt-out of the Debt Guarantee.

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Using the TLGP Debt Guarantee to Provide Capital

We are having discussions with clients regarding the possibility of issuing FDIC-guaranteed debt under the TLGP’s Debt Guarantee Program at the holding company level and using the proceeds of that debt to increase the capital of the bank subsidiary.  This is particularly attractive for banks that are eligible to report their risk-based capital positions on a bank-only basis.  (The Federal Reserve’s risk-based capital measures are generally applied on a bank-only basis for bank holding companies with consolidated assets of less than $500 million.)

Permissible Use for BHC FDIC-Guaranteed Debt

The FDIC’s Frequently Asked Questions (FAQ) explicitly permits a bank holding company to use the proceeds from a guaranteed debt issuance to purchase additional shares of bank stock.

Need to Apply to FDIC for Approval

In our experience, however, most bank holding companies for community banks had no, or very limited amounts of, senior unsecured debt outstanding as of September 30, 2008.  As a result, the bank holding company will have to file a letter application with the FDIC and, if different, the federal banking regulator for its largest subsidiary bank to establish an FDIC-guaranteed debt limit.  The letter application must describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of the debt proceeds.

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