On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program. The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Debt Guarantee.
Further Clarification on Brokered Interbank CDs
The FAQ clarifies that if an issuing bank owes a CD to a broker, the CD does not meet the definition of senior unsecured debt (and will not be guaranteed) even where an insured depository institution or credit union is the beneficiary of the CD. If, on the other hand, the broker merely arranges placement of a CD and the bank or thrift owes the CD directly to another insured depository institution or credit union, then the CD meets the definition of senior unsecured debt (and will be guaranteed), provided that the debt is owed to the insured depository institution or credit union in its own capacity and not as agent for someone else.
The Master Agreement, which the FDIC has created for use with the Debt Guarantee portion of the Temporary Liquidity Guarantee Program, provides an outline for how the guarantee program operates if the FDIC is called upon to honor the Guarantee. The operative provisions are found in Articles II, III, IV and V.
Article II describes how payments would be made in the event the Guarantee is called upon. The Section also contains language typically found in a letter of credit reimbursement agreement whereby the Issuer agrees to reimburse the FDIC immediately for any payments made by the FDIC. The “Reimbursement Payment” will bear interest, if not paid immediately, at a rate equal to the non-default rate of interest on the Senior Unsecured Debt plus 1%. As a practical matter, this is advantageous for the Issuer since a failure to reimburse would normally trigger a higher rate of interest in similar reimbursement agreements.
Article II also provides that the Issuer waives any defenses to the enforcement of the Senior Unsecured Debt once the FDIC has paid out under its guarantee. The FDIC is subrogated to the rights of the holder of the Senior Unsecured Debt and does not want the Issuer to raise lender liability defenses to the enforcement of the Debt which might likewise provide a defense to collection of the Reimbursement Payment. One of the documents found in the Annex to the Agreement is an Assignment by which the lender seeking payment from the FDIC assigns the promissory note or other evidence of indebtedness to the FDIC.