Publications

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On February 10, US Treasury Secretary Timothy Geithner announced the Financial Stability Plan (the Plan) designed to attack the global credit crisis with a series of new and enhanced tools.

Click here to read Secretary Geithner’s remarks announcing the Plan, and here to read a Fact Sheet on the Plan prepared and distributed by Treasury.

The Plan contains six interrelated elements:

1. A Financial Stability Trust;

2. A Public-Private Investment Fund;

3. A Consumer and Business Lending Initiative;

4. A Transparency and Accountability Agenda (including dividend limitations);

5. An Affordable Housing Support and Foreclosure Prevention Plan; and

6. A Small Business and Community Lending Initiative.

As a number of market observers have noted, the Plan reflects a “bare-bones” approach on the part of Treasury, and has been criticized in some quarters as lacking the necessary details to provide comfort to the banking and financial community on the viability of the programs it contains.

Indeed, Treasury has provided very few details to date on the Plan; we expect this information to emerge over the coming weeks. Secretary Geithner noted, “This is an enormously complicated financial crisis we’re facing. It’s going to take a lot of time to resolve, it’s going to be hard to do, but we’re going to keep at it until we fix it.”

The financial markets reacted negatively to the presentation of the Plan, with trading sessions on US exchanges reflecting sharp losses in the hours after it was announced.

Most critically, the Plan does not address the question of how to establish prices for the purchase and sale of troubled assets. This leaves such factors to be resolved in the bid and ask processes on the part of potential buyers and sellers. Those anticipating some relief from the consequences of “mark-to-market” accounting were disappointed because the Plan fails to address this issue in any way.

Although Secretary Geithner indicated that the Plan could result in the conveyance of up to $1 trillion in troubled assets from affected banking institutions, and could engender another $1 trillion in new consumer lending, Treasury is not seeking additional funding at this time from Congress to finance its proposals. The Plan relies, instead, on the allocation of the $350 billion remaining under the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008.

However, as President Obama noted in his press conference at the White House on February 9, 2009, “We don’t know yet whether we’re going to need additional money or how much additional money we’ll need until we see how successful we are at restoring a level of confidence in the marketplace.”

Each of the key elements of the Plan is described below.

Financial Stability Trust

This element of the Plan consists of the following parts:

• A comprehensive stress test: All banking institutions with consolidated assets in excess of $100 billion will be required to undergo this review. The review is designed to ascertain the real value of troubled assets and to gauge the ability of borrowers to repay loans while addressing uncertainties about adequate levels of capital at these financial institutions.
• Capital Assistance Program (CAP): Selected banking institutions will receive a convertible preferred security investment from Treasury that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review. Any capital investments made by Treasury under the CAP will be placed in a separate entity – the Financial Stability Trust – set up to manage the government’s investments in US financial institutions.

Public-Private Investment Fund

While Treasury will be setting forth further details, it is expected that, working in partnership with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board (Federal Reserve), it will establish a Public-Private Investment Fund to acquire troubled mortgage-related assets. The fund is expected to have the following principal characteristics:

• Public-private capital: This new program will put public and private capital to work side-by-side acquiring troubled assets, using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
• Private sector pricing of assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it requires private sector buyers to determine the price for current troubled and previously illiquid assets. Certain commentators have expressed concern that this aspect of the Plan will continue to impede the disposition or sale of such investments by holders of these troubled assets.

Consumer and Business Lending Initiative – Up to $1 Trillion

Designed to address the decline in securitized lending, this aspect of the Plan provides:

• An increase in support for the purchase of securitized assets of up to $1 trillion: This joint initiative with the Federal Reserve expands the resources of the previously announced but not yet implemented Term Asset-Backed Securities Loan Facility (TALF), facilitating the purchase of loans by providing the financing to private investors to help unfreeze and lower interest rates for auto, small business, credit card and other consumer and business loans. This part of the Plan attempts to protect taxpayer resources by limiting purchases to newly packaged securities that possess the highest rating.
• Expansion of program to include commercial real estate: The Consumer and Business Lending Initiative will expand the initial reach of the TALF to include commercial mortgage-backed securities (CMBS). In addition, Treasury will continue to consult with the Federal Reserve regarding possible further expansion of the TALF program to include other asset classes, such as non-Agency residential mortgage-backed securities (RMBS) and assets collateralized by corporate debt.

New Elements of Transparency, Accountability, Monitoring and Conditions

The Plan will call for greater transparency, accountability and conditionality, with tougher standards for firms receiving exceptional government assistance, which will include:

• Expanded lending: requiring firms that receive new government funds to show how assistance from the Plan is allowing them to expand or preserve lending at those firms.
• Mortgage foreclosure mitigation: committing recipients of new government funds to participate in mortgage foreclosure mitigation programs.
• Restricting dividends, stock repurchases and acquisitions: by restricting the paying of quarterly common dividend payments in excess of $0.01 until the government is repaid, as well as restricting repurchasing shares and pursuing acquisitions.
• Limiting executive compensation: requiring compliance with the senior executive compensation restrictions announced on February 4, 2009, including those pertaining to a $500,000 cap in total annual compensation plus restricted stock payable after the government is paid back, “say on pay” shareholder votes, and new disclosure and accountability requirements applicable to luxury purchases. Click here to read our February 9, 2009 Alert on this topic.
• Prohibiting political interference in investment decisions: ensuring that lobbyists do not influence applications for, or disbursements of, Plan funds, and will certify that each investment decision is based only on investment criteria and the facts of the case.
• Posting contracts and investment information on the Web: posting by Treasury of all contracts under the Financial Stability Plan on FinancialStability.gov within five to 10 business days of their completion.

Housing Support and Foreclosure Prevention

Treasury will announce a comprehensive plan that builds on the work of Congressional leaders and the FDIC in an attempt to:

• Drive down overall mortgage rates by spending as much as $600 billion for the purchase of government sponsored enterprises (GSE) mortgage-backed securities and GSE debt.
• Commit $50 billion to prevent avoidable foreclosures by helping to reduce monthly payments in line with prudent underwriting and long-term loan performance.
• Require all recipients of Plan funds to participate in foreclosure mitigation plans.
• Build flexibility into the Hope for Homeowners Act and related government programs.

Small Business and Community Lending Initiative: Treasury and the Small Business Administration (SBA) will announce the launch of an initiative to include:

• Financing the purchase of AAA-rated SBA loans.
• Increasing the guarantee for SBA Loans to 90 percent.
• Reducing fees for SBA 7(a) and 504 Lending and provide funds for both oversight and speedier and less burdensome processing of loan applications.