Below is an outline followed by a brief summary of some significant regulatory and governmental actions taken to date to attempt to mitigate the impact of the mortgage crisis and the related ripple effects through the securities and credit markets.

  • Bank of America announces acquisition of Countrywide Financial (January 11, 2008)
  • Federal Reserve lowered federal funds rate 75 basis points to 3.5% (January 22, 2008); lowered by 50 basis points to 3% (January 30, 2008); lowered by 75 basis points to 2.25% (March 18, 2008); lowered by 25 basis points to 2% (April 30, 2008); lowered by 50 basis points to 1.5% (October 8, 2008)
  • Federal Reserve increases temporary reciprocal currency arrangements with other central banks (March 11, 2008, May 2, 2008, July 30, 2008, September 18, 2008, September 26, 2008, September 29, 2008 and October 14, 2008) and extended the swap lines to additional central banks (September 24, 2008)
  • Federal Reserve Bank of New York guarantees $29 billion of Bear, Stearns debt as the government brokers its acquisition by JPMorgan for $2 per share (March 14, 2008), later raised to $10 per share (March 24, 2008)
  • Federal Reserve announces new Term Securities Lending Facility (TSLF) (March 11, 2008); accepts a wider pool of collateral for TSLF (May 2, 2008); TSLF extended through January 30, 2009 (July 30, 2008) and extended eligible collateral (September 14, 2008)
  • Federal Reserve authorizes Federal Reserve Bank of New York to create Primary Dealer Credit Facility to provide liquidity to dealers in the securitization markets for up to six months (March 16, 2008); extended the PDCF through January 30, 2009 (July 30, 2008) and extended the eligible collateral (September 14, 2008)
  • FDIC is appointed receiver for IndyMac (July 11, 2008), then the largest bank failure since the 1980's; the parent holding company subsequently filed for Chapter 7 bankruptcy protection (July 31, 2008)
  • SEC proposes rules in two phases to remedy concerns with the credit rating agencies (June – July 2008)
  • Housing and Economic Recovery Act of 2008, establishing the HOPE for Homeowners Program (July 30, 2008)
  • SEC takes emergency action against certain short selling practices (July – October 2008)
  • Federal Reserve introduces 84-day Term Auction Facility loans (July 30, 2008); Change follows a series of increases in number and size of auctions of 28-day credit throughout 2008 and was followed by increases in the size of the auctions of 84-day credit
  • FHFA appointed as conservator for Fannie Mae and Freddie Mac (September 7, 2008)
  • Lehman Brothers files for bankruptcy protection (September 15, 2008); Merrill Lynch sells itself to Bank of America (September 15, 2008)
  • Federal Reserve agrees to lend AIG $85 billion and the government takes a 79.9% stake in the company and removes CEO in a large scale bailout (September 16, 2008)
  • Federal Reserve announces loan program for depository institutions and bank holding companies to finance their purchase of high quality asset-backed commercial paper (ABCP) from money market funds (September 19, 2008)
  • Federal regulators seize Washington Mutual in the now largest bank failure in U.S. history and arrange a sale of assets to JPMorgan (September 24, 2008)
  • Treasury announces Temporary Guarantee Program for Money Market Funds (September 29, 2008) Citigroup announces acquisition of Wachovia businesses in deal brokered by the FDIC and federal regulators (September 29, 2008); followed by an offer from Wells Fargo for the entire bank (October 3, 2008)
  • Federal Reserve announced the commencement of interest payments on required and excess deposits at Reserve Banks (October 6, 2008)
  • Federal Reserve announces creation of a Commercial Paper Funding Facility to provide back-stop liquidity to commercial paper issuers (October 7, 2008) and releases updated terms and conditions (October 14, 2008)
  • Treasury announces coordinated effort with G7 to address liquidity and banking crisis (October 10, 2008)
  • FDIC announces Temporary Liquidity Guarantee Program to provide guarantees for bank debt and insurance for all non-interest bearing transaction accounts (October 14, 2008)

Federal Reserve Announces Two Lending Facilities

On March 11, 2008, the Federal Reserve announced an expansion of its securities lending program. The new Term Securities Lending Facility (TSLF) provides up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the previously existing program) by a pledge of other securities, including federal agency debt, federal agency mortgage-backed securities and non-agency triple-A rated privatelabel residential MBS. On May 2, 2008, the Federal Reserve announced an expansion in the collateral that can be pledged in the Schedule 2 TSLF auctions, to include triple-A rated asset-backed securities. On July 30, 2008, the TSLF was extended through January 30, 2009.

On March 16, 2008, the Federal Reserve announced the authorization of a lending facility designed to improve the ability of primary dealers to provide financing to participants in the securitization markets. The facility as initially announced was authorized for six months, though it was later extended through January 30, 2009. The interest rate charged for use of the facility is the discount rate at the Federal Reserve Bank of New York.

SEC Proposes Credit Rating Agency Reform1

On June 16, 2008 and July 1, 2008, the SEC issued rule proposals aimed at responding to ongoing concerns regarding the role and importance of credit ratings issued by nationally recognized statistical rating organizations (NRSROs). As a result of the sub-prime crisis, the NRSROs fell under criticism based on assertions that they made inaccurate judgments in their initial ratings of mortgage-backed securities and in their ongoing surveillance of these transactions. Concerns were raised regarding the potential conflict of interest that arises when the issuer that is requesting a rating also pays the NRSRO fee. The proposed rules address conflict of interest concerns and impose restrictions and disclosure requirements based on the interactions between rating agencies and issuers. The disclosure requirements would mandate that significant additional information be publicly provided. Finally, many of the proposed rules were intended to address the SEC's concern that the inclusion of credit ratings throughout its own rules and regulations may have acted as a regulatory "seal of approval" for the ratings such that market participants may have placed "undue reliance" upon them. The proposed amendments would eliminate references to these ratings in numerous SEC rules and forms. As drafted, the proposals would have a significant impact on how market participants use credit ratings during the new issuance process, in determining investment suitability, for computing net capital requirements, and in complying with other SEC rules and regulations.

The comment periods have closed and the rule proposals are pending final action by the SEC.

Federal Reserve Authorizes Lending to Fannie Mae and Freddie Mac

On July 13, 2008, the Federal Reserve announced that it had granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary. Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. The authorization was intended to supplement Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

SEC Takes Actions against Short Selling2

In an effort to address continuing market volatility, the SEC issued a series of emergency orders to limit short sales and require reporting of short positions. Given the speed with which these emergency orders were issued and the questions raised regarding their implementation, the SEC quickly followed with additional interpretive guidance. As of October 8, 2008, the emergency short sale orders have expired, and the emergency short sale reporting order is currently scheduled to expire on October 17, 2008. The new temporary rule and two new permanent rules described below remain in effect.

On July 15, 2008, the SEC issued its first emergency order barring naked short sales of the stocks of Fannie Mae, Freddie Mac and 17 financial firms, including several investment banks. The order was issued in response to a perception that naked shorting might trigger a market stampede away from the securities of the subject institutions. The order was intended to promote investor confidence and reassure investors that the SEC was protecting companies and investors from manipulative short selling. Market makers were excluded from the restriction in an amendment on July 18th. This initial order was extended through August 12th. At that time the SEC indicated that it was considering permanent rulemaking.

On September 17, 2008, following the government rescue of Fannie Mae and Freddie Mac, the failure of Lehman Brothers, the sale of Merrill Lynch and the bailout of AIG, the SEC took emergency action and adopted three rules to prohibit naked short selling.

  • The first was the adoption of a temporary rule under Regulation SHO, Rule 204T. The rule imposes a penalty on any participant of a registered clearing agency, and any broker-dealer from which it receives trades for clearance and settlement, for having a fail to deliver position – it requires that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposes penalties for a failure to do so. Rule 204T has also been proposed as a permanent rule and the SEC has a comment period open.
  • The SEC's second action was to adopt amendments to Reg SHO to eliminate the options market maker exception. As a result, options market makers will be treated in the same way as all other market participants, and are required to abide by the new hard T+3 closeout requirements. This change had been initially proposed in August 2007, the comment period was re-opened in July 2008, and the changes are final.
  • The third prong of the SEC's approach was to adopt Rule 10b-21 under the Securities Exchange Act of 1934. Rule 10b-21 is intended to highlight the specific liability of persons that engage in the practice of deceiving specific persons, such as a broker or dealer, about their intention or ability to deliver securities in time for settlement and then fail to make delivery by the settlement date. The new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This change was initially proposed in March, and the changes are final.

On September 18, 2008, the SEC issued an emergency order prohibiting short selling, as opposed to "naked short selling," of the publicly traded securities of 799 companies, each classified as an "Included Financial Firm," subject to certain exceptions, including for market makers, short sales occurring automatically as a result of an exercise or assignment under another security, and sales of covered securities pursuant to Rule 144. This most recent emergency order expired on October 8th.

Also on September 18, 2008, the SEC issued an emergency order implementing reporting requirements for institutional investment managers that exercise investment discretion over at least $100 million of securities subject to reporting on Form 13F. If these institutional investment managers conduct short sales of Section 13(f) securities, they must file new Form SH. Form SH is due on the first business day of every calendar week following a week in which short sales were executed. There are additional limitations on the filing requirements. The first Form SH was required to be filed on September 29th and the order requiring Form SH is scheduled to expire on Friday, October 17th, with the final Form SH due on Tuesday, October 14th. Although the SEC initially intended that Forms SH would be made public, it has amended the initial order and will retain as confidential (subject to requests under the Freedom of Information Act), all Forms SH.

Treasury's Temporary Guarantee Program for Money Market Funds

Following the bankruptcy filing by Lehman Brothers on September 15th, a money market mutual fund reported that due to the impact of its holdings of Lehman Brothers commercial paper losing market value, the fund's share value fell below $1.00. As a result, money market funds began reporting a significant increase in withdrawals as investors moved their money to FDIC insured bank deposits.

On September 19, 2008, Treasury announced the establishment of a Temporary Guaranty Program for Money Market Funds for the U.S. money market mutual fund industry. The program insures the holdings of nongovernment, non-agency publicly offered Rule 2a-7 money market mutual funds. Both retail and institutional funds will be able to participate, for a fee. Treasury made $50 billion available from the assets of the Exchange Stabilization Fund to guarantee the payment to investors of participating money market funds with a net asset value that falls below $1.00. Relief under the guarantee program will be triggered once a participating fund's board of directors acts to liquidate the funds and it is determined that holders would, absent the guarantee program, receive less than $1.00 per share.

On September 29, 2008, Treasury opened the Temporary Guarantee Program, providing coverage to holders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. The program will exist for a three-month term. Following the initial three-month term, Treasury has the option to renew the program up to the close of business on September 18, 2009. The program will not automatically extend for the full year without Treasury's approval, and funds would have to renew their participation at the extension point to maintain coverage. If Treasury chooses not to renew the program at the end of the initial three-month period, the program will terminate. Funds with a net asset value below $0.995 as of the close of business on September 19, 2008, were not eligible to participate in the program. Funds were required to apply by October 8, 2008.

Eligible funds include both taxable and tax-exempt money market funds. Treasury and the IRS issued guidance that confirmed that participation in the Temporary Guarantee Program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.

On October 8, 2008, Treasury announced that money market funds that have a policy of maintaining a stable net asset value or share price that is greater than $1.00 and had such a policy on September 19, 2008 were eligible to participate in the guarantee program, provided the fund meets all of the other original requirements. The enrollment deadline for these funds that were eligible as a result of this technical correction was October 10, 2008.

As of October 12, 2008, reports indicated that most of the large money market fund managers had entered the Temporary Guarantee Program, in order to boost their investors' confidence.

While the Temporary Guarantee Program was initially authorized under the Exchange Stabilization Act, as noted above, EESA requires that any costs associated with the Guarantee Program be reimbursed from the EESA authorized amounts.

Housing and Economic Recovery Act of 2008

On July 30, 2008, the President signed the Housing and Economic Recovery Act of 2008 (HERA), an omnibus housing bill combining regulatory reform of GSEs, modernization of the Federal Housing Administration (FHA), and provisions to help troubled borrowers. The Federal Housing Finance Regulatory Reform Act of 2008 created the FHFA, a new combined regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The power granted to the FHFA includes the authority to establish capital, management and risk standards, to enforce its orders through cease and desist authority, to put a regulated entity into receivership and review and approve new product offerings. The affordable housing component of the GSEs mission was expanded as was the conforming loan limit.

The HOPE for Homeowners Act of 2008 created a new temporary program within FHA designed to refinance distressed mortgage loans. The program was scheduled to begin October 1, 2008 and expire on September 30, 2011. The estimated number of households able to benefit from the program is 400,000.

The Foreclosure Prevention Act of 2008 modernizes many aspects of FHA lending, including increasing the FHA loan limit, authorizing $3.92 billion in supplemental Community Development Block Grant Funds provided to communities hardest hit by foreclosures, providing funds for housing counseling, and modifications to TILA disclosures.

Conservator Appointed for Fannie Mae and Freddie Mac

On September, 7, 2008, the FHFA, working with Treasury and the Federal Reserve, put Fannie Mae and Freddie Mac into conservatorship. The CEOs of each of the GSEs were replaced with CEOs appointed by the FHFA. At the same time, Treasury announced several steps to increase investor confidence in the GSEs and improve liquidity in mortgage-related products.

First, Treasury agreed to provide up to $100 billion of support to each GSE. In exchange for Treasury's commitment, it received preferred stock with a more senior liquidation preference than outstanding preferred stock or common stock. Beginning in 2010, the GSEs will be required to pay a commitment fee for the facility, at a rate to be determined. Treasury also received a warrant to purchase 79.9% of each GSE.

Second, Treasury established a secured lending credit facility, available to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The facility will act as a liquidity back-stop to provide funding and liquidity, expiring in December 2009.

Finally, Treasury announced a program to purchase the mortgage-backed securities issued by the GSEs to provide additional liquidity to the market. The purchase program is also set to expire in December 2009. On October 3rd, Treasury announced the retention of Barclays Global Investors and State Street Corp. to manage the debt acquired through this program.

FHFA announced that the primary mission of the GSEs at this time is "to proactively work to increase the availability of mortgage finance, including by examining the guarantee fee structure, with an eye toward mortgage affordability." The GSEs received authority to increase their holdings of mortgage-backed securities through the end of 2009 and, thereafter, are required to reduce their holdings by 10% per year.

These actions were taken under the authority of the Housing and Economic Recovery Act of 2008.

Federal Reserve Board Undertakes Several Initiatives

On September 14, 2008, the Federal Reserve announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities. The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) was expanded to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the TSLF was expanded to include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged. These changes represented a significant broadening in the collateral accepted under both programs. Schedule 2 TSLF auctions were increased to weekly from bi-weekly and the amounts offered were increased to a total of $150 billion, from a total of $125 billion.

The Federal Reserve also adopted an interim final rule that provides a temporary exception to the limitations in Section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Federal Reserve, and is subject to various conditions to promote safety and soundness.

Federal Reserve Board Liberalizes Rules for Investments in Banks3

On September 22, 2008, the Federal Reserve issued guidelines for non-controlling, minority investments in banks and bank holding companies. The guidelines clarify and liberalize the conditions under which an investor can make a minority investment in a banking organization without being regulated as a bank holding company under the Bank Holding Company Act (BHCA). The guidelines should facilitate private equity fund investment in the financial services sector.

BHCA Framework

Under the BHCA, an investor is deemed to control a banking organization if it (1) directly or indirectly owns 25% or more of any class of voting securities of the banking organization; (2) controls the election of a majority of the board of directors of the banking organization; or (3) otherwise exercises a controlling influence over the management or policies of the banking organization. The guidelines deal with the third prong of the test—by addressing, in general terms, which investments do not constitute the exercise of a controlling influence. Ultimately, a determination whether a particular minority investment involves the exercise of "controlling influence" by the investor depends on all the facts and circumstances of each individual investment, but the guidelines are helpful in providing a degree of predictability that should encourage minority investment.

Existing Policy Statement

The prior policy statement in this area was issued in 1982, in the context of stakeholder investments by out-of-state banks seeking to prepare for the advent of interstate banking operations. The 1982 policy statement has served as a compass for controlling influence determinations involving a broad range of proposed investments. In addition, over time, the Federal Reserve has grappled with many "controlling influence" issues not contemplated by the 1982 policy statement, which has resulted in staff-developed policy in the area. We summarize below the general guidance provided by the policy statement with regard to arrangements that have been particularly sensitive in controlling influence determinations.

What degree of director representation may an investor have on a banking organization board without being deemed to exercise controlling influence?

The Federal Reserve generally has regarded board participation by an investor with between 10% and 24.9% of the voting shares of a banking organization as indicative of control. Under the new policy, a minority investor will generally be permitted to have a single representative on an organization's board of directors without being deemed to exercise controlling influence over that organization. The policy statement also permits a minority investor in an organization to elect two directors of that organization's board, subject to the following conditions: (1) board representation must be proportionate to the minority investment; (2) no more than 25% of the board seats can be controlled by the minority investor; and (3) another shareholder, approved by the Federal Reserve, must control the banking organization. Without regard to the number of board seats held, no minority investor's board representative can serve as Chairman of the Board or chairman of any committee without raising control concerns.

What amount of total equity can a minority investor own in a banking organization without exercising controlling influence?

An investor is deemed to exercise control over a banking organization if it controls 25% or more of any class of voting securities of that banking organization. The BHCA, however, does not explicitly address the holding of nonvoting equity (or a combination of voting and non-voting equity). In the 1982 policy statement, the Board suggested that holding 25% or more of the total equity of a banking organization would be indicative of control. The policy statement liberalized the standards for holding non-voting equity, while continuing to express a belief that a large equity investment (regardless of voting power) can provide an investor with controlling influence over the organization. Under the new policy statement, a minority investor will not be seen to exercise controlling influence if its investment meets the two following criteria:

  • Its total equity investment does not exceed one-third of the total equity of the organization, and It does not own 15% or more of any class of voting securities of the organization.
  • In the context of investment in non-voting shares, the Federal Reserve also discusses situations under which rights to convert non-voting shares into voting shares will be deemed to trigger control issues.

To what degree can a minority investor consult with management without being deemed to exercise controlling influence?

Minority investors often seek to protect their investments by communicating to management and/or to the board their views about how best to enhance the value of the organization. Thus, a minority investor's board representative might seek to advocate changes in management; new strategies for the organization; capital or liquidity policies; mergers or acquisitions or other major corporate policies or decisions. Under the policy statement, advocacy in and of itself will not be equated with controlling influence as long as decision-making is left to an organization's board, shareholders or management, as the case may be. Nonetheless, control could be implicated if advocacy were linked to explicit or implicit threats to divest, sponsor proxy solicitations or take other actions that might coerce a banking organization or its management to take a particular course of action.

What other circumstances might demonstrate that a minority investor in fact exercises a controlling influence?

In the past, a non-controlling minority investor has generally been prohibited from conducting any material business transactions or having material business relationships with the banking organization in which it has invested. However, in the past business relationships limited quantitatively and qualitatively, have been allowed particularly if the minority investment were closer to 10% than to 25%. Such relationships will continue to be reviewed on a case-by-case basis to determine whether they might involve a controlling influence.

Past precedent and the 1982 policy statement also recognize that controlling influence might be exercised through the imposition by the investor of particular covenants accompanying the investment. In this regard, there has been particular concern about such covenants that might affect hiring, firing, executive compensation, engaging in new business lines, making substantial changes in operations, raising additional capital or otherwise retaining, disposing of or acquiring material corporate assets. On the other hand, covenants that are protective of the essential characteristics of the security held by the minority investor generally have been viewed as permissible. As the policy statement makes clear, these would include, for example, covenants that might prohibit the issuance of senior securities or the incurrence of senior borrowings that might adversely affect the existing rights or preferences of the security in which the minority investor has invested. Covenants that provide information rights to an investor also do not necessarily trigger control considerations.

The Federal Reserve has moved cautiously in the control area in recent months in anticipation of the issuance of these guidelines. The guidelines should ease the path for action on pending applications that involve controlling influence determinations and encourage minority investment in banking organizations at a time when capital in the industry is sorely needed. In particular, the guidelines provide a constructive framework for private equity funds to invest in the financial services sector.

The Federal Reserve takes Action Relating to AIG

On September 16, 2008, the Federal Reserve Board, with the support of the Treasury, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan was described as having terms and conditions designed to protect the interests of the U.S. government and taxpayers. The action was taken based on the determination that a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

The liquidity facility was designed to assist AIG in meeting its obligations as they became due, to facilitate the sale of certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. The facility has a 24-month term, an interest rate of three-month Libor plus 850 basis points and a maximum draw amount of $85 billion. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries, including the stock of substantially all of the regulated subsidiaries. The expected source of repayment was proceeds of the sale of the firm's assets. The U.S. government received a 79.9 percent equity interest in AIG and the right to veto the payment of dividends to common and preferred shareholders.

On October 8, 2008, the Federal Reserve announced a program under which the New York Fed would borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral. The securities were previously lent by AIG's insurance company subsidiaries to third parties.

Draws under the existing $85 billion loan facility were used, in part, to settle transactions with counterparties returning these third-party securities to AIG. The new program was designed to allow AIG to replenish liquidity used in settling those transactions, while providing enhanced credit protection to the New York Fed and U.S. taxpayers in the form of a security interest in these securities.

Federal Reserve Approves Bank Holding Company Applications

On September 21, 2008, the Federal Reserve approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

The Federal Reserve authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing PDCF to provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure. The Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Federal Reserve authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

Federal Reserve Emergency Action regarding purchases of commercial paper

On October 7, 2008, the Federal Reserve announced the creation of the Commercial Paper Funding Facility (CPFF), and updated program terms and conditions were published on October 14, 2008. As the credit crisis continued to unfold, it has become clear that issuers of commercial paper were encountering increasing difficulty in accessing the commercial paper market to issue new commercial paper or to refinance portions of the approximately $1.5 trillion of commercial paper currently outstanding as it becomes due. The CPFF will be structured as a credit facility to a special purpose vehicle (SPV) authorized under Section 13(3) of the Federal Reserve Act. The Treasury will make a special deposit at the Federal Reserve Bank of New York in support of the CPFF. The Federal Reserve will commit to lend to the SPV at the target federal funds rate and draws on the CPFF will be on an overnight basis, with recourse to the SPV and secured by all assets of the SPV. The SPV will be limited in the amount of commercial paper that it may purchase from a single eligible issuer; it will be limited to the greatest amount of commercial paper outstanding on any day between January 1 and August 31, 2008, less any amount of the issuer's outstanding commercial paper held by investors other than the SPV. Purchases of commercial paper by the SPV will cease on April 30, 2009, unless the Federal Reserve Board agrees to extend the facility. The Federal Reserve will continue to fund the SPV after that date until the SPV's assets mature.

Based on terms and conditions associated with the CPFF published by the Federal Reserve Bank of New York the SPV will purchase 3-month U.S. dollar-denominated commercial paper directly from eligible issuers at a spread over the 3-month overnight index swap (OIS) rate; 300 basis points for ABCP and 100 basis points for unsecured commercial paper. The Federal Reserve has indicated that the SPV will only purchase commercial paper from U.S. issuers, though U.S. issuers with a foreign parent company also will be permitted to sell commercial paper to the SPV.

Commercial paper purchased by the SPV must be rated at least A1/P1/F1 by a major NRSRO and, if rated by multiple NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs. Non-ABCP issuers will be charged an unsecured credit surcharge of 100 basis points per annum unless they can either provide collateral for the commercial paper that is acceptable to the New York Fed or obtain an indorsement or guarantee of its obligations that is acceptable to the New York Fed. Previously, the Federal Reserve has indicated several ways in which non- ABCP commercial paper may be secured:

  • the issuer pays the SPV an upfront fee based on the commercial paper initially sold to the SPV and an additional fee based on subsequent commercial paper sales above that amount; or
  • the issuer obtains an endorsement or guarantee of the issuer's obligations on the commercial paper sold to the SPV that is satisfactory to the Federal Reserve; or
  • the issuer provides collateral arrangements that are satisfactory to the Federal Reserve; or
  • the issuer otherwise provides security satisfactory to the Federal Reserve.

G-7 Finance Ministers and Central Bank Governors Plan of Action

On October 10, 2008, the G-7 agreed that the current situation calls for urgent and exceptional action, and issued a statement of commitment to work together to stabilize financial markets and restore the flow of credit, to support global economic growth. Specifically, the members agreed to:

  1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
  2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
  3. Ensure that G-7 banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
  4. Each country will ensure that its national deposit insurance and guarantee programs are robust and consistent so that retail depositors will continue to have confidence in the safety of their deposits.
  5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. There was agreement to use macroeconomic policy tools as necessary and appropriate.

In addition, a statement was issued in strong support of the International Monetary Fund's critical role in assisting countries affected by this turmoil. There was also a commitment to accelerate full implementation of the Financial Stability Forum recommendations and further commitment to the pressing need for reform of the financial system. On October 10, 2008, the Financial Stability Forum presented to the G-7 Finance Ministers and central bank governors a follow-up report to its April report, Enhancing Market and Institutional Resilience. Finally, a statement was made in support of further strengthening cooperation and working with others to accomplish this plan.

FDIC Guarantee of Debt and Deposits: Temporary Liquidity Guarantee Program

On October 14, 2008, the FDIC announced the creation of a new program, the Temporary Liquidity Guarantee Program (TLGP). The purpose of the program is to strengthen confidence and encourage liquidity in the banking system.

Institutions able to participate include (1) FDIC insured depository institutions, (2) U.S. bank holding companies, (3) U.S. financial holding companies and (4) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under section 4(k) of the BHC.

Under TLGP, newly issued senior unsecured debt issued on or before June 30, 2009 would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. Debt included in the program includes promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. The aggregate coverage for an institution may not exceed 125% of debt outstanding on September 30, 2008 that was scheduled to mature before June 30, 2009. Coverage extends to June 30, 2012, even if the maturity of the debt is beyond that date.

In addition, any participating depository institution will be able to provide full deposit insurance coverage for noninterest bearing deposit transaction accounts, regardless of dollar amount. These are primarily payment-process accounts, such as payroll accounts used by businesses. This guarantee will expire on December 31, 2009.

Special fees will be used to fund the program; it will not rely on taxpayer funding. Participants will be charged a 75-basis point fee to protect new debt issues. Current insurance assessments will be increased by a 10-basis point surcharge to fully cover the non-interest bearing deposit transaction accounts. The new coverage will extend to all FDIC insured institutions for the first 30 days without the institution incurring any cost. After that initial period, institutions wishing to no longer participate must opt out or be assessed for future participation. If an institution opts out, the guarantees are good only for the first 30 days.

The FDIC Improvement Act of 1991 authorizes the creation of TLGP upon a determination of systemic risk. The boards of the FDIC and the Federal Reserve made recommendations and, after consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act. As a result of the TLGP, banking regulators will be implementing an enhanced supervisory framework to assure appropriate use of the new guarantee and prevent rapid growth or excessive risk-taking. The FDIC will maintain control over eligibility for the program, in consultation with each institution's primary federal regulator.

Footnotes

1. See Morrison & Foerster LLP's News Bulletin "SEC Proposes Reforms to Credit Rating Agencies" at http://www.mofo.com/docs/pdf/080702CreditAgencies.pdf and "SEC Proposal for Credit Rating Agency Reform: Potential Impact on the Asset-backed Markets" at http://www.mofo.com/news/updates/files/080805AgencyReform.pdf .

2. See Morrison & Foerster LLP's News Bulletins "SEC Clarifies Short Sale Restrictions and Related Disclosure Requirements" at http://www.mofo.com/news/updates/files/080928SEC.pdf ; "SEC Takes Emergency Action on Shorting; South Dakota Short Selling Ballot Initiative" at href="http://www.mofo.com/news/updates/files/080917ShortSell.pdf ; and "A Short Summary of Short Selling Restrictions" at http://www.mofo.com/news/updates/files/080730ShortSelling.pdf

3. See Morrison & Foerster LLP's News Bulletin "Federal Reserve Board Liberalizes Rules for Investments In Banks" at http://www.mofo.com/news/updates/files/14497.html

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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