Recent US Government
Intervention in Support of
the Financial Markets
Overview of the US Capital
Purchase Plan and Liquidity
Guarantee Program
Thomas J. Pax
Partner, Clifford Chance US LLP
November 6, 2008
US Capital Purchase Program -- Authority

The US Congress passed the Emergency Economic Stabilization
Act (Pub. L. No. 110-343) (“EESA”) on October 3, 2008

EESA authorized the US Treasury to use up to $700 billion to
purchase troubled assets

EESA defined “Troubled Assets” to include “any other financial
instrument” that Treasury and the Fed determined “the purchase
of which is necessary to promote financial market stability”
Recent Goverment Intervention in the Financial Markets · November 6, 2008
1
US Capital Purchase Program -- Overview

The Capital Purchase Program has become the cornerstone of the
US government’s plan rather than EESA’s original focus, the
purchase of troubled assets

The program will be used to purchase up to $250 billion of senior
preferred shares of banks and thrift institutions

Bank of America, Bank of New York Mellon, Citigroup, Goldman
Sachs, JPMorgan Chase, Morgan Stanley, State Street, Wells
Fargo, and Merrill Lynch initially opted to participate in the program
and sold preferred shares in the aggregate of $125 billion

Since the original nine institutions initiated the program, press
reports indicate that Capital One, Huntington, KeyCorp, PNC, and
SunTrust have accessed another $30 billion

PNC is reported to have used its funds in its acquisition of National
City
Recent Goverment Intervention in the Financial Markets · November 6, 2008
2
US Capital Purchase Program -- Eligibility

Participation is available for bank holding companies, financial
holding companies, insured depository institutions, and savings
and loan holding companies that engage only in activities that are
permitted for financial holding companies under Section 4(k) of the
Bank Holding Company Act

Financial institutions controlled by foreign entities are currently
not eligible under this program

All eligible Qualifying Financial Institutions must apply to be a
part of the program by November 14, 2008. The eligible
institution must submit an application to the appropriate federal
banking agency

The minimum subscription amount will be 1% of risk-based
assets, while the maximum subscription will be the lesser of 3%
of risk-based assets or $25 billion
Recent Goverment Intervention in the Financial Markets · November 6, 2008
3
US Capital Purchase Program -Purchased Preferred Shares

Shares purchased under the program will qualify as Tier 1 capital and will
rank senior to common stock and pari passu with existing preferred shares

The purchased shares will be non-voting and pay a dividend of 5% per year
for the first five years, and 9% per year for subsequent years

The Treasury must consent to any increase in common dividends per share
for the first three years of the program, unless all senior preferred shares
have been redeemed or control of the shares has been transferred to a third
party

In the event of a liquidation, or any other winding up of the financial
institution, the senior preferred shares will have a liquidation preference of
$1000 per share

Shares will be callable at par after three years
Recent Goverment Intervention in the Financial Markets · November 6, 2008
4
US Capital Purchase Program -- Warrants

The Treasury will obtain warrants for common stock with a
market value of 15% of the amount of senior preferred stock

For publicly traded companies, the Treasury will receive warrants
for nonvoting common stock, preferred stock or voting common
stock

For non-publicly traded companies, the Treasury will receive a
warrant for common or preferred stock or a senior debt
instrument

All of the warrants must contain anti-dilution provisions
Recent Goverment Intervention in the Financial Markets · November 6, 2008
5
US Capital Purchase Program -Executive Compensation Standards

To qualify for the program, financial institutions must
adopt the Treasury’s standards for executive
compensation

The program requires that financial institutions restrict
incentives for executives to take excessive risks, and
clawback any bonus or incentive compensation paid to
officers or executives as a result of inaccurate or false
earnings statements
Recent Goverment Intervention in the Financial Markets · November 6, 2008
6
US Capital Purchase Programs in Other Countries
United Kingdom
Government Bank Reconstruction Fund -- HM Treasury
would make available at least GBP50bn in exchange for
ordinary or preference shares.
Germany
Financial Market Stabilization Fund -- EUR80bn in exchange
for non-voting preferred shares, shares and hybrid capital such
as participation certificates.
France
Recapitalization fund -- EUR 40bn for subscription in
preferred shares or subordinated debt issued.
Switzerland
The Swiss National Bank will subscribe to CHF6bn
mandatory convertible notes (MCN) of UBS in return for UBS
transferring illiquid assets to a special purpose vehicle for
orderly liquidation.
Recent Goverment Intervention in the Financial Markets · November 6, 2008
7
US Temporary Liquidity Guarantee Program

On October 14, 2008, Treasury invoked the systemic risk exception to
the FDIC Improvement Act of 1991, permitting the Federal Deposit
Insurance Corporation to implement the Temporary Liquidity Guarantee
Program

The program has two components:

One component guarantees newly issued senior unsecured debt of
the participating organizations, within a certain limit, issued between
October 14, 2008 and June 30, 2009. In the case of debts maturing
after June 30, 2009, the guarantee remains in effect until June 30,
2012
–

Eligible senior debt includes promissory notes, commercial paper,
interbank funding and any unsecured portion of secured debt
The other component provides full coverage for non-interest bearing
transaction deposit accounts, notwithstanding dollar amount, until
December 31, 2009
Recent Goverment Intervention in the Financial Markets · November 6, 2008
8
US Temporary Liquidity Guarantee Program -Eligible Institutions & Fees

Eligible entities generally include: FDIC-insured depository institutions, US
bank holding companies, US financial holding companies, US saving and
loan holding companies that engage only in activities that are permitted for
financial holding companies under Section 4(k) of the Bank Holding
Company Act

FDIC-insured institutions owned by a non-US entity are also eligible to
participate, but insured branches of foreign banks are excluded

All eligible institutions are automatically enrolled in the programs at no cost

Institutions that do not want to participate in the programs must “opt out” of
one or both programs by December 5, 2008. After that time, participating
institutions will be assessed fees
Recent Goverment Intervention in the Financial Markets · November 6, 2008
9
US Temporary Liquidity Guarantee Program -Terms and Conditions

Participants in the program will be charged a 75-basis point fee to
protect their new debt issues and a 10-basis point surcharge will be
added to an institution's current insurance assessment to cover the
non-interest bearing deposit transaction accounts

The amount of debt covered by this program may not exceed 125%
of debt that was outstanding as of September 30, 2008 that was
slated to mature before June 30, 2009

An enhanced supervisory regime will be put in place to ensure the
appropriate use of the guarantee
Recent Goverment Intervention in the Financial Markets · November 6, 2008
10
US Money Market Funds Guarantee

The Treasury will guarantee that investors receive $1 for each
money market fund share held as of September 29, 2008 ($1 is the
standard net asset value for money market mutual funds)

The guarantee will be triggered if a participating fund’s net asset
value falls below $0.995

Eligible funds must be regulated under the Investment Company Act
of 1940, and must maintain a stable share price of $1

Funds must be publicly offered and registered with the SEC

Both taxable and non-taxable funds are eligible to participate

There is no limit on the amount of shares that can be covered
Recent Goverment Intervention in the Financial Markets · November 6, 2008
11
Government Guarantees in Other Countries
United Kingdom
Credit guarantee scheme of up to GBP250bn pursuant to
which HM Treasury is to guarantee eligible liabilities issued
after October 13, 2008 and before April 9, 2009 of certain
eligible institutions
Germany
May issue guarantees of up to EUR400bn with respect to
liabilities incurred from date of enactment of authorizing
legislation until December 31, 2009.
Credit guarantee scheme without overall set amount for
liabilities issued before October 31, 2009, including CDs,
interbank deposits, and MTNs. The guarantee amount would
be determined for each institution by the Ministry of Finance
separately.
Canadian Lenders Assurance Facility would guarantee certain
senior unsecured marketable instruments issued until April 30,
2009. There is no set maximum amount for the guarantee
sheme.
Belgium
Canada
Recent Goverment Intervention in the Financial Markets · November 6, 2008
12
Recently Established US Liquidity Facilities

Commercial Paper Funding Facility -- US branches of a
foreign bank and US issuers with a foreign parent are
eligible participants

Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility -- US branches of foreign banks and
US depository institutions are eligible participants

Money Market Investor Funding Facility -- Eligible investors
include US money market funds and over time may include
other money market investors
Recent Goverment Intervention in the Financial Markets · November 6, 2008
13
Liquidity Measures in Other Countries
United Kingdom
GBP100bn under special liquidity scheme,
allowing illiquid assets to be swapped for T-Bills.
BoE to provide short-term liquidity (theoretically
unlimited).
Germany
Bundesbank to take steps to secure liquidity of
money market funds and near-market money
funds through temporary provision of special
liquidity support in return for collateral.
France
The French government will provide up to
EUR320bn until December 31, 2009 to address
funding needs of French banks.
Recent Goverment Intervention in the Financial Markets · November 6, 2008
14
Questions?
Contact:
Tom Pax
+1 202 912 5168
Thomas.Pax@CliffordChance.com
WA417839
Recent Goverment Intervention in the Financial Markets · November 6, 2008
15