Financial Markets in Crisis: Expanding Authorities to Promote Liquidity and Protect Homeowners

November 7, 2008

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on the new details the FDIC has issued regarding its Temporary Liquidity Guarantee Program (TLGP) and recent developments in the Administration’s implementation of TARP and other measures to restore liquidity to the markets.

New Details on FDIC Temporary Liquidity Guarantee Program

The FDIC has released more detailed information on its Temporary Liquidity Guarantee Program, a program designed to thaw the credit markets by temporarily guaranteeing newly issued senior unsecured debt and by providing coverage for non-interest bearing transaction deposit accounts.  Entities eligible to participate in the program include banking institutions, such as FDIC-insured depository institutions, U.S. bank holding companies and financial holding companies, and certain U.S. savings and loan holding companies.

All eligible institutions are enrolled automatically in the program.  Institutions may elect not to participate in either the debt guarantee portion of the program, the deposit account guarantee portion, or both.  All eligible entities held by a bank holding company or savings and loan company must make the same election regarding whether to participate in each part of the program.

Initially, entities had to decide whether to opt out by November 12, 2008.  Earlier this week, however, the FDIC announced that it was extending the opt-out deadline to December 5, 2008.  And today, the FDIC published in the Federal Register an amendment to its TLGP Interim Rule extending the opt-out deadline and also extending the deadline for complying with certain disclosure requirements to December 19, 2008.[1]  The Amendment also moves the effective date of the Interim Rule from October 23, 2008 to November 4, 2008.

The deadline for comment on the Interim Rule remains the same, November 13, 2008.  As of today, some sixty-two comments are posted on the FDIC web site.

 Beginning December 19, 2008, insured depository institutions must post signs informing their depositors whether they are participating in the TLGP, and all eligible entities must inform their customers whether they are participating in the debt guarantee portion of the program.  The FDIC also will maintain a list of institutions which have opted out on its website.

Bank Deposits:  Deposit accounts eligible for coverage include all non-interest bearing transaction deposit accounts held in the domestic offices of participating FDIC-insured institutions.  Money market deposit accounts, negotiable order of withdrawal accounts, and negotiable CDs are not covered, nor are deposits payable solely outside the U.S., including Eurodollar deposits.  Funds in sweep accounts will be treated according to which kind of account they are transferred into, except that funds swept into a non-interest bearing savings account from a non-interest bearing transaction account will be treated as though they are in the transaction account.  If a depository institution has failed, sweeps to external accounts will not be completed and the funds will remain in the depositor’s account in the failed institution, leaving them covered under the TLGP.

Unsecured Debt:  The senior unsecured debt eligible for coverage includes federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit owed to a bank, deposits in international banking facilities owed to a bank, and Eurodollar deposits owed to a bank.  The guarantee is limited to 125 percent of the par or face value of the entity’s senior debt outstanding, and will be calculated individually for each entity under a holding company.  The guarantee will extend until June 30, 2012 or until the maturity of the debt.  Once the entity reaches the 125 percent limit, the entity may continue to issue debt, but must disclose that it is not guaranteed.  After the 30 day opt-out period, eligible institutions will be charged a fee calculated by multiplying the amount of eligible debt guaranteed times the term of debt in years times 75 basis points.[2]

Related Developments in Federal Reserve Commercial Paper Funding Facility

Recall that the Federal Reserve Commercial Paper Funding Facility (CPFF) purchases three-month unsecured and asset-backed commercial paper from eligible issuers through a special purpose vehicle capitalized by the Federal Reserve Bank of New York.  The CPFF purchases commercial paper at the three-month overnight index swap rate plus 100 basis points for unsecured commercial paper and plus 300 basis points for asset-backed commercial paper.  In addition, a 100 basis point per annum charge is assessed on each trade of unsecured commercial paper. 

To participate in the CPFF, unsecured commercial paper must be effectively guaranteed in a manner satisfactory to the New York Fed.  This week, the New York Fed announced that commercial paper covered by the FDIC’s TLGP will be considered satisfactorily guaranteed and, after December 5, 2008, will not be subject to the 100 basis point surcharge applicable to unsecured paper.

TARP Developments

Though Treasury was expected to implement the asset purchase component of the Troubled Asset Relief Program (TARP) quickly after the President signed the Emergency Economic Stabilization Act of 2008 into law, it has yet to select asset managers.  We are told that Treasury continues to work out the details of TARP and could announce decisions soon.   However, Treasury is now consulting with President-Elect Obama’s transition team, which raises the possibility of fundamental shifts in the course of TARP and other administration initiatives.

While asset purchases have been slow to get off the ground, TARP’s Capital Purchase Program (CPP) has gained momentum.  Through the CPP, Treasury will inject capital directly into banking institutions.  Initially, nine large institutions agreed to participate at Treasury’s behest.  Soon thereafter, twenty-six more institutions agreed to accept capital contributions.[3]  In addition, earlier this week, Treasury announced that it has hired law firms Hughes, Hubbard & Reed, LLP and Squire, Sanders & Dempsey, LLP to handle legal issues arising under the CPP.

Treasury released new CPP documents late last week, including the securities purchase term sheet and form letter of agreement.[4]  Banking institutions must apply to the program by November 14, 2008.  Today, Treasury posted a solicitation for financial agents to provide equity, debt, warrants, and asset management services to help administer the CPP.  Applicants should note that Treasury will hire these agents using its financial agent authority; contracts will not be governed by the Federal Acquisition Regulation.[5]  Interested parties must apply by 5 p.m. (EST) on November 13, 2008. 


 [1]   73 Fed. Reg. 66160 (Nov. 7, 2008).

 [2]   For more information on FDIC’s Temporary Liquidity Guarantee Program, see http://www.fdic.gov/regulations/resources/TLGP/index.html.

 [3]   For a continually updated list of participating institutions and the amount of capital Treasury will invest in them, see The Wall Street Journal’s chart here: http://online.wsj.com/public/resources/documents/st_BANKMONEY_20081027.html.

[4] To view the CPP documents online, see
http://www.treasury.gov/initiatives/eesa/.   

 [5]   For a discussion of these two authorities, see
http://www.treasury.gov/initiatives/eesa/authorities.shtml.

Gibson, Dunn & Crutcher LLP

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)
John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)
Amy L. Goodman
– Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)
Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)
Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com)

Securities Law and Corporate Governance Expertise
Ronald O. Mueller
– Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)
K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)
Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)
Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)
Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)
John H. Sturc
– Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)
Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com)
Adam H. Offenhartz – New York (212-351-3808, aoffenhartz@gibsondunn.com)

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)
Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)
Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com)

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589, hadler@gibsondunn.com)
Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)
Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)
Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)
Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)
Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)
C. William Thomas, Jr.
– Washington, D.C. (202-887-3735, wthomas@gibsondunn.com)

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, mgreaney@gibsondunn.com)

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, esopher@gibsondunn.com)

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)
Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)
Andrew Levy – New York (212-351-4037, alevy@gibsondunn.com)
Fred Pillon – San Francisco (415-393-8241, fpillon@gibsondunn.com)
Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)
Andrew Lance – New York (212-351-3871, alance@gibsondunn.com)
Eric M. Feuerstein – New York (212-351-2323, efeuerstein@gibsondunn.com)
David J. Furman – New York (212-351-3992, dfurman@gibsondunn.com)

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com)

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com)
Oscar Garza – Orange County (949-451-3849, ogarza@gibsondunn.com)
Craig H. Millet – Orange County (949-451-3986, cmillet@gibsondunn.com)
Janet M. Weiss – New York (212-351-3988, jweiss@gibsondunn.com)

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)
Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com)

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)
Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)
Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com)
Amber Busuttil Mullen – Los Angeles (213-229-7023, amullen@gibsondunn.com

© 2008 Gibson, Dunn & Crutcher LLP

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