Financial Markets in Crisis: Final TLGP Rule

November 21, 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 final rule issued today by the Federal Deposit Insurance Corporation (the "FDIC") governing its Temporary Liquidity Guarantee Program (the "TLGP").[1]

On October 13, 2008, the FDIC adopted the TLGP, which guarantees newly issued senior unsecured debt of banks, thrifts, and most holding companies of federally insured depository institutions (the "Debt Guarantee Program") as well as non-interest bearing transaction deposit accounts (the "Transaction Account Guarantee Program").  Through these programs, the FDIC hopes to restore liquidity to the frozen credit markets, and in particular, to encourage interbank lending.  The program covers eligible debt issued between October 14, 2008 and June 30, 2009 with guarantees expiring no later than June 30, 2012.

On October 23, 2008, the FDIC issued an interim rule with a comment period lasting until November 13, 2008; the FDIC subsequently amended the Interim Rule on November 3, 2008 (the "Interim Rule").  After receiving more than 700 comments on the Interim Rule, the FDIC Board approved, today, a final rule (the "Final Rule") governing the program.  The Final Rule includes some important amendments to the Interim Rule.  We have noted some of these changes below.  Key provisions of the TLGP under the Final Rule are as follows:

Eligibility: Entities eligible to participate in the TLGP include federally-insured depository institutions, United States bank holding companies, and United States savings and loan companies that engage only in activities permissible for financial holding companies.  The FDIC may extend eligibility to affiliates of eligible entities on an individual basis.

Enrollment: Eligible entities will be enrolled automatically in the TLGP.  Entities must decide whether to opt out by December 5, 2008.[2]  Participation for the first 30 days of the program is free.  If an entity remains in the program after December 5, 2008, the entity will be subject to certain fees retroactive to November 13, 2008.

Conditions of Participation: Once an entity issues debt guaranteed under the TLGP, the entity consents to certain conditions of participation in the program, including that it will provide certain disclosures to the FDIC and to allow the FDIC to conduct on-site inspections as needed.  Non-compliance with the program’s conditions may result in civil monetary penalties and termination of deposit insurance.

Publication of Participation: The FDIC will publish a list of eligible entities that have opted out of either the debt guarantee program or out of the transaction account guarantee program. 

Details of the Debt Guarantee Program

• Under the Debt Guarantee Program, the FDIC temporarily will guarantee newly-issued senior unsecured debt up to set amounts. 
• Senior Unsecured Debt: The Final Rule redefined the term "senior unsecured debt" to mean unsecured borrowing issued between October 13, 2008 and December 5, 2008 that 1) "is evidenced by a written agreement or trade confirmation," 2) "has a specified and fixed principal amount," 3) "is noncontingent and contains no embedded options, forwards, swaps, or other derivatives," and 4) "is not, by its terms, subordinated to any other liability."  If the debt is issued after December 5, 2008, it must meet the listed criteria and must have a stated maturity of more than 30 days.  Debt that is payable upon demand is excluded from the definition of "senior unsecured debt."

• The Interim Rule also covered overnight and short-term borrowing of 30 days or less.  Because issuers relied on the Interim Rule when issuing debt, the change only excludes short term debt issued after December 5, 2008.
• Senior unsecured debt includes federal funds purchased, promissory notes, commercial paper, unsubordinated unsecured notes, certificates of deposit standing to the credit of a bank, bank deposits in an international banking facility, and Eurodollar deposits standing to the credit of a bank.  It may be denominated in foreign currency.
• Amount of Debt Guaranteed: Under the TLGP, the FDIC will guarantee outstanding debt up to 125 percent of the par value of the participating entity’s senior unsecured debt that was outstanding as of September 30, 2008 and scheduled to mature on or before June 30, 2009.  Under the Final Rule, if a participating entity that is an insured depository institution did not have any senior unsecured debt, or only had federal funds purchased, outstanding on September 30, 2008, its guarantee limit is two percent of its consolidated total liabilities of September 30, 2008.  Other participating entities may seek to have some debt guaranteed, up to a limit determined on a case-by-case basis by the FDIC.  The Final Rule also allows a participating entity to combine its debt limit with its holding company’s debt limit, so long as the guaranteed debt does not exceed the combined amount. 
• Disclosures: Participating entities must make uniform disclosures prescribed by the Final Rule, which they must include in written materials that underlie senior unsecured debt issued between December 19, 2008 and June 30, 2008.  The disclosures must indicate whether the debt is or is not guaranteed under the TLGP. 
• Assessments: The Final Rule modifies the assessments initially published.  Instead of a flat fee, the new structure works on a sliding scale. For debt with a maturity of 180 days or less, the annualized assessment rate is 50 basis points, for 181-364 days, 75 basis points, and for 365 days or more, 100 basis points.  Though the FDIC believes that the program will pay for itself, if the program does run a deficit, the FDIC will fund it through systemic risk assessments on federally insured depository institutions. 
• Payment of Claims

• Triggering Conditions: An uncured payment default by a participating entity will trigger the FDIC’s obligation to pay on FDIC-guaranteed debt.  This represents a significant change from the Amended Interim Rule, which provided that the failure of or the filing of bankruptcy by a participating entity would trigger payment.
• Payment Process: Claimants must demand payment within 60 days of the occurrence of an uncured payment default on FDIC-guaranteed debt.  Claimants must file specific information with the claim and must assign their rights in the debt to the FDIC.  The FDIC will satisfy the debt obligation by making payments according to the terms of the debt instrument.  The FDIC-insured entity then will become indebted to the FDIC for any payments the FDIC makes to satisfy the guarantee obligation.  The FDIC will consider the triggering of such payment on the depository institution’s behalf grounds to appoint the FDIC as the conservator or receiver of the institution. 

Details of the Transaction Account Guarantee Program

• Under the Transaction Account Guarantee Program, the FDIC will temporarily provide for a full guarantee of funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts through December 31, 2009. 
• IOLTAs: Under the Final Rule, Interest on Lawyers’ Trust Accounts ("IOLTAs") will be covered by the guarantee program.
• NOW Accounts: Under the Final Rule, and unlike under the Interim Rule, the program will cover Negotiable Order of Withdrawal Accounts ("NOW Accounts") with interest rates no higher than 0.5 percent. 
• Disclosures: The Final Rule requires that all insured depository institutions that offer transaction accounts must post prominent notices in their main offices and branches clearly indicating whether they are participating in the Transaction Account Guarantee Program.  The Final Rule also requires institutions which offer Internet deposit services to post the same disclosures on their websites.  Institutions may develop their own sweep product disclosures within certain limitations.  

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)
Mark K. Schonfeld – New York (212-351-2433, mschonfeld@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)
David M. Feldman – New York (212-351-2366, dfeldman@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)
Matthew J. Williams – New York (212-351-2322, mjwilliams@gibsondunn.com)
J. Eric Wise – New York (212-351-2620, ewise@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)
Charles F. Feldman – New York (212-351-3908, cfeldman@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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