Financial Markets in Crisis: The Capital Assistance Program Unveiled

February 25, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is closely tracking government responses to the turmoil that has catalyzed a 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 Capital Assistance Program, the details of which were released by the Treasury on February 25, 2009.

The Capital Assistance Program and its Role in the Financial Stability Plan

In General.  The Treasury Department today released the details of the Capital Assistance Program ("CAP").  CAP seeks to "ensure the continued ability of U.S. financial institutions to lend to creditworthy borrowers in the face of a weaker than expected economic environment and larger than expected potential losses."  The program has two core elements: (i) a capital assessment to determine if any of the major U.S. banking institutions need to establish an additional capital buffer during this period of uncertainty; and (ii) a program to provide qualifying financial institutions with contingent common equity funded by the U.S. government as a bridge to private capital in the future.

U.S. government ownership of financial institutions is not an objective of CAP.  The stated goal is to keep the period of government ownership temporary and encourage the return of private capital to replace government investment.

The application deadline for the CAP is May 25, 2009.

Executive Compensation Restrictions.  CAP participants will be subject to new executive compensation requirements consistent with the amendments to the Emergency Economic Stabilization Act made by the Stimulus Act.  (See Stimulus Act Enhances Executive Compensation Standards; TALF Expanded for a description of the changes made by the Stimulus Act).  Treasury indicates that it will release guidance implementing the new executive compensation standards set out in the Stimulus Act shortly.

Relationship to CPP.  The Treasury Department launched its Capital Purchase Program ("CPP") in October 2008.   (See The Capital Purchase Program Takes Shape  for a client alert on the program).   Though there are many similarities between the two programs, the CAP is not replacing the CPP.  Indeed, the CPP continues to make investments in Qualifying Financial Institutions ("QFIs").

Eligibility for capital under CAP will be consistent with the criteria and process established for identifying QFIs under the CPP.  The application documents and term sheets for the two programs are alike in most respects. Indeed, Treasury guidance warns that applicants should make sure that they are filling out the proper forms.

QFIs currently participating in the CPP will be permitted (with supervisory approval) to exchange preferred stock for the convertible preferred issued under the CAP.  A QFI that exchanges CPP preferred for CAP convertible preferred presumably will then be subject to the new (and stricter) executive compensation rules.

Stress Test.  Federal banking and thrift supervisors will undertake a capital planning exercise with each of the 19 major banking institutions (Bank Holding Companies with more than $100 billion in risk-weighted assets).  The assessment will allow supervisors to determine whether the institutions require an additional capital buffer to comfortably absorb losses and continue lending even if the markets deteriorate further.  If the bank requires additional capital, it will have a six month window to either raise the capital privately or access the capital made available through CAP.

Convertible Preferred Shares.  The capital that will be provided to eligible banking institutions through CAP will be a preferred security that is convertible into common equity.  The CAP convertible security is intended to serve as contingent common equity for the bank that can improve investor confidence in the institution and meet supervisory expectations regarding the amount and composition of capital. It is noteworthy that the capital buffer to be maintained is not intended to create a new capital standard. Instead, capital is being made available to help banking institutions absorb potential future losses and support lending to creditworthy borrowers in the economic downturn, within the parameters of the current supervisory framework.

Summaries of the terms of the convertible preferred security and warrants issued by the QFI follow.

Summary of Terms of Convertible Preferred Security[1]


Qualifying Financial Institutions ("QFI"):

  • any U.S. bank or U.S. savings association not controlled by a Bank Holding Company or Savings and Loan Company;
  • any top-tier U.S. Bank Holding Company; and
  • any top-tier U.S. Savings and Loan Company which engages solely or predominately in activities that are permitted for financial holding companies.

Application Process

CAP is available to publicly traded[2] QFIs that meet eligibility requirements similar to those used for the Capital Purchase Program ("CPP").

Relation to CPP

The issuance will be a "Qualified Equity Offering" under the CPP to the extent the proceeds of the sale are used to redeem Preferred Shares sold to the Treasury under the CPP.


Each QFI may issue an amount of Convertible Preferred equal to more than 1% and less than 2% of its risk-weighted assets.  Additional Convertible Preferred may be issued to redeem CPP Preferred Shares or if the QFI is deemed to need exceptional assistance.


Liquidation preference of $1,000 per share.


Mandatorily converts to common stock after 7 years.

Optional Conversion

Convertible in whole or in part at the option of the QFI at any time, subject to the approval of the Federal banking agency.

Conversion Price

90% of the average closing price for the common stock for the 20 day trading period ending February 9, 2009, subject to customary anti-dilution adjustments.


Senior to common stock and pari passu with existing preferred shares other than preferred shares which by their terms rank junior to any existing preferred shares.

Regulatory Capital

Tier 1, for holding companies.


Cumulative dividends at a rate of 9% per annum, compounding quarterly.


May be redeemed at any time, subject to Federal banking agency approval, in whole or in part solely with the proceeds of one or more issuances of common stock for cash which result in aggregate gross proceeds of not less than 25% of the issue price of the Convertible Preferred.

If redeemed within the first two years, redeemable at par, plus any accrued and unpaid dividends.

If redeemed after two years, redeemable at the greater of (i) par plus accrued and unpaid dividends, and (ii) the as-converted value.

Following redemption in whole, the QFI shall have the right to repurchase the warrant and any common stock then held by the Treasury at fair market value.

Dividend Stopper

As long as any Convertible Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, common shares, or preferred shares ranking pari passu with the Convertible Preferred.

Dividend Limit

As long as any Convertible Preferred or common stock is outstanding and owned by the Treasury, no dividend in excess of $0.01 per quarter may be paid on common stock without Treasury permission.

Restrictions on

As long as any Convertible Preferred is outstanding, the Treasury’s consent will be required for any repurchases of equity securities or trust preferred securities, subject to certain exceptions.

Voting Rights

No voting rights prior to conversion, other than class voting on (i) authorization or issuance of shares ranking senior to the Convertible Preferred, (ii) any amendment to the rights of the Convertible Preferred, or (iii) any merger, exchange or other transaction that would adversely affect the rights of the Convertible Preferred.


No restrictions on transfer.  The QFI must file a shelf registration statement covering the Convertible Preferred and underlying common stock.

Mandatory Sale

After the mandatory conversion date, the Treasury shall make reasonable efforts to sell on an annual basis an amount of common stock equal to at least 20% of the total common stock owned by it.

Executive Compensation, Transparency, Accountability, Monitoring

The QFI and its covered officers and employees shall agree to comply with the rules, regulations and guidance of the Treasury with respect to executive compensation, transparency, accountability and monitoring.


Summary of Terms of Warrant[3]


The Treasury will receive warrants to purchase a number of shares of common stock of the QFI having an aggregate market value of 20% of the Convertible Preferred on the date of the investment.

The initial exercise price shall be the Conversion Price subject to customary anti-dilution adjustments.


10 years.


Immediately exercisable, in whole or in part.


No restrictions on transfer.  The QFI will file a shelf registration statement covering the warrants and underlying common stock.


The Treasury will agree not to exercise voting power with respect to any shares of common stock of the QFI issued upon exercise of the warrants.


In the event the common stock of the QFI is no longer listed or traded on a national exchange, the warrants will be exchangeable for senior term debt or another economic instrument.

 [1] Full terms of Convertible Preferred available at

 [2] A separate term sheet will be made available for participation in CAP for QFIs which are not publicly traded or are organized as S corporations.

[3] Full terms of Warrant available at

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, [email protected]) 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, [email protected])
John F. Olson – Washington, D.C. (202-955-8522, [email protected])
Amy L. Goodman
– Washington, D.C. (202-955-8653, [email protected])
Alan Platt – Washington, D.C. (202- 887-3660, [email protected])
Michael Bopp – Washington, D.C. (202-955-8256, [email protected])

Securities Law and Corporate Governance Expertise
Ronald O. Mueller
– Washington, D.C. (202-955-8671, [email protected])
K. Susan Grafton – Washington, D.C. (202- 887-3554, [email protected])
Brian Lane – Washington, D.C. (202-887-3646, [email protected])
Lewis Ferguson – Washington, D.C. (202- 955-8249, [email protected])
Barry Goldsmith – Washington, D.C. (202- 955-8580, [email protected])
John H. Sturc
– Washington, D.C. (202-955-8243, [email protected])
Dorothee Fischer-Appelt – London (+44 20 7071 4224, [email protected])
Alan Bannister – New York (212-351-2310, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
Mark K. Schonfeld – New York (212-351-2433, [email protected])

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, [email protected])
Christopher Bellini – Washington, D.C. (202- 887-3693, [email protected])
Amy Rudnick – Washington, D.C. (202-955-8210, [email protected])
Rachel Couter – London (+44 20 7071 4217, [email protected])

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589, [email protected])
Richard Russo – Denver (303- 298-5715, [email protected])
Dennis Friedman – New York (212- 351-3900, [email protected])
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, [email protected])
Robert Cunningham – New York (212-351-2308, [email protected])
Joerg Esdorn – New York (212-351-3851, [email protected])
Wayne P.J. McArdle – London (+44 20 7071 4237, [email protected])
Stewart McDowell – San Francisco (415-393-8322, [email protected])
C. William Thomas, Jr.
– Washington, D.C. (202-887-3735, [email protected])

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, [email protected])

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, [email protected])
Jennifer Bellah Maguire – Los Angeles (213-229-7986, [email protected]

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, [email protected])
Alan Samson – London (+44 20 7071 4222, [email protected])
Andrew Levy – New York (212-351-4037, [email protected])
Fred Pillon – San Francisco (415-393-8241, [email protected])
Dennis Arnold – Los Angeles (213-229-7864, [email protected])
Michael F. Sfregola – Los Angeles (213-229-7558, [email protected])
Andrew Lance – New York (212-351-3871, [email protected])
Eric M. Feuerstein – New York (212-351-2323, [email protected])
David J. Furman – New York (212-351-3992, [email protected])

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, [email protected])

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, [email protected])
David M. Feldman – New York (212-351-2366, [email protected])

Oscar Garza – Orange County (949-451-3849, [email protected])
Craig H. Millet – Orange County (949-451-3986, [email protected])
Thomas M. Budd – London (+44 20 7071 4234, [email protected])
Gregory A. Campbell – London (+44 20 7071 4236, [email protected])
Janet M. Weiss – New York (212-351-3988, [email protected])
Matthew J. Williams – New York (212-351-2322, [email protected])
J. Eric Wise – New York (212-351-2620, [email protected])

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, [email protected])
Paul Issler – Los Angeles (213-229-7763, [email protected])

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, [email protected])
Charles F. Feldman – New York (212-351-3908, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected]

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