In an effort to calm the financial markets, on February 23, 2009, the Treasury, FDIC, OCC, OTS, and Federal Reserve issued a joint statement about the Capital Assistance Program and a “strong presumption” that banks should remain in private hands.

The joint statement also provides additional details about the Capital Assistance Program that was part of the Treasury’s previously announced Financial Stability Plan.  The Capital Assistance Program (presumably to become known as CAP, and not to be confused with the CPP, the Capital Purchase Program), will be “initiated” on February 25, 2009.  If the “stress test” indicates that an additional capital buffer is needed, institutions will be given an “opportunity” to raise capital privately before the government makes a capital buffer “available” to the institution.  The regulators provide that this higher level of capital “does not imply a new capital standard,” although it’s hard to see how that implication is avoided.

Any governmental infusion will be in the form of mandatory convertible preferred securities, and could be retired before conversion if the financial conditions improve.  It is not clear whether the preferred securities, prior to conversion, will be treated as Tier 1 capital.  The Treasury intends to make prior capital injections under the Capital Purchase Program also eligible to be exchanged for the new mandatory convertible preferred shares.

The joint statement concludes with an argument that widespread nationalization of banks will not occur under the Capital Assistance Program.  “Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”