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Public vs. Private, Round 2

Public vs. Private, Round 2

November 24, 2008

Authored by: Robert Klingler

As we’ve previously noted here, here and here, we’re not big fans of the Treasury’s definition of what constitutes a publicly traded company under the TARP Capital program.  The Treasury’s definition provides two tests, one of which is a subset of the other, and doesn’t specify whether both tests or either test must be met.

Non-Exchange-Listed Companies = Private

While speaking to an official with the Federal Reserve Bank of Atlanta today, we were told that: (i) both tests have to be met; (ii) the Over-the-Counter Bulletin Board and Pinksheets were NOT considered “national exchanges,” and therefore companies listed on such would be considered private; and (iii) they believe that all applications filed by companies which have asserted public status with an Over-the-Counter Bulletin Board or Pinksheets listing have been sent back to be reconsidered as private companies.

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Nuggets from the Second Tranche Report to Congress

November 24, 2008

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On November 24, 2008, the Treasury published its Second Tranche Report to Congress, for the period through November 14.  The appendices to the report are available here.  These reports are required under Section 105(b) of the Emergency Economic Stabilization Act of 2008, and are published on the Treasury’s website.

The Report confirms that the purchase of $40 billion in preferred shares from AIG was under the Systemically Significant Failing Institutions Program (SSFI) rather than the TARP Capital Purchase Program (TARP Capital).  The total committed under the TARP Capital program was $158.5 billion as of November 14, 2008.  This confirms our previous analysis.

The Report states that all commitments thus far under the TARP Capital program have been with financial institutions whose stock is traded on national securities exchanges.  As we’ve previously discussed, this is not true, as one of the recipients of the November 14 TARP Capital infusions is traded on the Over-the-Counter Bulletin Board.

The Report indicates that Treasury has established a streamlined evaluation procedure that has resulted in the federal banking agencies using a standardized process to review all applications to ensure consistency.  Treasury states that gives considerable weight to the recommendations of the federal banking agencies.

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Happy Thanksgiving Week

November 23, 2008

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Happy Thanksgiving Week

November 23, 2008

Authored by: Bryan Cave Leighton Paisner

First, a couple new jokes:

Q. What giant beasts are currently stalking the financial markets?
A. TARPosaurus and T-Reas.

Q. What is their favorite meal?
A. Lame duck.

Q. What’s the next car coming off the U.S. assembly line?
A. The new GMC TARP…gets one mile per 25 billion gallons.

And just in time for Thanksgiving—a simple potluck dish that’s easy to make and feeds billions.

TARP Casserole

  1. Mix 1% to 3% of everything you own in a large bowl.
  2. Sift contents through regulatory strainer.
  3. Deduct up to 500,000 cups of executive compensation.
  4. Whip thousands of bankers, lawyers and analysts into a frenzy and blend in.
  5. Garnish with shredded cash.
  6. Bake at 250 billion degrees to desired degree of doneness.

Makes enough to lend to your neighbors.  Goes great with Warrant Surprise.

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How Much TARP Capital Money is Left?

How Much TARP Capital Money is Left?

November 23, 2008

Authored by: Robert Klingler

When the Treasury announced the TARP Capital program on October 14, 2008, the Treasury indicated that it had set aside $250 billion of the $700 billion authorized for the overall Troubled Asset Relief Program.  The $250 billion TARP Capital program was for the purchase of senior preferred stock, with $125 billion designated for the initial participants and $125 billion for the remainder of the banking industry.

As of November 20, 2008, the Wall Street Journal’s list of participants in the TARP Capital program identifies a total of $232.9 billion that has been completed, applied for, or publicly announced as pending.  However, the Wall Street Journal’s list includes the $40 billion in senior preferred stock to be purchased from the American International Group (AIG), as announced by the Treasury on November 10, 2008.

AIG’s $40 billion investment is part of the overall TARP Program, but is not part of the $250 billion set aside for the TARP Capital program.  As a result, the Wall Street Journal’s number should be reduced to $192.9 billion, indicating that there is approximately $57.1 billion remaining under the TARP Capital program (assuming all of the applicants on the WSJ’s list are ultimately approved).

The application by several large insurance companies to become bank holding companies in light of recent thrift acquisitions increases the industry’s total risk weighted assets, and may make TARP Capital more scarce.  However, the Treasury still has an additional $60 billion that it can invest without further Congressional approval.  With the Treasury’s announcement that it is unlikely to purchase assets directly, the Treasury may elect to expand the $250 billion TARP Capital program if there is sufficient demand from eligible institutions.

Update 11/24/08 – The U.S. Government’s additional support of Citigroup is similarly not part of the $250 billion set aside for TARP Capital, although portions of the assessment are out of the overall TARP program.  Specifically, $5 billion of the asset guarantee and the $20 billion preferred stock investment are covered by TARP.  As a result, the Treasury now has $35 billion that it can invest or otherwise use without further Congressional approval.

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Commentary: Big Picture Thoughts on Applying for TARP Capital

Whether to apply for or accept TARP Capital is a decision that each bank needs to make individually depending on its own markets and circumstances.  However, as explained below, we believe each bank needs to prepare a realistic, worst-case scenario for the next three years.  Unless your bank’s capital will remain strong, we think you should apply for TARP Capital.

In three years, your bank will likely be in position to redeem the TARP Capital.  If that’s true, then the TARP Capital will have served as an inexpensive insurance policy that went unused, and you won’t be subject to any further government restrictions.

On the other hand, it is possible that, in three years, the financial condition of your bank makes you unable to redeem the TARP Capital.  In that event, it is very clear that you needed the TARP Capital.

With only these two scenarios, we believe almost every bank is better off applying for TARP Capital.

Where is the Economy Headed?

As the residential real estate market declined, all the contractors and subcontractors associated with that market began to suffer.  These contractors and subcontractors include our drywall installers, plumbers, painters, flooring specialists, lighting specialists, landscapers, pavers, pool installers, and numerous others – a vast group of construction and service-industry workers.  With new residential starts drying up, and with in-progress projects shutting down, many of the employees in those contracting and subcontracting fields began to lose their jobs.

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FDIC Publishes Final Rule on Temporary Liquidity Guarantee Program

On November 21, 2008, the FDIC approved the final rule regarding the Temporary Liquidity Guarantee Program.  The FDIC also held a teleconference on the final rule (with 2,100 participants) summarizing the changes, which will be available on the FDIC’s website.

There are important changes from the FDIC’s interim rule, including: (i) the exclusion of short term borrowings (30 days or less) and an alternative minimum cap for guaranteed debt under the Senior Unsecured Debt Guarantee portion of the Program; and (ii) the inclusion of IOLTA and NOW accounts in the Transaction Account Guarantee portion of the Program.

We continue to expect that all banks will decide to remain in the Transaction Account Guarantee portion of the Program, but, with the revised terms, we believe community banks will need to closely examine whether to participate in the the Senior Unsecured Debt Guarantee portion of the Program.

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Timing of TARP Capital Infusions

Timing of TARP Capital Infusions

November 23, 2008

Authored by: Ken Achenbach

A representative of the Federal Reserve Bank of Atlanta has informed us that the Treasury does not intend to process any applications for private companies until all public company applications have been processed.  As a result, we expect (and the Federal Reserve did not deny) that a December 31 funding date is probably a realistic expectation only for public companies at this point.  We hope that Treasury will begin to realize some efficiencies in the processing of closing documents, but December 31 is approaching rapidly.

To the extent that any privately-held clients may be expecting a potential TARP infusion to keep them “well-capitalized” at December 31, 2008, they may need to also be working on Plan B.

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Commentary: Tightening of TARP Capital Standards

Conversations with each of the federal banking regulators over the last several days confirm what we have heard elsewhere: the distribution of TARP Capital that started out with a more liberal bias has now turned more conservative.  Regulators have recently indicated that institutions with a CAMELS rating of 1 and 2 are almost certainly likely to receive an investment, while 3-rated institutions are now described as “perhaps” receiving an investment.  4 and 5-rated banks are unlikely to receive any TARP Capital, absent unique circumstances.  (Just a few weeks ago, these same regulators were telling us that a 3-rated institution would be treated more like a 2-rated institution, and that 4-rated institutions would “perhaps” receive an investment.)  This shift is certainly an outgrowth of Treasury’s position that the main test of which institutions will receive capital investments is assured long term viability.

What does this mean for the thousands of banks that will not receive funding?  They certainly need to be considering a public relations initiative to manage or preempt the questions that will come at them from shareholders and the local media.  Perhaps the conversation could be along the following lines: “(i) the banking industry did not ask for this plan (which has changed dramatically since it was first proposed); (ii) an investment by the Treasury in a bank is not an automatic guarantee that a particular bank will be successful and neither is a decision not to invest some sort of condemnation; (iii) our loan portfolio reflects our community and the real estate lending which helped our community grow is suffering; and (iv) we are here for the long run and look forward to meeting the credit needs of our customers for years to come.  Together we will both survive the current economic challenges.”

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Do Private Companies Need to Amend their Applications?

In light of the new term sheet for non-public institutions, we have been asked by several clients whether they need to amend their application if they have already submitted applications to their federal regulators.

At this time, unless the regulator specifically asks that you file an amendment, we do NOT believe an amendment should be necessary.  The Treasury has not updated its application form (available online directly from the Treasury in PDF format, or from Powell Goldstein in Word format) and the application does not contain any information that would differ because the company is applying under the new non-public company term sheet.

We are aware of one instance in which the regulators specifically requested an amendment, but in that case the applicant also desired to increase the amount of TARP Capital they were applying for, which would seem to independently necessitate an amendment.

Update 11/20/2008 – An FDIC representative confirmed to one of our privately-held clients that they did NOT need to file a new application or amend their application, but that they should confirm to the regulators that they have reviewed the new Term Sheet.

Update #2 11/20/2008 – A Federal Reserve Bank of Atlanta representative stated that they expect that private banks WILL NEED to make some kind of amendment, but they don’t know what form that amendment will take.  They expect to receive guidance later this week from D.C., and will inform applicants accordingly.

Update #3 11/21/2008 – The representative of the Federal Reserve Bank of Atlanta has informed us that the staff at the Board of Governors has advised that there is NO need to amend the application to reflect the recent terms announced for private companies.  The documents the Treasury will require participants to sign in order to participate will incorporate all of the changes, terms, conditions, etc.

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