Treasury Announces Obama Administration's Financial Stability Plan

Today Treasury Secretary Geithner outlined the Obama administration’s strategy to ease the credit crisis and shore up the financial system. Secretary Geithner emphasized the importance of broad and forceful government intervention and the need for transparency and accountability, but the long-awaited announcement was notably short on specifics. The four-prong plan incorporates most major elements rumored in the press, but provides few details and leaves key questions unanswered.

• More Capital Assistance for Banks: Banks with over $100 billion in assets will undergo a regulatory “stress test” and then will be eligible to receive a preferred security investment from Treasury through the Capital Assistance Program (“CAP”). Smaller institutions will be eligible for CAP after a supervisory review. Securities will be convertible to common by the issuer at a modest discount to the February 9, 2009, market price. Stock purchased under CAP will be held in a newly created Financial Stability Trust.
  
  
• Public-Private Investment Fund to Buy Troubled Assets: Treasury (together with the FDIC and the Federal Reserve) will initiate a Public-Private Investment Fund to acquire “legacy” assets weighing down banks’ balance sheets, although Treasury is still exploring how to structure the fund. The fund is initially pegged at $500 billion, but could be expanded to $1 trillion. In later Senate Banking Committee testimony, Secretary Geithner emphasized that the fund is intended to kick-start a private market, not provide a Resolution Trust Corporation-type solution. Notably, the announcement did not address pricing concerns, the issue that has bogged down previous asset purchase proposals, saying only that the program would allow private sector buyers to set their own prices. In later remarks, the Secretary noted that he is unwilling to let the government subsidize the financial sector by overpaying for assets.
  
  
• Consumer and Business Lending Initiative—Expanding the Federal Reserve’s Term Asset-Backed Securities Lending Facility (“TALF”): The TALF program, announced last November but not yet implemented, will be expanded in both size and scope. Under TALF, the Federal Reserve Bank of New York will make non-recourse loans to eligible participants fully secured by eligible newly packaged AAA asset-backed securities. TALF could grow substantially, using $100 billion of Treasury funding to provide up to $1 trillion in new lending. In addition, eligibility will be expanded beyond securities backed by student loans, credit card debt, small business and auto loans to include commercial mortgage-backed securities and possibly other assets.
  
  
• Housing and Small Business Initiatives: Details of a comprehensive housing program will be announced in the new few weeks. The program likely will include use of TARP funds for foreclosure prevention efforts, national loan modification guidelines, and continued support for purchases of GSE mortgage-backed securities and debt by the Federal Reserve. CAP recipients will be required to participate in foreclosure mitigation programs consistent with Treasury guidelines. Treasury and the Small Business Administration plan to take steps to encourage small business lending, including financing purchases of AAA-rated SBA loans and supporting legislation that would increase SBA loan guarantees.

There will also be new requirements and conditions, including public reporting of detailed lending data and executive compensation limits, imposed on banks that receive CAP funds or exceptional assistance going forward. The Treasury announcement states that these standards will not be retroactive.

Secretary Geithner’s remarks and the Treasury Fact Sheet describing the Financial Stability Plan are attached. If you would like to discuss the Treasury plan in greater detail, please feel free to contact any member of the firm’s Financial Institutions group in any of our offices worldwide.