The federal government plans to spend $250 billion to buy equity stakes in troubled banks to help them weather the credit crisis.
The money for the preferred shares will come out of the recently approved $700 billion financial rescue package. Nine financial institutions have agreed to take part in the program, including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Merrill Lynch (which is in the process of being acquired by Bank of America), Morgan Stanley, State Street and Wells Fargo. The capital infusion comes after meetings over the weekend among the Group of Seven nations, which agreed on a coordinated strategy to deal with the global credit crisis.
"Today, there is a lack of confidence in our financial system - a lack of confidence that must be conquered because it poses an enormous threat to our economy," said Treasury Secretary Henry Paulson. "Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other and to consumers and businesses."
Institutions that sell shares to the government will have to accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that the Treasury holds equity issued through the program. In addition, taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions.
The Federal Deposit Insurance Corp. will temporarily guarantee inter-bank loans to encourage liquidity in the market. The FDIC will also temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as insure deposits in non-interest-bearing deposit transaction accounts.
"These accounts are used primarily by small businesses to cover day-to-day operations," said President Bush. "By insuring every dollar in these accounts, we will give small business owners peace of mind and bring greater stability to the banking system."
To further increase access to funding for businesses, the Federal Reserve has also expanded its Commercial Paper Funding Facility program. Beginning October 27, the CPFF will fund purchases of commercial paper of three-month maturity from high-quality issuers. This will make the Federal Reserve a buyer of last resort for commercial paper to provide short-term financing for businesses and financial institutions, making it easier for them to meet payroll obligations.
Bank of New York Mellon has also been chosen by the Treasury Department as custodian of the Troubled Asset Relief Program. The custodian will provide the accounting of record for the portfolio, hold all cash and assets in the portfolio, provide for pricing and asset valuation services, and assist with other related services. It will also track linkages to executive compensation limits and to warrants received from selling institutions. In addition, the financial agent will support the acquisition of securitized assets by serving as auction manager and conducting reverse auctions for the troubled assets.
In related news, the Internal Revenue Service issued guidance on the limitations on executive compensation and golden parachutes for banks that participate in the rescue program, as well as guidance on the application of Section 382 to loss corporations whose instruments are acquired by the Treasury Department under the Capital Purchase Program.
