Financial Crisis News Center

COP Report: Asset Guarantees Had Calming Effect, But Other Concerns Remain

In its November 2009 monthly report, the Congressional Oversight Panel (COP) studied government-backed guarantees under the Troubled Asset Relief Program.  The COP stated in the report that the asset guarantees from the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation helped calm panic in financial markets, with minimal cost to taxpayers to date. The report raised concerns about moral hazard created by the guarantees and recommended greater disclosure by the Treasury Department with regard to government-guaranteed assets of Citigroup Inc. COP Chair Elizabeth Warren commented on these issues in an interview on CNBC.

Treasury Releases Asset Guarantee Program—Bank of America Termination Agreement

This story appeared in Bank Digest.

The Treasury Department has published a copy of the Asset Guarantee Program—Bank of America Termination Agreement, signed on Sept. 21, 2009. The Agreement, entered into between Bank of America, and the Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp., provided protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other similar assets. The majority of these assets were assumed by Bank of America as a result of its acquisition of Merrill Lynch.

http://www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-%20executed.pdf

FDIC Establishes Limited Six-Month Emergency Guarantee Facility

This story appeared in Bank Digest.

To ensure an orderly phase-out of the Debt Guarantee Program, a component of the Temporary Liquidity Guarantee Program, the FDIC is establishing a limited emergency guarantee facility. For most insured depository institutions and other participating entities, the Debt Guarantee Program will conclude on Oct. 31, 2009, with the FDIC’s guarantee expiring no later than Dec. 31, 2012. To the extent that certain of those entities become unable to issue non-guaranteed debt to replace maturing senior unsecured debt because of market disruptions or other circumstances beyond their control, the emergency guarantee facility will be available on an application basis. In order to utilize the emergency guarantee facility, an entity must apply to, and receive prior approval from, the FDIC. If the application is approved, the FDIC will guarantee the applicant’s senior unsecured debt issued on or before April 30, 2010. Debt guaranteed under the emergency guarantee facility will be subject to an annualized assessment rate equal to a minimum of 300 basis points.

Money Market Funds Guarantee Program Expires

This story appeared in Bank Digest.

The Guarantee Program for Money Market Funds expired on Sept. 18, 2009. The program was designed by the Treasury to stabilize markets after a large money market fund’s announcement that its net asset value had fallen below $1 per share (“broke the buck”) in the wake of the failure of Lehman Brothers in September of 2008. The program was initially established for a three-month period that could be extended up through Sept. 18, 2009. Treasury Secretary Tim Geithner noted, “The Guarantee Program for Money Market Funds served its purpose of adding stability to the money market mutual fund industry during market disruptions last fall and ultimately delivered a healthy return to taxpayers.”

TG-293 at http://www.ustreas.gov/press/releases/tg293.htm

Status Report on Financial Stabilization Efforts Released

By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guideand Bank Digest.

The Treasury Department has issued a “status report“ summarizing the Obama administration's financial system stabilization efforts to date and describing planned steps toward ending the current support programs. According to the report, some of the programs already are winding down, with the Money Market Mutual Fund Guarantee Program scheduled to end on Sept. 18, 2009, and the Debt Guarantee Program component of the Temporary Liquidity Guarantee Program (TLGP) scheduled to end on Oct. 31, 2009. Market condition improvements mean that there is no plan to extend either of these programs, although an emergency facility may be put in place to allow banks to issue guaranteed debt for an additional six months.

FDIC Seeks to Wind Down Debt Guarantee Program

This story appeared in Bank Digest.

The FDIC is seeking comment on a Notice of Proposed Rulemaking on two alternatives for phasing out the Debt Guarantee Program, a component of the FDIC's Temporary Liquidity Guarantee Program. The FDIC's guarantee will expire no later than Dec. 31, 2012.

Extension of Transaction Account Guarantee Program Proposed

This story appeared in Bank Digest.

The Federal Deposit Insurance Corporation has issued a notice of proposed rulemaking seeking comment on two alternatives for the conclusion of the Transaction Account Guarantee (TAG) Program, a component of the agency’s Temporary Liquidity Guarantee Program. The first proposed alternative would result in no change to the FDIC's current regulation. Under this alternative, the FDIC's guarantee for deposits held in qualifying noninterest-bearing transaction accounts would expire on Dec. 31, 2009. There would be no increase in fees for this coverage. The second proposed alternative would extend the TAG Program until June 30, 2010, with an increase in annual fees from 10 basis points to 25 basis points during the proposed extension period. The second proposed alternative also would provide insured depository institutions participating in the TAG Program with a one-time opportunity to opt out of the extended TAG Program on or before Oct. 31, 2009. Comments are due 30 days following publication of the notice of proposed rulemaking in the Federal Register.

TLGP Debt Guarantee Extended; Surcharges Imposed

This story appeared in Bank Digest.

An FDIC final rule amends the Temporary Liquidity Guarantee Program (TLGP) by providing a limited extension of the Debt Guarantee Program (DGP) for insured depository institutions (IDIs) participating in the DGP. The extended DGP also applies to other participating entities. However, other participating entities that did not issue FDIC-guaranteed debt before April 1, 2009, are required to submit an application to and obtain approval from the FDIC to participate in the extended DGP. The final rule imposes surcharges on certain debt issued on or after April 1, 2009. Any surcharge collected will be deposited into the Deposit Insurance Fund (DIF or Fund). The final rule also establishes an application process under which entities participating in the extended DGP may apply to issue non-FDIC-guaranteed debt during the extension period.

Treasury Announces Additional Investment in GMAC LLC

This story appeared in Bank Digest.

The Treasury Department has announced that it has invested $7.5 billion in GMAC LLC in order to support GMAC's ability to originate new loans to Chrysler dealers and consumers and help address GMAC's capital needs as identified through the Supervisory Capital Assessment Program (SCAP), commonly called the “stress test.” The investment will be made in the form of 9 percent Mandatorily Convertible Preferred Interests. It includes $4 billion to support GMAC's anticipated growth in Chrysler dealer and retail loans and $3.5 billion to help GMAC address its capital needs as identified through the SCAP. The SCAP called for GMAC to raise a total of $9.1 billion in new capital.

In a related matter, the Federal Deposit Insurance Corp. has announced the approval of GMAC Financial Services to participate in the Temporary Liquidity Guarantee Program (TLGP), allowing the company to issue up to $7.4 billion in new FDIC-guaranteed debt. GMAC will pay a fee to the FDIC for the guarantee. The agency said the deposit insurance fund will be fully protected because the company has committed to develop an appropriate funding plan and to maintain capital at “a level well above the regulatory minimums.”

FDIC Chair Warns of Insurance Fund Depletion

This story appeared in Bank Digest.

FDIC Chair Sheila Bair predicted that bank failures will cost about $65 billion over the next five years, with much of that in the next two years. Without additional assessments, that would nearly exhaust the Deposit Insurance Fund by the end of 2009, she told the American Bankers Association Government Relations Summit in Washington, D.C. Bair added that the recently announced special assessment could be reduced if Congress approves the additional borrowing authority the agency has requested. Revenue from the Temporary Liquidity Guarantee Program assessments also could help fill the gap. Bair encouraged bankers to participate in creating the Legacy Loan Program. She also said that creating a systemic risk regulator would not cure all of the problems, urging an end to the idea that an institution can be too big to fail.