15. Subsequent Events Amendment to FDIC Restoration Plan
Due to the extraordinary circumstances of the current enormous strains on banks and the financial system as well as the likelihood of a prolonged and severe economic recession, a Notice of FDIC Amended Restoration Plan was issued on March 4, 2009, amending its Restoration Plan initially adopted on October 7, 2008 (see Note 8 for additional discussion on establishing a DIF restoration plan). The period of the Plan is extended to seven years (December 31, 2015) and the FDIC is adopting assessment rates that will reflect this extended period accordingly. At least semiannually the FDIC will adjust assessment rates, if needed to ensure that the fund reserve ratio reaches 1.15 percent within the seven-year period.
On February 27, 2009, the Board approved for issuance a final rule on Assessments amending the risk-based assessment system to: 1) make it fairer and more sensitive to risk, 2) improve the way the risk-based assessment system differentiates risk among insured institutions, 3) increase deposit insurance assessment rates (initial base assessment rates at 12 to 45 basis points) to raise assessment revenue to help meet the requirements of the Restoration Plan, and 4) make technical and other changes to the rules governing the risk-based assessment system.
Emergency Special Assessment
On March 3, 2009, an interim rule was issued that imposes an emergency special assessment equal to 20 basis points of an institution’s assessment base on June 30, 2009, with collection on September 30, 2009, in order to raise assessment revenue to help meet the requirements of the Restoration Plan. FDIC projects that the combination of regular quarterly assessments and the 20 basis points special assessment will prevent the fund reserve ratio from falling to a level that would adversely affect public confidence or to a level close to zero or negative. However, the FDIC and the Congress simultaneously pursued an increase in FDIC’s borrowing authority with the U.S. Treasury (currently $30 billion), which could allow the FDIC to substantially reduce the special assessment below the proposed rate of 20 basis points (see Legislative Update below).
FDIC recognizes that there is considerable uncertainty about its projections for losses and insured deposit growth, and, therefore, of future fund reserve ratios. To further ensure that the fund reserve ratio does not decline to a level that could undermine public confidence in federal deposit insurance, the interim rule would also permit the Board to impose an emergency special assessment of up to 10 basis points on all insured depository institutions whenever, after June 30, 2009, the reserve ratio of the DIF is estimated to fall to a level that the Board believes would adversely affect public confidence or to a level which shall be close to zero or negative. The earliest possible date for such a special assessment is September 30, 2009, with collection on December 31, 2009.
Systemic Risk Transactions Assistance to Citigroup
On January 15, 2009, the U.S. Treasury, the FDIC and the Federal Reserve executed a final agreement to provide guarantees, liquidity access, and capital to Citigroup. Under the agreement, the U.S. Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program. In addition, the Treasury and the FDIC will provide protection against the possibility of unusually large losses on an asset pool of loans and securities backed by residential and commercial real estate and other such assets that would remain on the balance sheet of Citigroup.
The asset pool amount that is included in the loss-share agreement is $300.8 billion. Citigroup is solely responsible for the first $39.5 billion of losses incurred on the covered asset pool. Asset pool losses exceeding $39.5 billion will be split with 10 percent to Citigroup and 90 percent to the Treasury up to the first $5 billion, and 10 percent to Citigroup and 90 percent to the FDIC for the next $10 billion. If losses exceed the maximum amounts provided by Treasury and the FDIC, Citigroup can request borrowing from the Federal Reserve Bank of New York for 90 percent of the remaining values of the pool of assets through a non-recourse loan. The term of the loss-share guarantee is 10 years for residential assets and 5 years for non-residential assets.
In consideration for its portion of the loss-share guarantee, the FDIC received 3,025 shares of Citigroup’s designated cumulative perpetual preferred stock (Series G), with a liquidation preference of $1,000,000 per share, for a total of $3.025 billion. Quarterly dividends are payable to the FDIC at a rate of 8 percent annually.
Assistance to Bank of America
On January 16, 2009, the U.S. Treasury, the FDIC and the Federal Reserve reached agreement in principle to provide guarantees, liquidity access, and capital to Bank of America. It was announced that the U.S. Treasury would purchase $20 billion in Bank of America preferred stock under the Troubled Asset Relief Program. In addition, the Treasury and the FDIC would provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans and securities backed by residential and commercial real estate and other such assets that would remain on the balance sheet of Bank of America. For additional losses not covered by Treasury or the FDIC, Bank of America could receive funding through a non-recourse loan from the Federal Reserve Bank of New York.
Bank of America will be solely responsible for the first $10 billion of losses incurred on the covered asset pool. Asset pool losses exceeding $10 billion will be split with 10 percent to Bank of America and 90 percent to the Treasury and FDIC. The Treasury and the FDIC will cover their share of losses pro rata in proportions of 75 percent for Treasury and 25 percent for the FDIC. The FDIC exposure to loss is capped at $2.5 billion and the Treasury exposure is capped at $7.5 billion. If losses exceed the maximum amounts provided by the FDIC and the Treasury, Bank of America can request borrowing from the Federal Reserve Bank of New York for 90 percent of additional loss amounts incurred on the pool of assets. The term of the loss-share guarantee is 10 years for residential assets and 5 years for non-residential assets.
In consideration for its portion of the loss-share guarantee, the FDIC will receive a projected liquidation preference amount of $1 billion in Bank of America preferred stock and warrants. The preferred stock will have an 8 percent dividend rate.
Temporary Liquidity Guarantee Program
Mandatory Convertible Debt
On February 27, 2009, the FDIC issued an interim rule with request for comments to modify the debt guarantee component of the TLGP to include certain issuances of mandatory convertible debt (MCD). (See Note 14 for further details on the TLGP.) Currently, the TLGP regulation, at Section 370.2(e)(5) of Title 12 of the Code of Federal Regulations, precludes a FDIC guarantee for any “convertible debt.” The amendment provides for the FDIC to guarantee newly issued senior unsecured debt with a feature that mandates conversion of the debt into common shares of the issuing entity at a specified date no later than the expiration date of the FDIC’s guarantee. The MCD must be newly issued on or after February 27, 2009, and must provide for the mandatory conversion of the debt instrument into common shares of the issuing entity on a specified date that is on or before June 30, 2012. The amount of the guarantee fee for the FDIC’s guarantee of MCD is based on the time period from issuance of the MCD until its mandatory conversion date.
Amendment of the TLGP to Extend the Debt Guarantee Program (DGP) and to Impose Surcharges on Assessments for Certain Debt Issued on or after April 1, 2009
An Interim Rule with request for comments, issued on March 23, 2009, amends the TLGP by providing a limited four-month extension of the DGP for insured depository institutions participating in the DGP as well as other participating entities (bank and certain savings and loan holding companies and certain FDIC-approved affiliates). The interim rule permits entities that participate in the extended DGP to issue FDIC-guaranteed debt from June 30, 2009 through October 31, 2009 and extends the FDIC guarantee, set to expire no later than June 30, 2012 under the existing program, to no later than December 31, 2012 for debt issued on or after April 1, 2009.
The interim rule also imposes surcharges on assessments for certain FDIC-guaranteed debt issued on or after April 1, 2009. The limited extension, coupled with the surcharge provisions, is intended to facilitate an orderly transition period for participating institutions to return to the non-guaranteed debt market and to reduce the potential for market disruption when the TLGP ends.
Legacy Loans Program
On March 23, 2009, the FDIC and the U.S. Treasury announced the creation of the Legacy Loans Program (LLP) as part of the Public-Private Investment Program (a program to address the challenge of legacy (distressed or troubled) assets). Legacy assets are comprised of real estate loans held directly on the books of insured banks and thrifts. The assets have created uncertainty on the balance sheets of insured banks and thrifts, compromising their ability to raise capital and their willingness to increase lending.
To cleanse insured banks and thrifts balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets, the LLP attempts to attract private capital to purchase eligible legacy loans from participating insured banks and thrifts through the provision of FDIC debt guarantees and Treasury equity co-investment. Thus, the program is intended to boost private demand for distressed assets that are currently held by insured banks and thrifts and facilitate
market-priced sales of troubled assets.
The FDIC will provide oversight for the formation, funding, and operation of a number of Public-Private Investment Funds (PPIFs) that will purchase assets from insured banks and thrifts. The Treasury and private investors will invest equity capital in Legacy Loans PPIFs and the FDIC will provide a guarantee for debt financing issued by the PPIFs to fund asset purchases. The FDIC’s guarantee will be collateralized by the purchased assets and the FDIC will receive a fee in return for its guarantee. On March 26, 2009, the FDIC requested comments from interested parties on the critical aspects of the proposed LLP.
Supervisory Capital Assessment Program
As part of U.S. Treasury’s Capital Assistance Program, the federal bank regulatory agencies have conducted forward-looking economic assessments of the 19 largest U.S. bank holding companies (assets greater than $100 billion). These assessments are known as the Supervisory Capital Assessment Program (SCAP). The agencies worked with the institutions to estimate the range of possible future losses and the resources to absorb such losses over a two-year period.
On May 7, 2009, a detailed summary of the results of the SCAP was released in which the supervisory agencies identified the potential losses, resources available to absorb losses, and resulting capital buffer needed for the 19 participating bank holding companies. Any institution needing to augment its capital buffer will have until June 8, 2009 to develop a detailed capital plan and until November 9, 2009 to implement that capital plan.
Financial Stability Plan
In an effort to address the foreclosure problems, the Administration developed the Homeowner Affordability and Stability Plan (HASP) as part of the President’s broad strategy to move the economy back on track. The three key elements of the plan are: 1) allowing 4 million to 5 million homeowners with little equity in their homes to refinance into less expensive mortgages; 2) a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and 3) a doubling of the government’s commitment to Fannie Mae and Freddie Mac to $400 billion.
Legislative Update Helping Families Save Their Homes Act of 2009, was enacted on May 20, 2009. This legislation provides for: extending the FDIC’s deposit insurance coverage at $250,000 until 2013, extending the generally applicable time limit from 5 years to 8 years for an FDIC Restoration Plan to rebuild the reserve ratio of the DIF, permanently increasing the FDIC’s authority to borrow from the U.S. Treasury from $30 billion to $100 billion, and if necessary, up to $500 billion through 2010, and allowing FDIC to charge systemic risk special assessments by rulemaking on both insured depository institutions and depository institution holding companies (see Note 1).
Purchase and Assumption Indemnification
In late March 2009, the FDIC was named in a lawsuit in its corporate and receivership capacities and could be subject to potential losses of approximately $4 billion as a result of an indemnification clause in a purchase and assumption agreement associated with the resolution of Washington Mutual Bank on September 25, 2008. The Washington Mutual Receiver currently has approximately $1.9 billion and the remaining exposure of $2.1 billion would be borne by the DIF. As of December 31, 2008, the DIF has not recorded a provision for this matter as the ultimate outcome of this litigation cannot presently be determined (see Note 7).
2009 Failures Through May 20, 2009
Through May 20, 2009, 33 insured institutions failed with total losses to the DIF estimated to be $4.5 billion. These estimated losses were included in the December 31, 2008, contingent liability for anticipated failures.