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Each depositor insured to at least $250,000 per insured bank

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2009 Annual Report

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IV. Financial Statements and Notes

Deposit Insurance Fund (DIF) - Cont.

16. Systemic Risk Transactions

Pursuant to systemic risk determinations, the FDIC established the Temporary Liquidity Guarantee Program (TLGP) for insured depository institutions, designated affiliates and certain holding companies during 2008, and provided loss-share guarantee assistance to Citigroup on a pool of covered assets in 2009, which was subsequently terminated as described in Note 5. The FDIC received consideration in exchange for guarantees issued under the TLGP and guarantee assistance provided to Citigroup.

At inception of the guarantees, the DIF recognized a liability for the non-contingent fair value of the obligation the FDIC has undertaken to stand ready to perform over the term of the guarantees. As required by FASB ASC 460, Guarantees, this non-contingent liability was measured at the amount of consideration received in exchange for issuing the guarantee. As systemic risk expenses are incurred (including contingent liabilities and valuation allowances), the DIF will reduce deferred revenue and recognize an offsetting amount as systemic risk revenue. Revenue recognition will also occur during the term of the guarantee if a supportable and documented analysis has determined that the consideration and any related interest/dividend income received exceeds the projected systemic risk losses. Any deferred revenue not absorbed by losses during the guarantee period will be recognized as revenue to the DIF.

Temporary Liquidity Guarantee Program
The FDIC established the TLGP on October 14, 2008 in an effort to counter the system-wide crisis in the nation's financial sector. The TLGP consists of two components: (1) the Debt Guarantee Program (DGP), and (2) the Transaction Account Guarantee Program (TAG). On November 26, 2008, a final rule for the program was published in the Federal Register and codified in part 370 of title 12 of the Code of Federal Regulations (12 CFR Part 370).

Debt Guarantee Program
The Debt Guarantee Program initially permitted participating entities to issue FDIC-guaranteed senior unsecured debt between October 14, 2008 and June 30, 2009, with the FDIC's guarantee for such debt to expire on the earlier of the maturity of the debt (or the conversion date, for mandatory convertible debt issued on or after February 27, 2009) or June 30, 2012. To reduce market disruption at the conclusion of the DGP and to facilitate the orderly phase-out of the program, the FDIC issued a final rule on June 3, 2009, that extended the period during which participating entities could issue FDIC-guaranteed debt, through October 31, 2009. Concurrently, the FDIC extended the expiration of the guarantee period from June 30, 2012 to December 31, 2012. Upon the expiration of the extended DGP, the final rule grants existing participating entities access to a limited six-month emergency FDIC guarantee facility expiring on April 30, 2010. The FDIC's guarantee for all debt expires on the earliest of the mandatory convertible debt, the stated date of maturity, or December 31, 2012.

Fees for participation in the DGP are reserved for possible TLGP losses. Since inception, the FDIC has recorded $8.3 billion of guarantee fees and fees of $1.2 billion from participating entities that elected to issue senior unsecured non-guaranteed debt. During 2009, the total amount collected under the DGP was $7.1 billion, comprised of $6.1 billion for guaranteed debt and $1.0 billion for non-guaranteed debt. The fees are included in the "Cash and cash equivalents—restricted—systemic risk" line item and recognized as "Deferred revenue-systemic risk" on the Balance Sheet.

Additionally, as described in Note 5, the FDIC holds $800 million (par value) of Citigroup trust preferred securities (and any related interest) as security in the event payments are required to be made by the FDIC for guaranteed debt instruments issued by Citigroup or any of its affiliates under the TLGP. At December 31, 2009, the fair value of these securities totaled $705.4 million, and was determined using the valuation methodology described in Note 15 for other trust preferred securities held by the DIF. Because these TruPs are held on behalf of the Treasury, the decline in value has no impact on the fund balance of the DIF.

The FDIC's payment obligation under the DGP will be triggered by a payment default. In the event of default, the FDIC will continue to make scheduled principal and interest payments under the terms of the debt instrument through its maturity, or in the case of mandatory convertible debt, through the mandatory conversion date. The debtholder or representative must assign to the FDIC the right to receive any and all distributions on the guaranteed debt from any insolvency proceeding, including the proceeds of any receivership or bankruptcy estate, to the extent of payments made under the guarantee.

Since inception of the program, $618 billion in total guaranteed debt has been issued. To date, one debt issuer has defaulted on guaranteed debt of $2.0 million. Eighty-four financial entities (54 insured depository institutions and 30 affiliates and holding companies) had $309 billion in guaranteed debt outstanding at year-end 2009. At December 31, 2009, the contingent liability for this guarantee was $87.9 million and is included in the "Contingent liability for Systemic Risk" line item. The FDIC believes that it is reasonably possible that additional estimated losses of approximately $2.5 billion could occur under the DGP.

Transaction Account Guarantee Program
The Transaction Account Guarantee Program provides unlimited coverage for non-interest bearing transaction accounts held by insured depository institutions on all deposit amounts exceeding the fully insured limit (generally $250,000). In August 2009, the FDIC extended the expiration date of the TAG program from December 31, 2009 to June 30, 2010. During 2009, the FDIC collected TAG fees of $639.2 million which are earmarked for TLGP possible losses and payments.

Upon the failure of a participating insured depository institution, payment of guaranteed claims of depositors with non-interest bearing transaction accounts are funded with TLGP restricted cash. The FDIC will be subrogated to these claims of depositors against the failed entity, and dividend payments by the receivership are deposited back into TLGP restricted accounts.

At December 31, 2009, the "Receivables and other assets—systemic risk" line item includes $187.5 million of estimated TAG fees due from insured depository institutions. This receivable was collected at the end of the first quarter of 2010.

The contingent liability resulting from the anticipated failure of insured institutions participating in the TAG was $1.3 billion at December 31, 2009. For the 2009 failures, estimated losses of $1.7 billion were recorded for the non-interest bearing transaction accounts. The provision for anticipated failures and the loss recorded at resolution are both recorded as "Systemic risk expenses" with a corresponding amount of guarantee fees recognized as "Systemic risk revenue." The FDIC believes that it is reasonably possible that additional estimated losses of approximately $721 million could occur under the TAG.

As of December 31, 2009, the maximum estimated exposure under the TAG is $834 billion. However, 525 institutions elected to exit the TAG program after December 31, 2009. The reported TAG deposits associated with these institutions at December 31, 2009, totaled $568 billion. Consequently, the maximum exposure under the TAG as of January 1, 2010, is estimated to be $266 billion.

Systemic Risk Activity at December 31, 2009
Dollars in Thousands
  Cash and cash equivalents—
systemic risk
Receivables and other assets—
systemic risk
Deferred revenue—
systemic risk
Contingent liability—
systemic risk
systemic risk
Balance at 01-01-09 $ 2,377,387 $ 1,138,132 $ (2,077,880) $ (1,437,638)  
Guaranteed and non-guaranteed debt fees collected 7,066,423 (1,026,870) (6,039,553)    
TAG fees collected 639,176 (89,977) (549,199)    
Receivable for TAG fees   187,541 (187,541)    
Receivable for TAG accounts at failed institutions   4,124,849      
TruPs and accrued interest held for UST   801,422 (801,422)    
Market value adjustment on TruPs held for UST   (94,624) 94,624    
Estimated losses for TAG accounts at failed institutions   (1,741,653) 1,741,653   $ 1,741,653
Provision for TLGP losses in future failures     (25,672) 25,672 (25,672)
Default of guaranteed debt issued by a failed bank (16)   16   2,033
Overnight investment interest collected 6,085   (6,085)    
TLGP operating expenses     3,612   3,612
Reimbursement to DIF for TLGP operating expenses incurred (3,658,466)        
Totals $ 6,430,589 $ 3,298,820(a) $ (7,847,447) $ (1,411,966) $ 1,721,626
(a) Total may not equal the line item due to rounding

Last Updated 07/16/2010

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