The Federal Reserve Bank of Cleveland has issued a policy discussion paper that proposes a set of criteria to identify systemically important financial institutions (“SIFIs”) and recommends the development of a regulatory infrastructure based on the nature and source of their importance.  The paper, entitled “On Systemically Important Financial Institutions and Progressive Systemic Mitigation” (“the SIFI Paper”), states that the regulation of SIFIs is one of the most important regulatory reform issues.  The Obama Administration has proposed legislation regarding the consolidated supervision and regulation of SIFIs.  For more on the Obama Administration’s proposed legislation, please see the July 28, 2009 Alert.  The SIFI Paper asserts that establishing a financial stability supervisor alone will not achieve stability, it is also crucial to deal proactively with systemically important financial institution and have a workable definition of “systemically important.”  The resolution of SIFIs is not discussed in the SIFI Paper, but will be the subject of a forthcoming companion paper. [Read more →]

The FRB and the Treasury have announced the extension of the Term Asset-Backed Securities Loan Facility (the “TALF”).  For more on the TALF, please see the May 5, 2009 Alert.  The FRB and the Treasury approved extending TALF loans against newly issued asset-backed securities and legacy commercial mortgage-backed securities (“CMBS”) through March 31, 2010.  Because new CMBS deals can take a significant amount of time to arrange, the FRB and the Treasury approved TALF lending against newly issued CMBS through June 30, 2010.  The FRB stated that it will continue to monitor financial conditions and will consider in the future whether unusual and exigent circumstances warrant a further extension of the TALF to help promote financial stability and economic growth.  The FRB and the Treasury also announced that they are holding in abeyance any further expansion in the types of collateral eligible for the TALF.

As discussed in the July 28, 2009 Alert, the Obama Administration, through the Treasury, released the text of proposed legislation for various elements of its financial regulatory reform program (the “Program”) that it has submitted to Congress. The proposed legislation provides significant detail concerning many segments of the Program described in the Treasury’s June 2009 White Paper (as discussed in the June 23, 2009 Alert.) Many elements of the proposed legislation concerning the Program were described in the July 28, 2009 Alert, and additional segments are discussed below. There continues to be significant Congressional and industry opposition to certain elements of the Program and some or all of the segments of the Program may not be enacted. The Treasury, however, is reportedly continuing to pursue these initiatives in their current form. The Alert will continue to cover developments related to Treasury’s proposals as well as significant Congressional proposals dealing with financial regulatory reform.

Please click here to read the full article.

The Treasury, Federal Reserve Board and FDIC released a joint update on the Public Private Investment Program (”PPIP”).  Please find the entire release here (including the conflict of interest rules, FAQs, and letter of intent and term sheet):  http://www.financialstability.gov/latest/tg_07082009.html.  The key development in this update is the announcement of nine asset managers for the Legacy Securities Program (the “LSP”):

• AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
• Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
• BlackRock, Inc.;
• Invesco Ltd.;
• Marathon Asset Management, L.P.;
• Oaktree Capital Management, L.P.;
• RLJ Western Asset Management, LP.;
• The TCW Group, Inc.; and
• Wellington Management Company, LLP.

[Read more →]

The FRB made changes to a number of its extraordinary lending programs, extending many into next year while also closing one and shrinking others. Originally set to expire October 31, 2009, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AMLF”), the Commercial Paper Funding Facility (“CPFF”), the Primary Dealer Credit Facility (“PDCF”), and the Term Securities Lending Facility (“TSLF”) were extended through February 1, 2010. The FRB also extended its temporary reciprocal currency arrangements with 14 other central banks until February 1, 2010. The FRB did not alter the December 31, 2009 expiration date for the Term Asset-Backed Securities Loan Facility. [Read more →]

FASB.  The Financial Accounting Standards Board (“FASB”) finalized two Statements, Nos. 166 and 167, that will affect the ability of an institution to effectively transfer assets off of its balance sheet to a deconsolidated entity.  In each case, the amendments will become effective as of the beginning of the reporting entity’s first annual reporting period that begins after November 15, 2009.  Earlier application is not permitted.

Statement 167:  Statement 167 amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities.  Historically, a reporting company had to consolidate a variable interest entity (“VIE”) if, from a quantitative perspective, it was the primary beneficiary of the VIE (i.e., it absorbed a majority of the VIE’s losses, received a majority of its residual returns, or both).  Statement 167 amends that standard by requiring the reporting entity to also perform a qualitative analysis that results in a VIE being consolidated if the reporting entity:  (1) has the power to direct activities of the VIE that significantly impact the VIE’s financial performance, and (2) has an obligation to absorb losses or receive benefits that may be significant to the VIE.  In making the first evaluation, the reporting entity must consider whether it has an implicit financial obligation to ensure that the VIE operates as intended. [Read more →]

Executive Compensation Principles.  Treasury Secretary Geithner last week released a statement regarding compensation reform that is intended to better align compensation practices with sound risk-management, long-term growth and value creation.  His statement outlined a set of broad-based principles that he expects to evolve over time:

• Compensation plans should properly measure and reward performance;
• Compensation should be structured to account for the time horizon of risks;
• Compensation practices should be aligned with sound risk management;
• Golden parachutes and supplemental retirement packages should be reexamined to determine if they align the interests of executives and shareholders; and
• Transparency and accountability in the process of setting compensation should be promoted.

[Read more →]

The FRB outlined the criteria it will use to evaluate applications to redeem preferred shares issued to the Treasury under the Capital Purchase Program or the Targeted Investment Program (“Treasury Capital”) from the 19 bank holding companies (“BHCs”) that participated in the Supervisory Capital Assessment Program (“SCAP”). Please see the April 28, 2009 Alert and the February 25, 2009 Alert Special Edition for a further discussion of the SCAP. [Read more →]

Final Rule on Capital Treatment of TARP Senior Preferred Stock. The FRB adopted a final rule (the “Rule”) on the treatment of senior perpetual preferred shares (“Senior Preferred Shares”) issued to the Treasury pursuant to the Troubled Asset Relief Program’s (“TARP”) Capital Purchase Program as well as under the TARP’s Targeted Investment Program, Capital Assistance Program and Asset Guarantee Program (collectively, the “TARP Programs”). The Rule permits bank holding companies to include without limit all Senior Preferred Shares issued under the TARP Programs in Tier 1 capital for purposes of the FRB’s risk-based and leverage capital rules and guidelines for bank holding companies. The Rule leaves largely unchanged and makes final the interim final rule (the “IF Rule”) discussed in the October 21, 2008 Alert. [Read more →]

The FRB granted a waiver from Section 23A of the Federal Reserve Act to allow a thrift subsidiary of ING Groep, N.V. (“ING”) to transfer an 80 percent participation interest in a pool of Alt-A residential mortgage-backed securities (“MBS”) to a nonbank affiliate (“Affiliate”). In exchange for the asset transfer, Affiliate would assign to the thrift its rights to a stream of fixed payments from the Kingdom of the Netherlands. [Read more →]

The Treasury Department has released further guidance with respect to the PPIP Legacy Securities Program, as set forth in a press release today (http://www.treas.gov/press/releases/tg82.htm). Treasury has extended the deadline for Fund Manager applications to April 24, 2009, and has made a few clarifications to (a) the interaction between TALF and the PPIP, (b) proposals to encourage participation by small, minority-, women- and veteran-owned businesses, and (c) the role of Treasury debt financing. I also note that the additional FAQ document, which is hyperlinked into the Press Release, contains the following further comment as to PPIP warrants:

What are the terms of the Treasury warrants in a Legacy Securities PPIF?
The terms and amounts of warrants will be determined in part based on the amount of Treasury Debt Financing taken and will be evaluated on a case-by-case basis.

The FRB issued a supervisory letter (SR 09-4, the “Letter”) to bank holding companies (“BHCs”) and FRB supervisory staff concerning BHC payment of dividends, stock redemptions and stock repurchases. The FRB stated that the Letter largely reiterates longstanding FRB supervisory policies and guidance, but reflects the current deterioration in economic conditions. In the current economic environment, the FRB states, it has “heightened expectations” that BHCs will inform and consult with FRB staff sufficiently in advance of: (1) declaring and paying dividends that could raise safety and soundness concerns, e.g., dividends that exceed earnings for the period for which the dividend is being paid; (2) redeeming or repurchasing regulatory capital instruments when the BHC is experiencing financial weaknesses; or (3) redeeming or repurchasing common stock or perpetual preferred stock that results in a net reduction of these elements of capital. [Read more →]

The FRB extended through October 30, 2009, its existing liquidity programs that were scheduled to expire on April 30, 2009. The FRB approved the extension through October 30, 2009 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (the “ABCP Facility”), the Commercial Paper Funding Facility, the Money Market Investor Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility (the “TSLF”). The Federal Open Market Committee (“FOMC”) also took action to extend the TSLF, which is established under the joint authority of the FRB and the FOMC. For more information click here.

The FRB published a letter (the “Letter”) granting an exemption from Section 23A of the Federal Reserve Act and its Regulation W to allow a bank to purchase specified assets from affiliated money market mutual funds. The FRB granted the exemption, subject to a number of conditions, including that: (1) the bank only could purchase assets from SEC-registered open-end funds operating pursuant to SEC Rule 2a-7; (2) the bank’s purchase would be limited to the amount necessary to cover net redemptions to the funds, up to an aggregate maximum of a specified percentage of the bank’s capital and surplus; (3) the assets to be purchased must be rated by an NRSRO at A-1/P-1 or the credit equivalent; (4) the bank must purchase the assets at fair market value as determined by a third party pricing service; (5) the bank must be reimbursed for any losses sustained by the bank in connection with the program; and (6) the exemption will expire on March 31, 2009.

Term Asset-Backed Securities Loan Facility

The FRB announced the creation of the Term Asset-Backed Securities Loan Facility (”TALF”), a facility that will support the issuance of asset-backed securities (”ABS”) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (”SBA”). The set of permissible underlying credit exposures of eligible ABS may be expanded to include commercial mortgage-backed securities, non-Agency residential mortgage-backed securities, or other asset classes. [Read more →]