Treasury Announces Financial Stability Plan
Treasury Secretary Timothy Geithner announced on February 10, 2009 the Financial Stability Plan.* This Plan includes provisions to enhance bank capitalization, supervision, and public disclosure; a public-private bad asset investment and disposition program; initiatives for consumer and business lending; and a program for foreclosure avoidance. Many of these programs will be funded through additional TARP and related bailout funding. Significant details regarding the Financial Stability Plan are included in a Fact Sheet also released today by Treasury.
Key bank supervisory components of the Plan are enhanced financial analysis and comprehensive stress testing of banks, a revised capital assistance program, and expanded disclosures by banks and regulators. There are no specifics for the comprehensive stress test although the guidance and recent practice indicate a focus on testing core earnings against anticipated loan losses and capital. Banking agencies are charged with developing coordinated, accurate, and realistic assessment criteria, as well as procedures for a forward looking assessment designed to indicate whether banks are prepared to withstand future risks. The Treasury announcement cautions supervisors against overly conservative positions or steps that would inappropriately constrain lending.
A revised capital assistance program will be available to institutions that survive a comprehensive stress test. Treasury will provide a capital buffer to help absorb losses and serve as a bridge to receiving increased private capital. Participating banks will receive preferred investments from Treasury in the form of preferred securities that can convert to common equity if needed to preserve lending in a worse than anticipated economic downturn. These investments will be held by a Financial Stability Trust.
Additional restrictions will apply to banks participating in the revised capital assistance program. Until the government investment is repaid, participating banks may not: (i) pay dividends in excess of $.01 per share; (ii) purchase any privately held shares; or (iii) make cash acquisitions of healthy banks. Further, executive compensation is limited in essentially the same manner presented by Treasury on February 4. Participating institutions are also required to participate in mortgage foreclosure mitigation programs consistent with guidelines that Treasury will release based on industry standards best practices.
The Plan’s transparency and accountability agenda requires banks to show how capital assistance will expand their lending and how every dollar of capital they receive is enabling them to preserve or generate new lending compared to what would have been possible without the assistance. Each applying bank is required to submit a plan for its use of capital to preserve and strengthen its lending capacity. This increased disclosure includes a monthly report to Treasury detailing loan volume by loan type, the number of new loans provided to businesses and consumers, and how many asset-backed and mortgage-backed securities were purchased.
Signaling new levels of disclosure, the “taxpayers’ rights to know component” provides that all information disclosed or reported to Treasury by recipients of capital assistance will be posted on FinancialStability.gov. The rational is that taxpayers have the right to know whether these programs are succeeding in creating and preserving lending and financial stability. Any political interference with investment decisions or involvement of politician or lobbyist influence on an application will be disclosed. Finally, contracts and investment information will be posted for each bank participating in the program.
The Consumer and Business Lending Initiative will rely principally on the Term Asset Backed Securities Loan Facility (TALF) with the goal of leveraging a $100 billion investment to create $1 trillion of funding for purposes of promoting increased lending. This initiative recognizes the power of secondary markets and securitization, which, through leveraging, can be expanded by reinvesting the same dollars multiple times throughout the economy. This initiative will support the purchase of loans by providing the financing to private investors to help unfreeze and lower interest rates for small businesses, autos, credit cards, and other consumer and business credit businesses.
A Public-Private Investment Fund will seek to combine public-private capital to facilitate public financing, leveraging private capital alongside public capital with private sector pricing of assets. Importantly, newly packaged AAA rated loans or securities are the only type that Treasury is offering to purchase from this program, thus minimizing risks to taxpayers.
Housing Support and Foreclosure Prevention will be accomplished by programs for institutions recovering from the current crisis. The Plan provides $50 billion to prevent avoidable foreclosures and includes measures to help bring order and consistency to the foreclosure process, to require all Plan recipients to participate in foreclosure mitigation plans, and to build flexibility and hope for homeowners and the FHA.
The Small Business and Community Lending Initiative recognizes the need for increased capital for SBA lending which includes the use of a consumer and business lending initiative to finance the purchase of AAA rated SBA loans, increasing the guaranty for SBA loans to 90%, and reducing fees for SBA 7(a) and 504 lending as well as providing funds for both oversight and speedier and less burdensome processing of loan applications.
More information regarding the Financial Stability Plan will be provided as the details are released. Copies of the press announcement and fact sheet are available by clicking below or on the links embedded in the first paragraph above.
*The Financial Stability Plan and Fact Sheet are vague in many key areas. This Alert summarizes important features of the Plan as announced on February 10, 2009.
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