Government to Buy Equity Stake in Financial Institutions

On Tuesday, October 14, the Treasury Department announced the creation of a Capital Purchase Program, through which the Treasury will purchase up to $250 billion of senior preferred shares in qualifying U.S. controlled banks, savings associations, and bank and savings and loan holding companies. The program, which is part of the $700 billion Troubled Assets Relief Program (TARP), but is a departure from previously announced plans to purchase troubled assets from financial institutions, is intended to encourage U.S. financial institutions to build capital and increase the flow of financing into the U.S. economy.

Participation. Participation in the program will be on standardized terms published in the program's term sheet. The Treasury will determine eligibility and allocations for interested parties after consultation with the appropriate banking agency. Institutions must elect to participate on or before November 14, 2008. Treasury Secretary Paulson announced that nine banks have already agreed to participate. The Treasury has not released the names of the banks. According to media reports, the nine initial participants are: Citigroup, Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America and Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp., and State Street Corp.

Investment Amounts. The minimum subscription available to a program participant is 1 percent of its risk-weighted assets; the maximum subscription is the lesser of $25 billion and 3 percent of risk weighted assets.

Senior Preferred Shares. The senior preferred shares purchased by the Treasury will rank senior to common stock, and will be at an equal level in the capital structure as most existing preferred shares. Other terms of the senior preferred shares include the following: (a) they will earn a cumulative dividend of 5 percent per year for the first five years, and 9 percent per year thereafter, (b) they will be non-voting shares, other than on matters that could adversely affect the shares, and (c) they will be callable at par after three years.

Limits on Executive Compensation. Participants in the program must adopt standards for executive compensation that would generally apply to the CEO, CFO and the next three most highly compensated executive officers. The Treasury has issued interim final rules for the executive compensation standards.