U.S. Government come out with a plan to inject %250 billion into struggling banks and guarantee a beat back on the financial crisis that has economy under threat.
Following are details of the U.S. Treasury Department’s recapitalization plan and the Federal Deposit Insurance Corp.’s decision to guarantee 100 percent of banks’ unsecured debt and non-interest bearing deposits.
Treasury plan
—The Treasury will buy up to $250 billion in preferred stock in banks, thrifts, or other depository institutions, but not those controlled by a foreign bank or company.
—Government non-voting stakes in qualifying financial institutions, with stakes in each institution limited to the lesser of $25 billion or 3 percent of risk-weighted assets. It set a Nov. 14 deadline for banks to apply for government purchases.
—The funds for the purchases will come from the $700 billion authorized by Congress under a financial bailout bill known as the Emergency Economic Stabilization Act. The rescue plan initially focused on purchases of bad assets from banks to allow them to room to resume lending.
—The government non-voting senior preferred shares may not be redeemed for three years and will pay dividends of 5 percent annually for the first five years and 9 percent thereafter until the institution repurchases them. The government senior preferred shares do not alter rights of existing senior preferred share holders.
—Participating banks will need the Treasury’s approval to increase common stock dividends for three years under the plan.
—The Treasury will also receive warrants to purchase common stock in a participating bank at an aggregate market price of 15 percent of its senior preferred stock investment. The warrants will be exercisable for 10 years and the exercise price will be based on a 20-day trailing average of the institutions’ common stock price on the date of the Treasury investment.
—Participating banks must comply with Treasury restrictions on executive compensation, which limit tax deductible of senior executive pay to $500,000. Banks also must ensure that incentive compensation does not encourage unnecessary and excessive risks that threaten the value of the institution. They require bonuses to be “clawed back” if earnings statements or gains are later proven to be materially inaccurate and prohibit “golden parachute” payments to senior executives.
—A number of these same executive pay restrictions apply to financial firms that sell more than $300 million of troubled mortgage related assets to the Treasury under the asset purchase plan.
FDIC guarantee plan
—The Federal Deposit Insurance Corporation, the government agency which traditionally guarantees deposits at banks, will guarantee senior unsecured debt issued by U.S-regulated banks, thrifts and other depository institutions issued before June 30, 2009, including promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. This must not exceed 125 percent of debt outstanding on Sept. 30, 2008.
—This debt would be fully protected in the event that the issuing institution subsequently fails, or its holding company files for bankruptcy. Coverage would be limited until June 30, 2012, even if the debt’s maturity exceeds that date.
—The FDIC will guarantee all funds in non-interest-bearing transaction deposit accounts held by FDIC-insured banks until Dec. 31, 2009. These are mainly payment processing accounts, such as payroll accounts used by businesses.
—Fees for these guarantees would not rely on taxpayer funding. They would be paid by participating banks that would pay a 75 basis-point fee to protect their new debt issues and a 10 basis-point surcharge for deposits not otherwise covered by the existing deposit insurance limit of $250,000. All FDIC-insured institutions will be covered under the program for the first 30 days without any costs. After this initial period, banks not wishing to continue their participation will have to opt out or be assessed for future guarantees.
