Executive Summary: Treasury Secretary Timothy Geithner Announces a New “Financial Stability Plan”

On February 10, 2009, in a widely-anticipated speech, United States Treasury Secretary Timothy Geithner announced details of a new “Financial Stability Plan.” According to Secretary Geithner, the Financial Stability Plan has been designed to “stabilize and repair the financial system, and support the flow of credit necessary for recovery.”

For your convenience, set forth below is an executive summary of the Financial Stability Plan, as announced by Secretary Geithner on February 10, 2009.

Capital Assistance Program/Financial Stability Trust

The United States Treasury Department (Treasury) plans to provide funds to lending institutions in need of capital support through a new Capital Assistance Program (CAP). Under the CAP, lending institutions will sell convertible preferred securities to the Treasury in exchange for cash. Institutions will be able to convert the securities into common equity if such conversion is needed to preserve lending in a worse-than-expected economic environment. The convertible preferred securities will carry a dividend to be specified and will have a conversion price set at a modest discount from the prevailing level of the applicable institution’s stock price as of February 9, 2009.

Capital investments made by the Treasury under the CAP will be placed into a separate entity called the Financial Stability Trust. The Financial Stability Trust will manage the government’s CAP-related investments.

The Financial Stability Trust will serve as a “capital buffer,” (i.e., it will operate as a form of contingent equity that will ensure that institutions have the capital strength to preserve or increase lending in worse-than-expected economic times). Additionally, the CAP funds are intended to serve as a “bridge to private capital” and, as such, the terms of the lending will be designed to encourage the institutions to replace the public assistance from the Treasury with private capital as soon as possible. When making an investment via the CAP , the Treasury will impose conditions that will “help ensure that such funds will be used to generate a level of lending greater than that which would have been possible without government support.”

Institutions that request a CAP investment will be required to undergo a comprehensive “stress test.” The stress test will include an analysis of whether the applicable institution has the capital necessary to continue lending and absorb potential losses that could result from a worse-than-expected economic downturn. All banking institutions with assets in excess of $100 billion will be required to participate a coordinated supervisory review and comprehensive stress test. Banking institutions with assets below $100 billion will be eligible to obtain capital from the CAP after a supervisory review only.

In connection with the implementation of the CAP, the Treasury will be introducing new measures to help increase transparency and improve public disclosure by banks, including current exposures on bank balance sheets.