The Creation of the TALF Program, the Citigroup Bailout and Other Recent Developments Related to the Emergency Economic Stabilization Act of 2008

Since the Emergency Economic Stabilization Act of 2008 (the “Act”) became law on October 3, 2008, the United States government has taken unprecedented steps to bolster troubled credit markets and to protect and stabilize key lending institutions. Over the past several weeks, there have been several major announcements regarding programs to be implemented by the United States government.

Term Asset-Backed Securities Loan Facility

On November 25, 2008, the United States Department of Treasury (“Treasury”) and Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced the creation of the Term Asset-Backed Securities Loan Facility program (the “TALF Program”). Under the TALF Program, the Federal Reserve Bank of New York (the “FRBNY”) will make up to $200 billion of loans (the “TALF Loans”) available to eligible borrowers. Eligible borrowers are United States persons¹ that own eligible collateral.

Eligible collateral is defined to include United States dollar-denominated cash asset-backed securities (“ABS”) that have a long term credit rating in the highest investment-grade rating category from two or more nationally recognized statistical rating organizations and that do not have a long-term credit rating of below the highest investment-grate rating category from a major nationally recognized statistical rating organization. The underlying credit exposures of eligible ABS initially must be auto loans, student loans, credit card loans or small business loans guaranteed by the United States Small Business Administration. The permissible underlying credit exposures of eligible ABS may be expanded later to include commercial mortgage-backed securities, non-Agency residential mortgage-backed securities or other asset classes. The underlying credit exposures cannot include exposures that are themselves cash or synthetic ABS. Eligible collateral for a particular borrower cannot be backed by loans originated by such borrower or an affiliate of such borrower.

Each of the TALF Loans shall be fully secured by eligible collateral and shall be non-recourse to the borrower. The amount of each of the TALF Loans will be equal to the market value of the ABS less a haircut established by the FRBNY for each class of eligible collateral. Haircuts will be determined based on the price volatility of each class of eligible collateral. The TALF Loans will have a one-year term, with interest payable monthly, and the term may be lengthened later “if appropriate.” The TALF Loans will not be subject to mark-to-market or re-margining requirements and will be made available to eligible borrowers until December 31, 2009.

Each month, the FRBNY will offer a fixed amount of loans under the TALF Program. Such loans will be awarded to borrowers on a competitive, sealed bid auction process. Each bid must include the desired amount of credit and an interest rate spread over one-year overnight index swap (“OIS”), with the FRBNY setting minimum spreads for each auction. Borrowers will have to pay a non-recourse loan fee at the inception of each loan transaction.

The Treasury will provide $20 billion of credit protection to the Federal Reserve in connection with the TALF Program. Treasury Secretary Henry Paulson said of the TALF Program, “By providing liquidity to issuers of consumer asset backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans.”

Originators of the credit exposures underlying eligible ABS must comply with or already be subject to the executive compensation provisions set forth in Section 111(b) of the Act².