Announcing the Administration’s emergency banking program, Treasury Secretary Henry Paulson said the first step is to “make capital available on attractive terms to a broad array of banks and thrifts, so they can provide credit to our economy.” Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock.

The regulators stressed that the recapitalization program is voluntary, but it was clear the government had all but forced the participation of the nine large institutions that signed on early and received roughly half of the $250 billion. Treasury will purchase $25 billion in preferred stock of Bank of America Bank of America (including Merrill Lynch), J.P. Morgan, Citigroup, and Wells Fargo; $10 billion each in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and $2 billion in State Street.

“These are healthy institutions, and they have taken this step for the good of the U.S. economy,” Paulson said. He also said these purchases will be on the same terms that will be available to a wise arrange of small and medium-sized banks and thrifts across the nation.

The program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate before 5:00 pm (EDT) on November 14, 2008. Treasury will determine eligibility and allocations after consultation with the appropriate federal banking agency.

Ground Rules

Treasury established the following ground rules for the program:

• The minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets; the maximum is the lesser of $25 billion or 3 percent of risk-weighted assets.
• Treasury will fund the senior preferred shares purchased under the program by year-end 2008. Institutions interested in participating in the program should contact their primary federal regulator for specific enrollment details.
• The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock. The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five.
• The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares.
• The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock.
• Treasury may also transfer the senior preferred shares to a third party at any time.
• In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to buy common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution’s common stock at the time of issuance, calculated on a 20-trading day trailing average.

Executive Pay

Institutions that sell shares to the government must accept limits on executive pay. For the CEO, CFO, and the next three highest-paid executive officers, each institution must:

• Ensure that incentive compensation does not encourage unnecessary and excessive risks that threaten the value of the institution;
• Require clawback of any bonus or incentive compensation paid on the basis of criteria that are later proven to be materially inaccurate;
• Prohibit the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and
• Agree not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

Paulson also said participating banks will be expected to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.

“While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy.” Paulson said. “Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury, and raise additional private capital, so that they can make more loans to businesses and consumers across the nation.”