GSE Developments

The federal bank and thrift regulatory agencies today announced that they are seeking comment on a proposal to permit banking organizations to assign a 10% (currently 20%) risk weight to claims on or guaranteed by Fannie Mae and Freddie Mac, including all credit exposures, such as senior and subordinated debt and counterparty credit risk exposures, but not including preferred or common stock. The FDIC will accept comments through November 26.  FDIC Release.

 Fannie Mae announced on October 29 that it has determined to take a valuation allowance against its deferred tax asset in an amount that is yet to be determined but which is likely to be substantially all of the value of the deferred tax asset as of September 30.  Fannie Mae Release

The Emergency Economic Stabilization Act provided banks and certain financial institutions ordinary treatment for gains and losses on direct investments in preferred stock of Fannie Mae and Freddie Mac. On October 29, the IRS issued Rev. Proc. 2008-64, which provides banks and certain other financial institutions the benefit of ordinary treatment on gains and losses that they are experiencing on certain indirect investments in this preferred stock.  IRS Rev. Proc. 2008-64.

Selected International Initiatives

On October 28, the Hong Kong government established a taskforce to help Hong Kong tackle the financial
On October 29, the Financial Services Commission of South Korea said it would ease capitalization rules for
local banks. Local banks will now be required to set aside assets to cover Won denominated debts maturing
within a month rather than three months in an effort to ease liquidity. FSC of Korea Press Release.
The Federal Reserve has recently entered into a number of temporary reciprocal current arrangements with the central banks of Brazil, Mexico, South Korea, Singapore and New Zealand to help improve liquidity
conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding.  October 29 Federal Reserve Press Release.  October 28 Federal Reserve Press Release.

FDIC Initiatives

In the event of the failure of an FDIC-insured depository institution, the FDIC is concerned that there could be unexpected losses to securitization investors of principal and interest payments deposited at such institution by a securitization servicer.  Accordingly, on October 24, the FDIC adopted an interim rule to simplify the deposit insurance rules for accounts held at FDIC-insured institutions by mortgage servicers.  Under the interim rule, the FDIC will be able to make deposit insurance determinations on mortgage servicing accounts, as well as pay deposit insurance, more quickly.  FDIC Rule.

 

Market Developments

On October 28, the House Committee on Oversight and Government Reform, chaired by Rep. Henry Waxman (D. Cal.), sent a letter to the nine major banks which are the recipients of Treasury’s $125 billion investment seeking broad ranging compensation information on all personnel, including total compensation and average compensation paid or projected to be paid from 2006-2008, as well as the number of employees paid more than $500,000 and individual salary and bonus breakdowns for the ten highest paid employees.  The letter states that the committee “questions the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of bonuses”. For more information about this ongoing investigation, contact Mike Delikat, Adam Goldberg, Mike Madigan or Howard Altarescu.

Barclays announced today plans to raise up to £7.3 billion, without government aid, from existing and new investors as part of its plan to achieve the new higher capital targets set by the UK Financial Services Authority.  Barclays Press Release.

On October 22, the Bankruptcy Court for the Southern District of New York approved bidding procedures to auction Lehman Brothers Holdings Inc.’s Investment Management Division (including Neuberger Berman) and a portion of its private equity business.  The proposed purchaser is IMD Parent LLC (jointly controlled by Bain Capital Partners and Hellman & Friedman), which is entitled to certain break up fees and expense reimbursement in the event they are not the winning bidder. The estimated net purchase price is $1.75 billion.  Bids are due on December 1with an auction for qualified bidders scheduled to occur on December 3. The sale hearing is scheduled for December 22. Orrick Client Alert.

 Orrick’s Creditors’ Rights & Bankruptcy Group has prepared a user’s guide to investments held in distressed financial institutions and broker-dealers, which summarizes the current investment landscape.  Investments Held in Distressed Financial Institutions and Stockbrokers: A User’s Guide

 

Emergency Economic Stabilization Act Developments

Agreements were signed over the past weekend with the initial nine institutions electing to participate in Treasury’s Capital Purchase Program.  Treasury began delivering $125 billion in capital to those institutions on October 28.  A number of regional banks have also applied to receive approximately $35 billion in capital under the program.  CPP Transaction Report.  Treasury Press Release. 

On October 28, SIFMA and ASF jointly issued a comment letter relating to the development of the asset guarantee program authorized under the Emergency Economic Stabilization Act and requested that Treasury consider limiting and targeting the circumstances in which the guarantee program might be effectively used.  SIFMA/ASF Comment Letter

Internal Revenue Code Sec. 597 provides for rules to prevent a double tax benefit on the receipt by a bank or S&L of “federal financial assistance” pursuant to section 406(f) of the National Housing Act, section 21A of the Federal Home Loan Bank Act or section 11(f) or 13(c) of the Federal Deposit Insurance Act.  On October 14, the IRS announced that amounts furnished to financial institutions under TARP will not be treated as “federal financial assistance” within the meaning of Sec. 597.  IRS Notice 2008-101.

 

Tax Treatment of Fannie and Freddie Preferred Stock

Section 301 of the Emergency Economic Stabilization Act allows certain banking organizations to change the character of losses on certain holdings of Fannie Mae and Freddie Mac preferred stock from capital losses to ordinary losses for federal income tax purposes. The federal banking and thrift regulatory agencies announced that these banking organizations can recognize the economic benefit of these changes in tax treatment in the third quarter of 2008 for regulatory capital purposes.  FDIC Press Release.

 

FDIC Initiatives

In testimony given yesterday before the Senate Committee on Banking, Housing and Urban Affairs, Sheila C. Bair, Chairman of the FDIC, discussed the FDIC’s Temporary Liquidity Guarantee Program, including related fees and timelines, as well as efforts to reduce unnecessary foreclosures and the possibility of government guarantees of loans that have been modified by servicers in accordance with established standards.  Chairman Bair’s Testimony.

Also yesterday, the FDIC released an Interim Final Rule implementing the FDIC’s Temporary Liquidity Guarantee Program. The rule sets forth the criteria and conditions for participation in the program, which was initially announced on October 14.  Orrick Structured Finance Alert.