The Recapitalization of the Banking System - The TARP Capital Purchase Program

By Jeffrey R. Kesselman

On October 14, the U.S. Treasury unveiled its response to the current turbulence in the global financial markets. As authorized under The Emergency Economic Stabilization Act of 2008 (the "Act"), Treasury announced that it will purchase up to $250 billion in preferred equity shares in certain financial institutions. The equity infusion plan represents a rather dramatic departure from the previously anticipated structure of using the $700 billion treasure chest authorized by the Act in order to purchase toxic mortgage-backed securities directly from distressed financial institutions.

While both the equity infusion plan and the toxic asset purchase plan are authorized by the rather ominous sounding Troubled Asset Relief Program ("TARP") established by the Act, the implementation of the equity infusion plan appears to be an effort by Treasury to take more of a top-down approach to calming the financial waters. In that regard, Treasury started at the very top of the food chain, announcing immediately that nine major financial institutions would be participating in the program by selling $125 billion of preferred securities to Treasury. The remaining $125 billion will be used to provide preferred equity investments in other smaller financial institutions, with the clear expectation being that the capital will be injected into institutions that will not utilize the infusion as a financial lifeline, but instead will deploy the capital in a manner that will stimulate economic growth.

It is widely anticipated that the equity infusions will dramatically reshape the banking landscape. The stronger banks will now have the capital to expand their loan portfolio and possibly acquire some of their more distressed competitors. The TARP recapitalization needs to be carefully examined by each and every qualifying financial institution, which includes both public and privately held banks. It is anticipated that many of even the best capitalized banks will apply to participate in the plan, so financial institutions need to carefully consider their place in the new competitive landscape.

As for the equity infusion plan itself, the terms of the transactions will be standardized and are as described in a public term sheet issued by Treasury and attached to this notice as Annex A. It is very important for all financial institutions to be aware that in order to participate in the equity infusion plan, the institution will need to notify its federal banking agency by November 14, 2008, 5:00 p.m.

Our attorneys are of course prepared to assist your financial institution in evaluating and implementing the equity infusions contemplated by TARP.

For more information please contact your Sherman & Howard relationship attorney or one of the attorneys on our
Changing Markets Practice Group.

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