This article was originally published 11 February, 2009
On Tuesday, February 10, 2009, Secretary of the Treasury Timothy Geithner outlined the six-point Financial Stability Plan (FSP), pursuant to which the Department of the Treasury, in cooperation with Federal Reserve, the FDIC, the Office of Thrift Supervision and the Office of the Comptroller of the Currency, hopes to bring stability to the U.S. credit markets. The high level terms of the FSP as discussed in the FSP Fact Sheet are summarized below. Critical aspects of the FSP remain undefined, however. Further details of the FSP, as they become available, will be posted at http://www.financialstability.gov .
Financial Stability Trust
The FSP will include provisions for (i) increased transparency regarding exposures embedded in bank balance sheets through disclosure requirements adopted in conjunction with the banking agencies, the SEC and accounting standards bodies, (ii) coordinated actions by the financial regulatory agencies to assess the exposures of financial institutions, and (iii) forward-looking "stress tests" as part of the Capital Assistance Program described below that are designed to test whether major financial institutions are healthy enough to continue lending. Banking institutions with assets in excess of $100 billion will be required to participate in the coordinated review and stress test processes.
In addition, the FSP will establish a Capital Assistance Program designed to act as a "buffer" to "preserve or increase" lending in the event of a worse than expected downturn. Financial institutions that have undergone stress tests will be able to receive preferred security investments from the Treasury that may be converted by the issuer into common equity at a "modest discount" to the prevailing stock price on February 9, 2009. All such investments by the Treasury will be placed in a Financial Stability Trust (the Trust) to manage the investments. Presumably the Treasury will engage private parties to assist in the management of the Trust, but no details regarding the Trust are yet available. Banking institutions with less than $100 billion in consolidated assets will be eligible to participate in the Capital Assistance Program after a supervisory review.
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