Recent US Government Intervention in Support of the Financial Markets Overview of the US Capital Purchase Plan and Liquidity Guarantee Program Thomas J. Pax Partner, Clifford Chance US LLP November 6, 2008

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Program -- Authority The US Congress passed the Emergency Economic Stabilization Act (Pub. L. No ) (“EESA”) on October 3, 2008 EESA authorized the US Treasury to use up to $700 billion to purchase troubled assets EESA defined “Troubled Assets” to include “any other financial instrument” that Treasury and the Fed determined “the purchase of which is necessary to promote financial market stability”

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Program -- Overview The Capital Purchase Program has become the cornerstone of the US government’s plan rather than EESA’s original focus, the purchase of troubled assets The program will be used to purchase up to $250 billion of senior preferred shares of banks and thrift institutions Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, Wells Fargo, and Merrill Lynch initially opted to participate in the program and sold preferred shares in the aggregate of $125 billion Since the original nine institutions initiated the program, press reports indicate that Capital One, Huntington, KeyCorp, PNC, and SunTrust have accessed another $30 billion PNC is reported to have used its funds in its acquisition of National City

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Program -- Eligibility Participation is available for bank holding companies, financial holding companies, insured depository institutions, and savings and loan holding companies that engage only in activities that are permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act Financial institutions controlled by foreign entities are currently not eligible under this program All eligible Qualifying Financial Institutions must apply to be a part of the program by November 14, The eligible institution must submit an application to the appropriate federal banking agency The minimum subscription amount will be 1% of risk-based assets, while the maximum subscription will be the lesser of 3% of risk-based assets or $25 billion

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Program -- Purchased Preferred Shares Shares purchased under the program will qualify as Tier 1 capital and will rank senior to common stock and pari passu with existing preferred shares The purchased shares will be non-voting and pay a dividend of 5% per year for the first five years, and 9% per year for subsequent years The Treasury must consent to any increase in common dividends per share for the first three years of the program, unless all senior preferred shares have been redeemed or control of the shares has been transferred to a third party In the event of a liquidation, or any other winding up of the financial institution, the senior preferred shares will have a liquidation preference of $1000 per share Shares will be callable at par after three years

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Program -- Warrants The Treasury will obtain warrants for common stock with a market value of 15% of the amount of senior preferred stock For publicly traded companies, the Treasury will receive warrants for nonvoting common stock, preferred stock or voting common stock For non-publicly traded companies, the Treasury will receive a warrant for common or preferred stock or a senior debt instrument All of the warrants must contain anti-dilution provisions

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Program -- Executive Compensation Standards To qualify for the program, financial institutions must adopt the Treasury’s standards for executive compensation The program requires that financial institutions restrict incentives for executives to take excessive risks, and clawback any bonus or incentive compensation paid to officers or executives as a result of inaccurate or false earnings statements

Recent Goverment Intervention in the Financial Markets · November 6, US Capital Purchase Programs in Other Countries

Recent Goverment Intervention in the Financial Markets · November 6, US Temporary Liquidity Guarantee Program On October 14, 2008, Treasury invoked the systemic risk exception to the FDIC Improvement Act of 1991, permitting the Federal Deposit Insurance Corporation to implement the Temporary Liquidity Guarantee Program The program has two components: One component guarantees newly issued senior unsecured debt of the participating organizations, within a certain limit, issued between October 14, 2008 and June 30, In the case of debts maturing after June 30, 2009, the guarantee remains in effect until June 30, 2012 –Eligible senior debt includes promissory notes, commercial paper, interbank funding and any unsecured portion of secured debt The other component provides full coverage for non-interest bearing transaction deposit accounts, notwithstanding dollar amount, until December 31, 2009

Recent Goverment Intervention in the Financial Markets · November 6, US Temporary Liquidity Guarantee Program -- Eligible Institutions & Fees Eligible entities generally include: FDIC-insured depository institutions, US bank holding companies, US financial holding companies, US saving and loan holding companies that engage only in activities that are permitted for financial holding companies under Section 4(k) of the Bank Holding Company Act FDIC-insured institutions owned by a non-US entity are also eligible to participate, but insured branches of foreign banks are excluded All eligible institutions are automatically enrolled in the programs at no cost Institutions that do not want to participate in the programs must “opt out” of one or both programs by December 5, After that time, participating institutions will be assessed fees

Recent Goverment Intervention in the Financial Markets · November 6, US Temporary Liquidity Guarantee Program -- Terms and Conditions Participants in the program will be charged a 75-basis point fee to protect their new debt issues and a 10-basis point surcharge will be added to an institution's current insurance assessment to cover the non-interest bearing deposit transaction accounts The amount of debt covered by this program may not exceed 125% of debt that was outstanding as of September 30, 2008 that was slated to mature before June 30, 2009 An enhanced supervisory regime will be put in place to ensure the appropriate use of the guarantee

Recent Goverment Intervention in the Financial Markets · November 6, US Money Market Funds Guarantee The Treasury will guarantee that investors receive $1 for each money market fund share held as of September 29, 2008 ($1 is the standard net asset value for money market mutual funds) The guarantee will be triggered if a participating fund’s net asset value falls below $0.995 Eligible funds must be regulated under the Investment Company Act of 1940, and must maintain a stable share price of $1 Funds must be publicly offered and registered with the SEC Both taxable and non-taxable funds are eligible to participate There is no limit on the amount of shares that can be covered

Recent Goverment Intervention in the Financial Markets · November 6, Government Guarantees in Other Countries

Recent Goverment Intervention in the Financial Markets · November 6, Recently Established US Liquidity Facilities Commercial Paper Funding Facility -- US branches of a foreign bank and US issuers with a foreign parent are eligible participants Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility -- US branches of foreign banks and US depository institutions are eligible participants Money Market Investor Funding Facility -- Eligible investors include US money market funds and over time may include other money market investors

Recent Goverment Intervention in the Financial Markets · November 6, Liquidity Measures in Other Countries

Recent Goverment Intervention in the Financial Markets · November 6, Questions? Contact: Tom Pax WA417839