Institutions that wish to take part will receive investment in return for preferred shares, which will pay a cumulative dividend of 5% per annum for the first five years and reset to 9% per annum thereafter.
Under the terms of the scheme, the Treasury will compel participants to accept restrictions on executive compensation including ensuring that bonus systems do not encourage excessive risk taking, a ban on golden parachutes and a mandatory recovery of any incentive based on criteria later confirmed to be inaccurate. The US government’s investment in banks will be funded through the $700 billion Troubled Asset Relief Program (Tarp) rescue package.
The Treasury will make $250 billion of capital available to U.S. financial institutions, with nine large financial organizations having “already indicated their intention to subscribe to the facility in an aggregate amount of $125 billion,” allowing the US Government to apply for a preferred stock investment by the institutions involved.
News sources in the US have claimed Citigroup, Wells Fargo, JP Morgan and Bank of America - encompassing Merrill Lynch - will each receive a $25 billion equity infusion, with Morgan Stanley and Goldman Sachs to receive $10 billion each. A spokesperson for the US Treasury declined to confirm the validity of the figures.
$3 billion will be invested in Bank of New York Mellon, the company announced, while a spokesperson for Boston-based State Street confirmed a $2 billion preferred stock purchase in the firm. The senior debt of all FDIC-insured institutions will be temporarily guaranteed, as will as deposits in non-interest bearing deposit accounts, said FDIC chairman Sheila Bair.
The Fed also announced further details of its commercial paper funding facility scheme, which from October 27 will acquire three-month commercial paper from high-quality issuers. Pricing will be based on the three-month overnight index swap rate, plus a spread determined by the quality of the collateral: 100bp for unsecured commercial paper and 300bp for asset-backed commercial paper.
The Fed added that it will accept as much commercial paper from a single issuer as the issuer had outstanding between January and August this year, and will accept only dollar-denominated A-1 rated paper.
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Treasury secretary Hank Paulson announced the initiative this morning in a joint press conference with the US Federal Reserve and the Federal Deposit Insurance Commission (FDIC).