Who is Driving the Workout Bus?

Transcription

1 Who is Driving the Workout Bus? Understanding the Parties and Perspectives Live from Chicago and via webinar April 30, 2009 This presentation is provided for informational purposes only, and the content should not be construed as legal advice on any matter.

2 Welcome Introduction Objectives Approach Louis Cohen Chair, Chicago Real Estate Department Hypothetical loan scenarios For each perspective, we will examine the: Issues Parties involved Process Results This presentation will be available on DLA Piper s website at the conclusion of the seminar. MCLE Information: CLE credit will be applied for as requested for those states in which DLA Piper currently has an office. Webinar participants applying for CLE credit must record the code that will be given later in the presentation. Webinar participants may submit questions during the presentation through the Chat function on the bottom left of the web presentation screen. If your question is not addressed during the presentation, you will receive a response subsequent to the program. Who is Driving the Workout Bus? April 30,

3 Introduction of Panelists Panelists Louis Cohen Chair, Chicago Real Estate Department Jim Kaplan David Sickle Scott Weinberg Chair, Midwest Banking Practice Partner Real Estate Practice Partner Finance Practice Who is Driving the Workout Bus? April 30,

4 Hypothetical Loan Scenario #1 Bank Loan May 2007: Acquisition Borrower purchased multi-tenant office building for $100 million At purchase, building was fully occupied Louis Cohen Chair, Chicago Real Estate Department Several tenants were paying market-based rents 50% of building subject to leases set to roll over next 5 years Borrower obtained $70 million mortgage loan to fund purchase Interest at 100 basis points above Prime Initial term of 2 years, with 3 one-year extension options, each conditioned upon.25% fee Who is Driving the Workout Bus? April 30,

5 Hypothetical Loan Scenario #1 Bank Loan Louis Cohen Chair, Chicago Real Estate Department May 2009: Property-level status and refinancing options Rental income much lower as tenants have vacated, filed for bankruptcy or renewed leases at lower rents Money still left in interest reserve, and loan is just barely current Borrower s investors forced to infuse additional equity into the property to pay operating costs, or are being asked by lender to increase interest reserve/capital reserve account due to failure to meet debt service coverage thresholds Borrower s investors debating whether to pay loan extension fee Only potential refinancing available is for a loan of $55 million Who is Driving the Workout Bus? April 30,

6 Borrower s Perspective Workout Strategy David Sickle Partner Real Estate Practice Borrower s objectives and approaches to workouts are influenced greatly by the complexity of ownership and financial structures Typical structures include: Direct ownership. Property is 100% owned by a single person or entity (probably through a SPE) Traditional syndication or promote structure. Sponsor may have a disproportionate share of risk/return Preferred Equity structure. Fund or other institutional investor provides the bulk of capital, often in a second loss position, and retains ultimate management control Mezzanine Loans. Fund or other institutional investor provides subordinate debt and retains the right to assume ownership of the property Tenants in Common. Sponsor may have no greater authority or control than any other owner (and unanimity may be required for any workout), and the imbedded tax gain of co-owners often compound the issues Who is Driving the Workout Bus? April 30,

7 Borrower s Perspective Workout Strategy David Sickle Partner Real Estate Practice How do these structures impact the workout process? Authority issues Ability to raise additional capital True party-in-interest may depend on specific valuation of property and the waterfall for the deal Disproportionate downside exposure for guarantors or indemnitors Conflicts of interest among various constituent owners resulting from relationships with lender, fee income, divergent tax positions, disconnect between management authority and financial interests Who is Driving the Workout Bus? April 30,

8 Borrower s Perspective Personal Liability David Sickle Partner Real Estate Practice Guaranty or Indemnity liability The personal liability actual and potential of the owner or guarantor is likely to be the overriding consideration of the borrower in most workouts Identification and resolution of personal liability should be the beginning and end of the workout process, for both the borrower and the lenders Personal liability may arise directly from the loan documents or indirectly from the structure of the borrower Who is Driving the Workout Bus? April 30,

9 Borrower s Perspective Personal Liability Guaranty or Indemnity liability (cont.) Loan guaranties may include: David Sickle Partner Real Estate Practice Payment guaranties Completion and cost overrun guaranties (frequently including tenant improvement work) Carry guaranties covering taxes and insurance, etc. Non-Recourse carve outs Environmental Waste Prohibited transfers Intentional or willful defaults SPE and other specific covenant defaults Hindrance or delay of lender s remedies Who is Driving the Workout Bus? April 30,

10 Borrower s Perspective Personal Liability Guaranty or Indemnity liability (cont.) Structural guaranties may include: David Sickle Partner Real Estate Practice Mezzanine loan guaranties Personal liability for capital contributions Clawback guaranties in favor of Preferred Equity Providers Letter of Credit reimbursement obligations Frequently, the guarantor or indemnitor may have recourse against others through capital calls or express or implied rights of contribution Who is Driving the Workout Bus? April 30,

11 Borrower s Perspective - Sources of Income David Sickle Partner Real Estate Practice Borrower must identify and protect all potential sources of income and capital Fee income. Includes property-level fees (e.g., management and leasing fees) and internal fees (e.g., asset management fees and guaranty fees) New capital. Even where the owner/sponsor has the power to make capital calls, co-owner may not be willing or able to pay, and dilution remedies may be meaningless Existing cash flow. Owner or sponsor may have to choose between distributing cash when received and building internal cash reserves to fund workout Reserves and holdbacks. Loan reserves may be available for other project purposes (e.g., leasing commissions and tenant improvement costs, or deferred cap-ex, or even operating deficits), if the lender is willing and able to permit Who is Driving the Workout Bus? April 30,

12 Borrower s Perspective - Sources of Income David Sickle Partner Real Estate Practice Borrower must identify and protect all potential sources of income and capital Debt service. If lender cooperates, amortizing loans may be converted to interest only, or even negative amortization Given lenders historically low borrowing costs, lenders may be willing to reduce contract interest rates and/or interest rate floors Principal write-downs. Given capital and accounting constraints faced by banks, the tax regulations and servicing limitations that govern most CMBS debt, and the potential adverse tax consequences to borrowers, the write-down of an outstanding mortgage loan usually is not an attractive option Who is Driving the Workout Bus? April 30,

13 Borrower s Perspective Tax Considerations David Sickle Partner Real Estate Practice A real estate loan workout may have significant income tax ramifications to the constituent owners and must be considered, particularly in light of various ownership structures The workout may have significantly different consequences for the sponsor who may be insolvent (at least on paper), the preferred equity provider that may be comprised of tax-exempt entities, and the TIC investor who may have little or no basis in the property Cancellation of Debt (COD) income may arise in any workout or loan modification Who is Driving the Workout Bus? April 30,

14 Borrower s Perspective Tax Considerations David Sickle Partner Real Estate Practice COD income most commonly arises from express writedown of outstanding principal balance Example Bank lender reduces a principal balance (or agrees to accept discounted payoff) of $55 million when outstanding loan balance is $70 million Result is $15 million of COD income, which will be treated as ordinary income to borrower COD income also may rise from a significant modification of loan terms COD income may also result from recourse loans, foreclosure or deed-in-lieu of foreclosure: To the extent that the outstanding loan balance exceeds the value of the property If treated as a sale of the property for an amount equal to the outstanding loan balance Who is Driving the Workout Bus? April 30,

15 Borrower s Perspective Tax Considerations David Sickle Partner Real Estate Practice Primary exceptions to COD income recognition: Debt discharge in bankruptcy of taxpayer If taxpayer is insolvent at the time the debt is discharged Reduction in seller-provided purchase money financing may be treated as a reduction of purchase price rather than COD income Qualified Real Property Business Indebtedness (generally does not apply to property held for investment) Who is Driving the Workout Bus? April 30,

16 Borrower s Perspective Tax Considerations 2009 changes The American Recovery and Reinvestment Tax Act of 2009 provides some relief against COD income David Sickle Partner Real Estate Practice Recognition of COD income may be deferred for 5 years (for 2009 transactions) or 4 years (for 2010 and subsequent transactions) After deferral period, COD income is recognized ratably (i.e., spread out) over 5 years Application to real estate investments not entirely clear due to trade or business language in 2009 Act; need guidance from IRS Who is Driving the Workout Bus? April 30,

17 Lender s Perspective Jim Kaplan Chair, Midwest Banking Practice Capital is king for banks and financial institutions now and for the foreseeable future Banks and financial institutions have neither the desire nor the expertise to manage and efficiently sell large amounts of real estate Regulatory pressure on banks and bank holding companies is perpetual and increasing significantly, given the economic crisis Regulatory pressure to resolve so-called troubled assets and write them down to net realizable value will be particularly intense But, note the potential conflict with the overriding importance of capital Who is Driving the Workout Bus? April 30,

18 Lender s Perspective Banks preferred approach Jim Kaplan Chair, Midwest Banking Practice For relatively healthy institutions (RHIs), if a loan is current in principal and interest payments, the question is whether the loan can be paid or refinanced at maturity If not and few can be in the current environment banks prefer to extend the loans, especially if the underlying facts have not materially deteriorated Leases with tenants in an income-producing property will be a critical factor Have these underlying leases been defaulted upon, rewritten to provide for lower lease payments or have the tenants departed? If so, the loans may have to be written down if a triggering event, like a loan default or failure to pay at maturity occurs Who is Driving the Workout Bus? April 30,

19 Lender s Perspective Banks preferred approach (cont.) It does not make sense for there to be strong regulatory pressure to write down loans that: Jim Kaplan Chair, Midwest Banking Practice have been extended are currently performing where the underlying fundamentals have not dramatically changed The loan will be written down to current market value for cases where: the interest on the loan cannot be met by the borrower or the market value of the real estate has dropped so far below the principal loan amount that there is no realistic chance it will return to a more standard valuation Note the accounting concept of permanent impairment, which requires a write-down under GAAP Who is Driving the Workout Bus? April 30,

20 Lender s Perspective Jim Kaplan Chair, Midwest Banking Practice Banks preferred approach (cont.) For loans that are impaired or otherwise required to be written down, banks will seek to: sell these as troubled assets to the Public-Private Fund or TALF or work them out as restructured loans Foreclosure and ownership of real estate by the bank will not be a preferred alternative Banks do not have the staffing or expertise to manage and rehabilitate commercial properties, much less finish construction of them Banks will try to sell REO as quickly as possible, preferably in government-assisted fashion, and try to manage it only as long as necessary to achieve best execution of the sale Opportunities may exist for firms seeking to provide advice and property management services to banks during the period the banks are holding the property Who is Driving the Workout Bus? April 30,

21 Lender s Perspective Sales assisted by government Legacy Loan Program Jim Kaplan Chair, Midwest Banking Practice Seeks to cleanse FDIC-insured bank and thrift balance sheets by selling these loans to individual Public-Private Investment Funds ( PPIFs ), funded through a combination of private equity, equity from the Treasury Department and FDIC-insured debt 1 Legacy Securities Program Seeks to restart the market for legacy securities, specifically securities backed by residential and commercial mortgages and consumer debt through two sub-programs The first is the establishment of large PPIFs to engage in a long-term buy and hold strategy with the ultimate goal of maximizing returns The second is the expansion of the previously announced Treasury Asset Loan Facility (TALF) to cover legacy securities, including commercial backed securities that were rated AAA at the time of their original issuance (see DLA Piper materials for details, copy provided) 1. Source: U.S. Treasury Department release (copy provided) Who is Driving the Workout Bus? April 30,

22 Lender s Perspective What if my lender is taken over by the FDIC? Bankruptcy Code does not apply to banks, thrifts, credit unions and domestic insurance companies (11 U.S.C. 109(b)(2)) Jim Kaplan Chair, Midwest Banking Practice When a bank fails, its closure and winding up are exclusively overseen by bank regulators The FDIC acts as receiver or conservator of any FDIC insured institution Unlike bankruptcy, neither the bank nor its creditors can initiate an FDIC resolution; only the bank s primary regulator can There is no court proceeding Shareholders and creditors do not participate in the insolvency proceeding Who is Driving the Workout Bus? April 30,

23 Lender s Perspective Jim Kaplan Chair, Midwest Banking Practice What if my lender is taken over by the FDIC? (cont.) FDIC can repudiate a contract or lease by letter to the affected counterparty without court approval or prior notice The FDIC can repudiate any contract it finds burdensome to the failed institution - an almost totally elastic and subjective standard The FDIC thus can repudiate revolving lines of credit, partially funded construction loans and letters of credit Much of this discussion draws from the excellent summary prepared by K&L Gates law firm: Dust Off Your Files: The FDIC is Back in Town (August 4, 2008). Who is Driving the Workout Bus? April 30,

24 Lender s Perspective What if my lender is taken over by the FDIC? (cont.) Selected issues in FDIC resolutions and repudiation of agreements: Jim Kaplan Chair, Midwest Banking Practice Secured Loans to the bank (12 U.S.C. 1821(e)(11)); FDIC 1993 Policy Statement Providing services to the bank post-notification of repudiation (12 U.S.C. 1821(e)(7) (B)); First National Bank of Keystone case, 394 F. Supp. 829, 835 (S.D. W.Va. 2005) Securitizations and participations generally not set aside (12 CFR 360.6) Set off rights can be valuable to holders of accounts at failed banks the uninsured portion of a deposit may be set off against a performing loan owed by the depositor. However, rights can be adversely effected if FDIC transfers the assets Who is Driving the Workout Bus? April 30,

25 Hypothetical Loan Scenario #2 CMBS Loan May 2007: Acquisition Borrower purchased multi-tenant office building for $100 million At purchase, building was fully occupied Louis Cohen Chair, Chicago Real Estate Department Several tenants were paying market-based rents 50% of building subject to leases set to roll over the next 5 years Borrower obtained $90 million CMBS loan to fund purchase Interest at 200 basis points above LIBOR Non-recourse loan with carveout guaranty from Borrower principal Rent delivered to hard lockbox controlled by lender Who is Driving the Workout Bus? April 30,

26 Hypothetical Loan Scenario #2 CMBS Loan May 2007: Acquisition Louis Cohen Chair, Chicago Real Estate Department Loan tranched into $70 million mortgage loan and 2 mezzanine loans of $10 million each Mezzanine loans purchased at closing by hedge funds new to real estate debt market Unbeknownst to borrower, mortgage loan split into $50 million A Note and $20 million B Note A Note pooled with other loans in $1 billion securitization B Note sold to a German Bank B Note holder s consent required for most major servicing decisions Loan is serviced by the servicer of the A Note securitization However, if loan goes into default or there is an imminent risk of default, servicing will be transferred to a special servicer Who is Driving the Workout Bus? April 30,

27 CMBS Issues Scott Weinberg Partner Finance Practice Tranche warfare Unlike in past cycles, the big issues in a workout today are likely to be between various tranches/classes of lenders, not between lenders and borrowers Lenders in different positions in the capital stack have vastly different interests in a workout context Borrower may be so far out of the money that it no longer has any interest in keeping the property would give a deed in lieu if it could figure out who to give it to Subordinate holders who are well out of the money (especially holders of mezzanine loans) may still have ability to hold up senior lenders in pursuing a workout since they may have consent or blocking rights; may demand a payment in return for granting consent Who is Driving the Workout Bus? April 30,

28 CMBS Issues Control appraisal event In many workouts of CMBS loans, it will be unclear who will be in control of the workout on the lender side of the table Scott Weinberg Partner Finance Practice Even if control is established, that control may shift to another party based on a Control Appraisal Event (i.e., the value of the lender s position has declined below a certain percentage of original value, usually 25%) Events that typically trigger an appraisal: The passage of a certain number of days (often 40) after an uncured payment default Loan maturity An insolvency event by borrower or guarantor Who is Driving the Workout Bus? April 30,

29 CMBS Issues Scott Weinberg Partner Finance Practice Control appraisal event (cont.) If subordinate debt holders disagree with the appraisal, they generally have the right to obtain their own at their cost Different documents contain different tie-breaking rules if the appraisals differ A loss of control rights does not mean a loss of economic interest, which will occur only upon the final disposition of the mortgaged property to a third party Who is Driving the Workout Bus? April 30,

30 CMBS Issues Scott Weinberg Partner Finance Practice Special servicing Unless a CMBS loan is in default or there is imminent risk of default, you will likely not be able to get a servicer's attention Master servicers do not have authority in most cases to effectuate any modifications or waivers of loan terms Prior to an event of default, neither master servicers nor special servicers are permitted to agree to a material modification of loan terms pursuant to the REMIC rules Transfers to special servicing often trigger fees, such as special servicing fees, workout fees and liquidation fees Who is Driving the Workout Bus? April 30,

31 CMBS Issues Scott Weinberg Partner Finance Practice Avoiding litigation Most likely course of action is to simply extend the loan and delay dealing with the issue Servicers primary goal is to stay in the box and protect themselves; they generally have nothing to gain by stretching the rules The exception is when the special servicer is also a holder of a subordinate interest in a loan Who is Driving the Workout Bus? April 30,

32 Final Thoughts Jim Kaplan Chair, Midwest Banking Practice Where are things going? More defaults that are called by the party in charge (e.g., lender, special servicer) Properties actually taken back by the lender(s) Resolutions in workouts for those properties that can be worked out Wheat separated from the chaff A settling of values at a much lower valuation than, for example in mid-2007 And appreciation in value from that level Who is Driving the Workout Bus? April 30,

33 Q & A Questions? Who is Driving the Workout Bus? April 30,

34 Financial Stability Plan April 16, 2009 David Krohn

35 The Basics Emergency Economic Stabilization Act of 2008, enacted on October 3, 2008 $700 Billion Troubled Asset Relief Program made available under EESA Permitted Treasury to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with the Act and the policies and procedures developed and published by the Secretary. 2

36 The Basics Financial Institution: Any institution, including any bank, savings association, credit union, security broker or dealer or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government. Troubled Assets 1. Residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and 2. Other financial instruments that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System (Federal Reserve), determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination to the appropriate committees of Congress. 3

37 The Basics First $350 Billion used to support Financial Institutions and systemically important companies beginning in October 2008 Financial Stability Plan announced on February 10,

38 Treasury s Financial Stability Plan Six Components 1. Financial Stability Trust 2. Consumer and Business Lending Initiative (TALF) (up to $1 Trillion) 3. Public-Private Investment Fund ($500 Billion - $1 Trillion) 4. Transparency and Accountability Agenda Dividend Limitations 5. Affordable Housing Support and Foreclosure Prevention 6. Small Business and Community Lending Initiative 5

39 Recurring Themes Restore confidence, credit, consumer demand and jobs Protect against systemic risk Partner with private capital to leverage federal funding Partner with private investors for price discovery and market validation Taxpayer protection Government participation in future recoveries in exchange for providing capital and downside protection Transparency and accountability 6

40 Financial Stability Trust Three Components 1. Comprehensive Stress Test for 19 Largest Bank Holding Companies with Assets Over $100 Billion 2. Capital Assistance Program Contingent Capital 3. Increased Balance Sheet Transparency and Disclosure 7

41 Consumer and Business Lending Initiative TALF - Term Asset-Backed Securities Loan Facility (up to $1 Trillion) Intended to free up additional lending by jump starting the securitization markets Seeks to leverage TARP funds and private investor expertise TALF 1.0 Newly originated, AAA-rated securities backed by US auto loans, credit cards, student loans, small business loans, auto fleet leases, floorplan loans, business equipment loans and leases, residential mortgage servicing advances TALF 2.0 Newly originated (AAA-rated?) residential and commercial mortgage-backed securities still on the drawing board TALF 3.0 Expansion to legacy securities originally AAA-rated announced as part of PPIP TALF 4.0? Some possibility that program may be further expanded. 8

42 Consumer and Business Lending Initiative TARP ($700B) $20B to $100B Subordinated Loan TALF LLC Federal Reserve Bank of NY ($200B to $1T in Loans) Key Cash Eligible Securities 9

43 TALF Loan TARP ($700B) $20B to $100B Subordinated Loan TALF LLC Forward Purchase Agreement Federal Reserve Bank of NY ($200B to $1T in Loans) Collateral Custodian Consumers Key Cash Primary Dealers Eligible Securities Loans (Up to 3 years) Pledge of Eligible Securities Issuers Eligible Securities Underwriters Eligible Securities Investors (5% to 16% Exposure) 10

44 TALF Unwind TARP ($700B) $20B to $100B Subordinated Loan TALF LLC Returned Securities FRBNY Loan Amount Federal Reserve Bank of NY ($200B to $1T in Loans) Returned Securities Collateral Custodian Key Cash Eligible Securities Future Recoveries Primary Dealers Loans Cancelled Returned Securities Issuers Investors (5% to 16% Exposure) 11

45 Public-Private Investment Program $500 Billion to $1 Trillion Two Programs Legacy Loan Program administered by FDIC and Legacy Securities Program administered by Treasury Purpose is to allow financial institutions to cleanse balance sheets of legacy loans and to attract capital to the legacy securities markets Stated principles: Maximize impact of taxpayer dollars Shared risk and profits with private sector Private sector price discovery Goals Reduce legacy asset discounts Draw in private capital from a wide range of investors Improve health of financial institutions 12

46 Legacy Loan Program Separate Public Private Investment Funds will be set up for legacy loans held by insured US banks and thrifts Equity capital of each PPIF will be funded 50% from Treasury and 50% from the private investor Treasury will receive warrants in each PPIF The FDIC will evaluate the pool of legacy loans, using third party valuation firms, to determine the appropriate level of leverage for the pool not to exceed 6:1. PPIF debt will be non-recourse and FDIC guaranteed; FDIC guarantee would be secured by PPIF assets The pool will then be auctioned by the FDIC; selling bank can reject bids Loans and collateral must be predominantly in the US PPIF will be subject to strict FDIC oversight 13

47 Legacy Loan Program Private Investors FDIC Treasury Cash 50% Equity Debt Guarantee Up to 6:1 Debt: Equity Guarantee Fee/Collateral Cash 50% Equity and Warrants PPIFs FDIC-Guaranteed Debt and Cash Legacy Loans Eligible Bank Key Cash Assets or Securities 14

48 Legacy Loan Program Official Example: Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC. Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio. Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector in this example, $84 would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages. Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity. Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6. Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis using asset managers approved and subject to oversight by the FDIC. 15

49 Legacy Loan Program Open Questions: Pricing Mark-to-Market Accounting Concerns FDIC Oversight; Role of Government Reputational Risk Program Details Investor Eligibility/Prequalification Process Auction Process Terms of Debt, Guarantee and Warrants Transferability of Interests Ongoing Participation of Selling Bank Executive Compensation (not applicable to passive private investors) 16

50 Legacy Securities Program Two sub-programs Expansion of TALF to include legacy securities, which will include non-agency CMBS, RMBS and ABS originally rated AAA. PPIFs for Legacy Securities Anticipated that Treasury will approve up to 5 asset managers to raise at least $500 million of private capital each; Asset managers will have $10 Billion Eligible Assets under management, demonstrated experience, operational capacity and be headquartered in the US Treasury will match private equity capital on a dollar-for-dollar basis and will receive warrants Treasury will provide senior secured non-recourse debt financing to the PPIF equal to 50% of the total equity capital of the PPIF; and will consider request for loans up to 100% of equity capital To purchase eligible legacy securities, initially CMBS and RMBS originated before 2009 and rated AAA at time of issuance, from Financial Institutions as defined in EESA Anticipated that the legacy securities PPIFs will employ asset level leverage, including TALF loans 10 year life, subject to extension 17

51 Legacy Securities Program Treasury Fund Manager Management Fees Private Vehicle Cash Private Investors Equity Cash and Debt Financing 50% Equity and Warrants Portfolio Management Management Fees Cash 50% Equity PPIFs Cash Legacy Securities Eligible Financial Institutions Key Cash Assets or Securities Additional Financing TALF

52 Legacy Securities Program Official Example: Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program. Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury. Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund. Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund. Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities. Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched. 19

53 Legacy Securities Program Open Questions: Pricing Mark-to-Market Accounting Concerns Role of Government Reputational Risk Funding Uncertainty Investment Strategy and Hedging Program Details Executive Compensation 20

54 Other Initiatives Transparency and Accountability Agenda Affordable Housing Support and Foreclosure Prevention Small Business and Community Lending FDIC s Temporary Liquidity Guarantee Program FDIC Asset Sales Federal Reserve Lending Programs 21