Debt Research Cross Product January 2, 2009 Cross-Product

35

Situation Room
The Bailout Guide Research Analyst Contributors
Jeffrey Rosenberg
(646) 855 7927

Mike Cho
(646) 855 6302

Hans Mikkelsen
(646) 855 6468

Economists
Gary Bigg
(646) 855 1980

Peter Kretzmer
(646) 855 1046

Mickey Levy

(646) 855 1045

The Bailout Guide. We provide an updated version of our bailout guide summarizing the panoply of government intervention efforts to date in one single spot. The economic consequence of these combined actions, we estimate, is that they provide more than 70% government support of bank liabilities in addition to the $315 billion capital in the form of preferred stock. – Jeffrey Rosenberg, Hans Mikkelsen, Mike Cho.......................................................................................... (Page 5) Equities and Credit Gain Over Last Two Weeks. On the first trading day of the new year, equities gained as the S&P 500 closed up 3.2% to 932. Credit was largely unchanged, with the CDX IG remaining at 198 and CDX HY up slightly at 80 ¼. Week over week, the S&P 500 has rallied nearly 7% while CDX IG has tightened 5 bps and CDX HY is up 1 ¾ pt. Since Friday, December 19, the S&P 500 has climbed 5% while CDX IG has tightened 15 bps and CDX HY is up 3 pts. – Mike Cho.......................................................................................................... (Page 3) Record Low Confidence, More Housing Declines but Hope for Spending? 2008 ended with the U.S. in severe recession. With labor market conditions dismal, Conference Board consumer confidence hit an all-time record low in December. The long fall in housing also continued late in the year, as sales plummeted and home price declines reaccelerated. However, five months of decline in inflation-adjusted consumer spending ended in November, a sign that the huge declines in energy costs are providing some consumer relief and the worst of the adjustment to large wealth declines may be past. But we do not expect a quick consumer-led recovery. – Peter Kretzmer, Mickey Levy, Gary Bigg ............................................................................................................................ (Page 33) The factory recession continued to worsen in December, as the ISM manufacturing index recorded a 5th consecutive below-50 reading. The composite index fell to 32.4, while new orders fell at a record-setting pace. Export orders also continued to weaken at an accelerating pace last month as did input prices. – Peter Kretzmer ........................................................................ (Page 34)

This report has been prepared by Banc of America Securities LLC (BAS), member FINRA and SIPC. BAS is a subsidiary of Bank of America Corporation. This report is intended for sophisticated institutional investors and equivalent professionals in the fixed income market only. Please see the analyst certification and important disclosures on page 37 of this report. BAS and its affiliates do and seek to do business with companies mentioned in their research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Should investors consider this report as a factor in making an investment decision, it must be considered as a single factor only. Any portion of this report that has been prepared by a desk strategist or an economist is NOT a product of the debt research department and is NOT covered by the research analyst certification provided on page 37. For additional information concerning the role of trading desk strategists and economists, please see the important conflicts disclosures beginning at page 36 of this report.

Cross-Product Research
January 2, 2009

35

Table of Contents
Research Overview — The Situation .................................................................................................................................... 3 Equities and Credit Gain Over Last Two Weeks .................................................................................................................. 3 Credit Strategy ........................................................................................................................................................................ 4 The Bailout Guide ................................................................................................................................................................. 5 Congressional Interventions: EESA and HERA ................................................................................................................... 5 Emergency Economic Stabilization Act (EESA) of 2008................................................................................................. 5 Housing and Economic Recovery Act (HERA) of 2008................................................................................................... 5 Hope for Homeowners ...................................................................................................................................................... 6 Treasury Interventions .......................................................................................................................................................... 8 FDIC Deposit Insurance Limit Increase............................................................................................................................ 8 Temporary Liquidity Guarantee Program (TLGP)............................................................................................................ 9 Guaranteed Performance..................................................................................................................................................... 10 Guarantee Program for Money Market Funds................................................................................................................. 11 Troubled Asset Relief Program (TARP) ......................................................................................................................... 12 Treasury Programs Under TARP .................................................................................................................................... 13 The Heart of Financial Market Uncertainty—Insolvency ............................................................................................... 13 The Expanding Safety TARP .......................................................................................................................................... 14 Toward a Final Version of TARP ................................................................................................................................... 15 Company Specific Bailouts ............................................................................................................................................. 17 The Citi Bailout............................................................................................................................................................... 17 The AIG Bailout.............................................................................................................................................................. 18 Auto Bailout .................................................................................................................................................................... 19 DIPping Into the TARP................................................................................................................................................... 19 GMAC Bailout ................................................................................................................................................................ 20 Three Steps to Complement Fannie/Freddie Conservatorship ........................................................................................ 21 What Is a Conservatorship?............................................................................................................................................. 21 Federal Reserve Interventions: Supporting Funding........................................................................................................... 22 Funding From the Fed ..................................................................................................................................................... 25 Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)....................................................... 26 Commercial Paper Funding Facility (CPFF)................................................................................................................... 26 The CPFF in Short........................................................................................................................................................... 27 Money Market Investor Funding Facility (MMIFF) ....................................................................................................... 28 Term Asset-Backed Securities Loan Facility (TALF) .................................................................................................... 29 Clarification on TALF..................................................................................................................................................... 29 Leveraging the TARP...................................................................................................................................................... 30 GSE Direct Obligation & MBS Purchase Program......................................................................................................... 31 Fed Liquidity Facilities ................................................................................................................................................... 32 Economics .............................................................................................................................................................................. 33 Record Low Confidence, More Housing Declines but Hope for Spending? ...................................................................... 33 Manufacturing Recession Continued to Worsen in December ........................................................................................... 34

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Electric Utilities & Power: Credit Ratings Card Telecommunications High Yield Weekly: Market Update BAS IG Consumer & Retail Earnings and Event Calendar For more information visit http://bofa.com/research/

Authors
Peter Quinn Ana Goshko, Jhanvi Lakhani, Raj Atri Todd Duvick, Thomas Truxillo

Situation Room

2

Cross-Product Research
January 2, 2009

35
Research Overview — The Situation
Equities and Credit Gain Over Last Two Weeks

Mike Cho (646) 855 6302

On the first trading day of the new year, equities gained as the S&P 500 closed up 3.2% to 932. Credit was largely unchanged with the CDX IG remaining at 198 and CDX HY up slightly at 80 ¼. Week over week, the S&P 500 has rallied nearly 7% while CDX IG has tightened 5 bps and CDX HY is up 1 ¾ pt. Since Friday, December 19, the S&P 500 has climbed 5% while CDX IG has tightened 15 bps and CDX HY is up 3 pts.
Figure 2. …as Did Credit
CDX IG 217 CDX IG Index (bps) 213 209 205 201 197 193
19 -D e 22 c-0 -D 8 e 23 c-0 -D 8 e 24 c-0 -D 8 e 26 c-0 -D 8 e 29 c-0 -D 8 e 30 c-0 -D 8 e 31 c-0 -D 8 ec 2- -0 8 Ja n09

Figure 1. Equities Gained Over the Last Two Weeks…
S&P 500 940 930 920 S&P 500 910 900 890 880 870 860
De c08 De c 23 -0 8 -D ec 24 -0 8 -D ec 26 -0 8 -D ec 29 -0 8 -D ec 30 -0 8 -D ec 31 -0 8 -D ec -0 8 2Ja n09

CDX HY 80.9 80.4 79.9 79.4 78.9 78.4 77.9 77.4 76.9 CDX HY Index (pts)

19 -

Source: Bloomberg.

22 -

Source: Banc of America Securities LLC.

Situation Room

3

Name Guarantee Program for Money Housing and Economic Recovery Act Market Funds Allows homeowners to refinance into FHA loans with principal writedown. Other term against eligible general that provides funding . controlled banks and thrifts. Unlimited currency swaps with foreign Government Sponsored central banks including the ECB. interest bearing deposit accounts.4bn in short term The Fed buys 3-month commercial in pfd stock. with 10% coupon from AIG. planned programs including to collateral. Also buys $20 bn loans to GM and $4bn paper from Tier 1 issuers.000. Congress 19 GSE Debt & MBS Purchase Program 25-Nov-08 GSE Debt & MBS Purchase Program Treasury 17 Guarantee Program for MMkt Funds 19-Sep-08 Federal Reserve 27 HERA 30-Jul-08 Source Page Acronym Date Ann. Treasury 8 PDCF 16-Mar-08 Description Banks borrow from the Fed to Treasury purchases $40 bn in new pfd Purchase ABCP from money stock. Fed buys CP. Name AIG 10-Nov-08 AIG Bailout AMLF 19-Sep-08 Asset Backed Commercial Paper Money Market Fund Liquidity Facility Autos 19-Dec-08 Auto Bailout Citi 23-Nov-08 Citi Bailout CPFF 7-Oct-08 Commercial Paper Funding Facility EESA 3-Oct-08 Emergency Economic Stability Act Creates the Troubled Asset Relief Program (TARP). Guarantees funds held in Federal Housing Finance Regulatory participating money market Reform Act establishes a new stronger funds on September 19 against regulator of the GSEs. Treasury 18 Foreign Crncy Swaps 18-Sep-08 Foreign Currency Swaps Federal Reserve 26 FNM/FRE Conservatorship 7-Sep-08 FNM/FRE Conservatorship Guarantees $306 bn in RMBS Congress provides & CMBS in exchange for $7 bn $13. market funds at amortized cost and zero risk-weighting. thrifts and Fed provides $200 billion in certain holding companies. GSE Mortgage Backed Securities Purchase Program. Federal Reserve 26 TLGP 14-Oct-08 Temporary Liquidity Guarantee Program Treasury 21 Fed buys Fannie. warrants. Treasury 9 Treasury 29 TARP Capital Purchase Program to buy up to $250 billion pfd shares in Provides loans over a 1-month Overnight loan facility U. Unlimited loans to lend against AAAFDIC Insurance coverage on nonrated ABS. purchase "Troubled Assets" from financial institutions. Source Page Acronym Date Ann. Name Federal Reserve 31 Federal Reserve 28 Federal Reserve 32 TALF TAF 25-Nov-08 12-Dec-07 Term Asset-Backed Securities Term Auction Facility Loan Facility Description FDIC guarantees newly issued Senior unsecured debt of banks. Enterprise Credit Facilit. Freddie & Home Loan debentures and Agency MBS.S. in pfd stocks and receives to Chrysler.Cross-Product Research January 2. Congress 5 MMIF 21-Oct-08 FDIC Deposits 3-Oct-08 FDIC Deposit Insurance Limit Increase Increases account limit to $250. Created the breaking the buck. Federal Reserve 32 Federal Reserve 32 Treasury 12 Source Page Situation Room 4 . 2009 35 Credit Strategy The Bailout Guide Acronym Date Ann.000 from $100. Overnight loan facility that provides funding in exchange for a range of eligibile collateral. bank notes and CDs to 90 days maturity from money market funds. Federal Housing Finance Agency (FHFA) Treasury 11 TSLF 11-Mar-08 Term Securities Lending Facility Congress 5 TARP 28-Sep-08 Troubled Asset Relief Program Money Market Investor Primary Dealer Credit Funding Facility Facility Description Senior Preferred Stock Purchase Agreement.

2008. Senate.New stronger regulator for Fannie Mae. Freddie Mac and the Federal Home Loan Banks (FHFA) . Please see the section.Raising conforming loan limit in areas with high home prices by as much as 50% to as much as $625. 2009 35 The Bailout Guide 1 Jeffrey Rosenberg (646) 855 7927 Hans Mikkelsen (646) 855 6468 Mike Cho (646) 855 6302 We provide an updated version of our bailout guide summarizing the panoply of government intervention efforts to date in one single spot. which was signed into law by President Bush on October 3.$3. established the Troubled Assets Relief Program (TARP) administered by the Treasury. 2008 Credit Market Strategist. 2008. we estimate. is that they provide more than 70% government support of bank liabilities in addition to the $315 billion capital in the form of preferred stock.000 HOPE for Homeowners Act of 2008 .92 billion to assist communities devastated by foreclosures Source: U. These new regulatory powers were used to place Fannie Mae and Freddie Mac under conservatorship on September 7. Figure 3.Increasing FHA Loan limits . and contains three separate acts.Cross-Product Research January 2. We reprint below our summary of the HOPE for Homeowners program. 2008. Congressional Interventions: EESA and HERA Emergency Economic Stabilization Act (EESA) of 2008 The EESA. Key Aspects of the Housing and Recovery Act (HERA) of 2008 Housing and Economic Recovery Act (HERA) of 2008 Federal Housing Finance Regulatory Reform Act of 2008 . including the establishment of the Federal Housing Finance Agency (FHFA) as a stronger regulator for the GSEs. The other key part of the HERA is the HOPE for Homeowners program to refinance distressed mortgages with significant principal writedowns.Refinancing distressed loans into FHA insured mortgages with significant write downs Foreclosure Prevention Act of 2008 .S. 1 Updated version of our US Bailout Guide which we last published in the November 26. Please see the TARP section under Treasury Interventions later in this bailout guide. “Three Steps to Complement Fannie/Freddie Conservatorship” under Treasury Interventions later in this bailout guide for details on the three programs initiated by the Fed to complement the FHFA’s action on Fannie Mae and Freddie Mac. Housing and Economic Recovery Act (HERA) of 2008 The HERA was signed into law by the president on July 30. Situation Room 5 . The economic consequence of these combined actions.

These changes will “reduce the program costs for consumers and lenders alike while also expanding eligibility by driving down the borrower’s monthly mortgage payments” according to HUD. The guidance also helps to clarify how the implementation will attempt to overcome one of the key issues in a wider adoption: securing the subordinate lien holders’ approval. 2008 Situation Room. that may be enough to ease this restriction and open this avenue of refinancing to borrowers. In addtion to revising payments to subordinate lienholders. refinancing prior to a sale does not relieve the homeowner from the obligation to share current and future appreciation with the FHA. 2009 35 Hope for Homeowners 2 HOPE provides refinancing through the FHA with principal writedown The Bush administration announced the launch of the HOPE for Homeowners program and provided detailed guidance on its usage. Excerpted from the October 1. For a detailed explanation of the profit-sharing mechanism. Figure 6 summarizes the key changes. The bill initially called for a subordinated holder to receive 9 or 12% of claims after the sale of the home. 2008 issue with that date. as described above. As we previously commented . including increasing the loan-to-value (LTV) and adjusting debt-to-income (DTI) ratios. it has an October 2 date.Cross-Product Research January 2. The HOPE for Homeowners program. 2008. the Department of Housing and Urban Development (HUD) made several other changes on November 19. 2008 Situation Room. While the percentage of equity that FHA takes from the homeowners decreases with the immediate payment to subordinate lienholders. Relative to current marks of cents on the dollar. Importantly. Recall. this was the centerpiece of what we previously called the “Frank-Dodd” bailout for homeowners that provided 3 refinancing options for homeowners through the FHA. the ultimate language in this plan showed marked improvement with regard to protecting against moral hazard as the massive potential subsidy through principal reduction comes at the cost of sharing all future appreciation (as well as equity created) with the government. retains the distinction between the “equity” created as a result of the restructuring of the loan and any “appreciation” that may be achieved due to future increase in the price of the house above the appraisal value at the time of restructuring. but was revised on November 19 to an immediate payment after origination of the new loan. Notice that since that issue was published after midnight. We also published a regular (and different) October 2. please see Figure 5 below. though gaining the acceptance of the large writedowns required by first lien holders remains. 2 Situation Room 6 . the appreciation is split 50-50 regardless of the timing of sale. 3 Please see the September 21.

and the Federal Reserve to establish additional program standards Voluntary .upon selling or refinancing of the property the borrower pays: 100% of the created equity in year 1 following restructuring of the loan. 2009 35 Figure 4. this definition was expanded to mean a DTI ratio > to 31% after taking into consideration the terms of the mortgage refinance New Loan < 90% of property current appraised value Note this provision was modified under EESA legislation to give discretion to the Board to set a higher percentage as the Board determines at their discretion 1) including a 3% upfront mortgage insurance premium for the FHA and closing costs 2) An additional annual 1. Key Aspects of the HOPE for Homeowners Program I.process initiated when borrower or loan servicer contacts an FHA approved lender Original lender must accept losses at a level to be set by the Board Program starts October 1. must have made at least 6 payments Mortgage debt-to-income > 31% Under the EESA legislation. 80% in year 3. HOPE for Homeowners Act of 2008 (previously referred to as the "Frank-Dodd" bill) How does it Work? In guarantees from FHA. 90% in year 2. 2008 and ends September 30. Treasury. borrower must not have ownership interest in any other residential real estate Originated on or before January 1.e.5% premium paid by the borrower of the remaining balance Underwriting Criteria Fully documented and verified income with the IRS Only refinanced if borrower can reasonably be expected to pay new terms New loan must extinguish all subordinate liens New loan will have a fixed interest rate and a minimum maturity of 30 years New loan cannot exceed 132% of the 2007 GSE loan limit (132% of $417k=$550k) Safeguards Against Misuse . 60% in year 5 and 50% thereafter 2) Any realized appreciation in value (difference between future sale price and original appraised value) is shared 50-50 between the government and the borrower Limiting Risks to the Regular FHA Program The program will be paid for using part of the Affordable Housing Trust Fund The GSE bill will provide a further $2 billion cushion by establishing a reserve fund New loans will be permitted to be sold through GNMA Source: FHA. 2008. FDIC. 2011 Estimated to help approximately 400k borrowers Eligibility Requirements Owner-occupied 1-unit primary residences only. 1) 5 Year Phase In .Equity & Appreciation Sharing Distinguish between 1) Equity created as result of the loan restructuring (i. Situation Room 7 . min 10% of appraised value) and 2) Future home appreciation after loan restructuring.Cross-Product Research January 2. up to $300 billion to refinance distressed loans for borrowers at significant discounts Establishes Board of Directors made up of HUD. 70% in year 4.

135.reducing monthly payments Source: U.500 80%. 2009 35 Figure 5.Loan-to-value (LTV) increases to 96. 2008 Modifications to Hope for Homeowners Program . The Emergency Economic Stabilization Act (EESA) of 2008 authorized an increase in FDIC provided insurance of bank accounts to $250. or $7. if sold Suppose.500 Homeowner Receives… 0%.S. or $6.500 20%.000 FHA receives 50% appreciation.Paying subordinate lien holders immediately to remove liens * Under previous rules would have to wait for the eventual sale of the home .1 trillion from $4.000 Equity because of loan restructuring = 150.000 50%. or $3. or $10.000 .000 50%. Homeowner receives 50% appreciation.000 FHA Mortgage Amount = $135. or $7.000 from $100.5 trillion. or $10. or $12. Selling Price = $170.000 .Cross-Product Research January 2. or $1.000 70%.000 90%. or $4.500 Appreciation is realized and shared. or $10. or $0 10%.000 If sold or refinanced: During Year 1 During Year 2 DuringYear 3 During Year 4 During Year 5 After Year 5 FHA Receives… 100%. Highlights of Modifications to Hope for Homeowners Program Modifications Made on November 18.000 Regardless of holding period. Department of Housing and Urban Development. thus injecting extra stability into this important part of bank liabilities. or $15.000 Appreciation = 170. * household debt payments are no more than 43% of monthly gross income * Continue to offer 90% LTV with ratios of 38% and 50%.000 = $15.Allowing the extension of maturities to 40 years * Up from previously 30 years . reducing the likelihood of Situation Room 8 . Profit-Sharing Under HOPE for Homeowners An example of how profits are shared under HOPE for Homeowners At Time of FHA Mortgage Origination… Appraised Value of Home = $150.5% for loans where: * mortgage payment is less than or equal to 31% of monthly gross income and. That increases the volume of insured bank accounts to $5. respectively .500 40%. or $9.500 60%.000 30%.150. Figure 6. or $13.000. Treasury Interventions FDIC Deposit Insurance Limit Increase Treasury interventions include the TARP and the guarantee program for money market funds.000 = $20.000… …but FHA has to provide upfront payments to subordinate lien holders Source: FHA.

S.Cross-Product Research January 2. 2008. government intervention announced October 14. then institutions can opt out Source: FDIC. and cost of participation. Figure 7. then institutions can opt out -Guarantee will only cover up to 125% of debt outstanding as of Sep 30. among others -Excludes debt with a maturity of 30 days or less -Coverage ends June 30. senior unsecured debt issued before June 30. 2009. While this insurance program is backed by the FDIC’s own deposit insurance fund. 2009 -Unlimited insurance coverage of noninterest baring transaction accounts. -Coverage ends December 31. 2009. thrifts and certain holding companies -Backed by the full faith and credit of the United States -Issued prior to June 30. respectively. including guarantees of timely payment of principal and interest. the FDIC held a board meeting to approve several revisions to the TLGP. Temporary Liquidity Guarantee Program (TLGP) This expansion of U. An October 14 FDIC technical briefing estimated the amount of senior debt and non-interest bearing accounts eligible for the TLGP program to be $1. The increase in the insured limit is only temporary and after the end of 2009 the insurance limit is scheduled to again drop back to $100. As of January 2. 2009 -Cost of participating is a 10 bps surcharge -Coverage is automatic for 30 days free of charge. 2008 and maturing before June 30.4 trillion and $400-500 billion. Figure 8. overnight debt). 2008 underscores the two critical issues of the credit crisis: funding and liquidity. the Treasury effectively backstops the program. On November 21. The FDIC’s Temporary Liquidity Guarantee Program (TLGP) provides FDIC-insured US Bank Holding Cos and US S&Ls a three-year guarantee on newly issued. backing by the full faith and credit of the United States. Situation Room 9 . 75 bps for 181-364 days. and unlimited guarantees on non-interestbearing deposit accounts through December 31. Key Aspects of the FDIC TLGP Program Temporary Liquidity Guarantee Program -FDIC guaranteeing newly issued senior unsecured debt of banks. 2009 -Includes commercial paper and interbank funding. overnight debt). 100 bps for 365 days or greater -Coverage is automatic for 30 days free of charge. 2009 35 bank runs. 100 bps for 365 days or greater Source: FDIC. TLGP issuance totaled close to $115 billion. 2012 -Guarantees timely payment of principal and interest -20% risk-weighting applied to debt guaranteed by the FDIC -Cost of participation is 50 bps for debt maturing in 180 days or less (excl.000. Key Changes to the TLGP on November 21 Temporary Liquidity Guarantee Program (Final Rule) -Backed by the full faith and credit of the United States -Guarantees timely payment of principal and interest -20% risk-weighting applied to debt guaranteed by the FDIC -Excludes debt with a maturity of 30 days or less -Cost of participation is 50 bps for debt maturing in 180 days or less (excl. 75 bps for 181-364 days.

FDIC-Guaranteed Bonds Have Tightened About 120 bps to Treasuries Since Issuance. 4 Based on the December 17. GS 3. Outperforming Agencies Recently 3 year TLGP TLGP & Agencies Spread (bps) 210 190 170 150 130 110 90 70 50 3 year Agencies 1-5 year Bank debt 720 710 700 690 680 670 660 650 640 630 Bank Spread (bps) De c08 De c08 De c08 3D 5D 9D De c08 15 - Note: TLGP spread includes average of MS 3.Cross-Product Research January 2. taking advantage of the availability of cheap funding. Situation Room 11 - 17 - 19 - 23 - 26 - De c08 De c08 08 ec - 08 ec - ec - 08 10 .25 ’11. JPM 3.25 ’12. which has resulted in tightening in non-guaranteed short-dated financial paper as well. We expect this program to absorb much of financial issuance requirements in 2009. The availability of term funding for banks sharply reduces the probability of default at shorter horizons. 2009 35 Guaranteed Performance 4 TLGP appears successful in bringing down term financing costs for financial issuers. outperforming agencies recently.875 ’11.125 ’12. Figure 9. making it attractive at higher yields.125 ’11. C 2. Source: Banc of America Securities LLC. BAC 3. TLGP issuance appears successful in its intent: bringing down term financing costs for financials As banks continue to issue FDIC-guaranteed debt under the TLGP. the guaranteed bonds have tightened about 120 bps to Treasuries since issuance. 2008 Credit Market Strategist.

5 Based on the September 29. Guarantee Program for Money Market Funds 5 The Treasury on September 29. Funds could elect to continue coverage and pay a fee by December 5.5 bp upfront fee for participation. including a minimum net asset value of $0. The program initially will last three months. The program guarantees the share price of any publicly eligible money market fund that participates. 2009. 2008.Cross-Product Research January 2. after which the Treasury will review needs and possibly extend until September 18. Situation Room 11 . the Treasury extended the program to April 30. 2008. On November 24. 2008 Credit Market Strategist.995 and a 1–1. 2009 35 Figure 10. released updated details regarding the guarantee program for money market funds (originally announced on September 19. Funds not currently participating were precluded from signing up. TLGP Issuance Now Totals $115 billion TLGP Issuance 12 TLGP Issuance ($ bn) 10 8 6 4 2 0 -0 8 1De c08 3De c08 5De c08 9De c08 11 -D ec -0 8 15 -D ec -0 8 17 -D ec -0 8 19 -D ec -0 8 25 -N ov Cumulative 120 Cumulative ($ bn) 100 80 60 40 20 0 Source: Banc of America Securities LLC. 2009 from December. New details include eligibility requirements. if the fund’s NAV breaks the buck. 2008). The program covers approximately $3 trillion of assets.

.Voluntary with attractive terms to encourage participation from healthy institutions.Funds with a NAV below $0.Provides coverage for amounts held in participating money market funds as of the close of Sept 19. 2009 35 Figure 11.Mortgage-backed securities and whole loans . see Figure 33. 2008 effectively put on hold the initial intent of the TARP to purchase illiquid mortgage assets directly from financial institutions. Department of Treasury. Situation Room 12 . 2009 . .Program covers approximately $3 trillion of assets . We republish below our thoughts on the TARP program from the September 28.Help homeowners when purchasing mortgages and mortgage-backed securities while protecting taxpayers 6) Executive compensation .Establishing Oversight and Compliance structures Source: U. Department of Treasury and Banc of America Securities LLC. Neel Kashkari. Troubled Asset Relief Program (TARP) TARP now includes up to $310 billion in capital injections via preferred stock Interim Assistant Secretary for Financial Stability. 2009 from December .995 as of Sept 19.Cross-Product Research January 2.S.Extended to April 30.Identifying which troubled assets to purchase.Encourage complementary private capital raising 5) Homeownership preservation .995 (breaks the buck) .To participate. Figure 12. money market funds with a NAV greater or equal to $0.Guarantees the share price of any publicly offered eligible money market mutual fund that participates .995 and $0.Money market funds with a NAV between $0. 2008 will pay a 1. The Term Asset-Backed Securities Loan Facility (TALF) represents another use of TARP initially with a $20 billion guarantee. after which the Treasury will review needs and possibly extend . updated on October 13 the structure of TARP implementation. from whom and pricing mechanism 2) Whole loan purchase program aimed particularly at regional banks.The Treasury has the option to renew the program up to Sept 18. 2008 will pay a 1 bp up .Will differ depending on the method of troubled asset purchases 7) Compliance .9975 as of Sept 19. 2008 are ineligible .Identifying which troubled assets to purchase first and pricing mechanism 3) Insurance program for troubled assets .S. 2008 Structure of TARP Implementation 1) Mortgage-backed securities purchase program .9975 as of Sept 19.Guarantee triggered if the participating fund's NAV falls below $0. or the current amount.5 bp upfront fee . Update on TARP Implementation by the Treasury Department on October 13.Public request for comment issued on October 10 requiring responses with ideas for program within 14 days 4) Equity purchase program targeting broad array of financial institutions . whichever is less . 2008.Will initially exist for 3 months.Specifying requirements on executive compensation for firms that participate in the TARP . Secretary Paulson on November 12.Fees will only cover the first three months of the program Source: U. Updated Details on the Guarantee Program for Money Market Funds Temporary Guarantee Program for Money Market Funds . 2008 Situation Room.

the autos and Citi. Such an expansion goes directly to the heart of financial market uncertainty—insolvency.Eligibility determined on a case-by-case basis and no deadline for participation 3. The key future question will be defining “healthy”—before or after such capital injections? And for the remaining financial institutions seeking such capital.Eligibility determined on a case-by-case basis and no deadline for participation 4. respectively) we provide more details about the more broadly applicable Capital Purchase Program below. equity or warrants that are determind to be troubled . 3) Automotive Industry Financing Program and 4) Targeted Investment 6 Program. Automotive Industry Financing Program .Eligibility determined on a case-by-case basis and no deadline for participation Source: U. equity or warrants that are determind to be troubled from the automotive industry . While the last three have been used for company specific bailouts (AIG.Treasury purchases any financial instrument including debt.Cross-Product Research January 2.Participation requires issuing warrants to Treasury and executive compensation limits . Finance companies as well face critical strategic decisions as the actions further tip the competitive landscape in favor of regulated banks.Participation requires issuing warrants to Treasury and executive compensation limits .Treasury purchases any financial instrument including debt. Capital Purchase Program . 2) Systematically Significant Failing Institutions Program.treas.Treasury purchases any financial instrument including debt. Systemically Significant Failing Institutions Program .Participation requires issuing warrants to Treasury and executive compensation limits . Targeted Investment Program . Treasury’s determination of “eligibility and allocations” becomes an existential event.Treasury purchases up to $250bn in senior pfd stock from qualifying US controlled banks.S. 1. equity or warrants from systemically significant institutions . 6 Please see: http://www. 2009 35 Treasury Programs Under TARP The Treasury has released program descriptions for four programs under TARP: 1) Capital Purchase Program. The Heart of Financial Market Uncertainty—Insolvency Treasury’s expansion of TARP to include purchases of preferred stock through the Capital Purchase Program (CPP) dramatically expands the initial focus of TARP from assets to equity. Figure 13. Department of Treasury and Banc of America Securities LLC. Summary of Treasury Programs Under the Economic Stabilization Act. savings associations and certain bank and savings & loan holding co's (see below table for full details) 2.gov/initiatives/eesa/program-descriptions Situation Room 13 .

5 00 3 . Maximum is the lesser 3% of risk-weighted assets or $25 billion . 2008 Credit Market Strategist. .5 00 3 . and certain bank and savings and loan holding companies . Situation Room 14 . Figure 15.S.5 55 17 2 . P o p ular. .. controlled banks. B a n k o f N e w Yo rk Me llo n C orp or atio n K e yCo rp C o m er ica In c. Reports suggesting inclusion of insurance companies mark only the latest episode of expansion of the EESA legislation and the role of government to respond to the financial crisis. TARP CPP Participation List (>$330 million) As of December 29. O th er T ot al Amount ($mm) 1 . Key Aspects of the TARP Capital Purchase Program TARP Capital Purchase Program .5 99 3 .4 00 1 .5 55 3 . Source: Treasury Department.0 00 1 0 . Department of Treasury and Banc of America Securities LLC.5 00 2 . F irst H orizon N a tio n al C o rpo ra tio n M & T B a nk Co rp ora tio n A sso ciat ed B a nc-C o rp C ity Na tio na l C orp ora tio n W e b ste r Fin an cia l C orp o rat io n F ulto n Fina n cia l C orp ora tio n T CF F in an cial C or po rat io n S o u th Fina n cia l G ro u p. .0 00 1 5 . Despite the volatility for individual institutions. W e lls Far go & C o m p an y B a n k o f A m erica C orp or atio n M e rrill L yn ch & C o .1 34 3 . I nc. In c.0 00 2 . The extension into insurance companies.S.Dividend on new preferred shares is 5% for the first five years. Please see the October 14.S . The Treasury’s capital determinations and its apparent accelerated pace should go a long way to relieving the uncertainty of solvency currently plaguing financial markets.0 00 2 5 . B an co rp C a pita l O n e Fina n cia l Co rp ora tio n R e gion s F in a ncia l Co rp. then increasing to 9%. and the purchase of National City by PNC illustrates exactly such a point. S u n Tru st B a n ks.Senior preferred shares will be funded by the Treasury by year-end 2008. 2008 Date 2 8 -O ct-0 8 2 8 -O ct-0 8 2 8 -O ct-0 8 2 8 -O ct-0 8 2 8 -O ct-0 8 2 8 -O ct-0 8 2 8 -O ct-0 8 1 4-N o v-0 8 1 4-N o v-0 8 1 4-N o v-0 8 1 4-N o v-0 8 1 4-N o v-0 8 2 8 -O ct-0 8 1 4-N o v-0 8 1 4-N o v-0 8 2 8 -O ct-0 8 Company C itig ro up I nc.Must elect to participate November 14.Size is a minimum 1% of risk-weighted assets. In c. B B & T C orp .0 00 Date 1 4-N o v-0 8 1 4-N o v-0 8 1 4-N o v-0 8 1 4-N o v-0 8 19 -D ec-0 8 5 -D ec-0 8 1 4-N o v-0 8 23 -D ec-0 8 2 1-N o v-0 8 2 1-N o v-0 8 2 1-N o v-0 8 23 -D ec-0 8 1 4-N o v-0 8 5 -D ec-0 8 Company M a rsh all & Ilsley C orp o rat io n N o rth ern T rust C orp o rat io n Z io n s B an co rpo ra tion H u nt in gt on B a n csha re s S yn ovu s Fin an cial C orp .Treasury to purchase up to $250 billion of senior preferred shares in qualifying U.New preferred stock is non-voting and ranks pari pasu to existing preferred stock except junior preferred stock. the rapid clarification of these issues should be welcomed for its duration limiting impact on the credit crisis. 2008 Situation Room.3 98 9 68 9 35 8 67 6 00 5 25 4 00 4 00 3 77 3 61 3 47 1 0 . 2009 35 Figure 14. The Expanding Safety TARP 7 The Treasury’s safety net for financial markets appears to be expanding.Cross-Product Research January 2.Participating companies adopt the Treasury's standards for executive compensation and corporate governance Source: U. 2008. I nc. 8 We wrote in “Engineering the Bottom” that the capital purchase plan and Treasury’s determination of “eligibility and allocations” would create an existential event for banks.Treasury receives warrants to purchase 15% of the amount of the senior preferred stock purchase . especially if those end up including the monoline industry.0 00 1 0 . U .5 76 1 .0 00 1 0 .4 61 Source: Treasury Department.0 00 6 . . S t at e S t ree t Co rp ora tion Amount ($mm) 2 5 . will further help to reduce systemic risk critically important as banks holding 7 8 Based on the October 24.0 00 2 5 . M o rg an S ta n le y T he G old m a n S a ch s G r ou p. In c.2 50 2 .7 15 1 . savings associations. JP M o rg an C ha se & C o .

Toward a Final Version of TARP Funding for the TARP will be tranched with $700bn authorized.772 38.195 42.846 SCA 17. Warrants attached to participation remain in the bill. Warrants and limits on executive compensation remain in the bill. with some critical easing of the compensation limits relative to earlier versions. The goal is for the warrants to not be punitive so as to not create a disincentive to 9 Based on the September 28.742 297.265 19.447 23. Auto Loan.900 6. $20bn has been reserved for the TALF.832 95 CIFG 9. Commercial MBS. Treasury’s guidance was that in exercising this discretion. more discretion was granted to the Secretary on both fronts.361 15. an additional $100bn can be accessed and the remaining $350bn subject to Congressional disapproval.901 156.301 2.509 FGIC 10. Funding will now be tranched with $700bn authorized.992 16.305 46. a final version of the TARP emerged on September 29.836 18. say. Situation Room 15 . increasing their exposure to monolines in the corporate analog (albeit much less severe) to last year’s subprimerelated super senior CDO issues.067 15. but terms of the warrants governing the degree of dilution now stand at the discretion of the Secretary. (4) MBS and HE are comprised of roughly 50% Prime MBS with an average rating of A+.996 26. The bill’s language requires program guidelines to be issued within 45 days of passage.371 Total 99.304 8. Banc of America Securities LLC estimates. but $250bn available for immediate use. Financial Debt.367 12. respectively and $6 billion for GMAC and GM (see section below). the Treasury hosted a call to go over aspects of the legislation and to field analysts’ questions. With presidential certification. Treasury gave further guidance on the call regarding their intent.184 56.894 (4) AGO 1. Source: Company reports.541 60. That Sunday night. All other exposures are only US. Other Other Structured RMBS and Company ABS CDO Other CDO Home Equity ABS (2) Finance (3) ABK 29. providing further details. As of December 29. Both direct purchases and market mechanisms remain with little specificity on how the price determination would be met. Credit Card and Non-Specified ABS. But for institutions accessing the program through the market mechanism.900 FSA 364 72. 2008.600 100. Regarding both price and conditions.296 33. (3) Investor owned Utilities.715 (1) CDOs include both international and US CDOs.Cross-Product Research January 2. (2) Other includes Student Loans. Direct purchases envision the purchase of assets from failing institutions such as in the case of Bear Stearns or AIG with substantial and punitive equity stakes taken.932 17.255 38. Most of the main provisions from earlier versions remained intact with some critical changes and additions.931 152.499 MBI 30. 2009 35 commercial-based CDO exposures face writedowns on those. as a percentage of total liabilities of the institution sold into the fund.577 22. 2008 Situation Room.400 1. . Figure 16. the Secretary would look to scale the size of dilution according to participation. $172bn of the $250bn was allocated through preferred stocks to 208 banks in addition to an extra $20 and $40bn for Citi and AIG. Direct Corporate Exposure and unspecified structured finance. or within 2 days of the first purchase. Breakdown of Monolines’ Structured Finance Guarantee Portfolios (1) .168 31. but $250bn available for immediate use 9 Working through the weekend.

sellers into the fund will choose the more advantaged pricing scheme. Provisions in terms of size and equity warrants appear to apply to this portion. by reducing the punitive nature of the executive compensation limits present in earlier versions of the bill. and those limits only include limitations of “No Golden Parachutes” under the events of termination. may end up falling well short of the realized loss. premium-based payments for insurance create potential issues as. otherwise. but also to an as-yet undefined amount of future equity dilution. and therefore a broader usage of the program would expose them to not only these scaled-down executive compensation limits. Relative to earlier bills. for example. The most stringent limits now only apply to use of the fund under the “direct purchases” method. the insurance premium must be set equal to the consideration given under the purchases method. As we have discussed. The new version gives substantial discretion to the Secretary in regards to the attachment of warrants to usage of the program. In what appears a political concession. Not intended to bail out failing institutions. for example. but under insurance the problem is exacerbated by the fact that premiums received. and any decision to use the program will first and foremost depend on how Treasury sets price. Note as well that the bill includes language stipulating the Secretary take into consideration the long-term viability of the institution before purchasing the assets. this clearly appears to be the case. for most institutions. This appears an even less well thought through provision. exposures to the troubled assets far exceed these limits. this version makes some critical revisions relative to earlier versions. bankruptcy. and its inclusion is for political rather than economic sense. The issue of price as well remains unclear. the House Republican proposal for the establishment of an insurance fund as an alternative mechanism appears in the bill. The guidance on the call clearly suggests that Treasury envisions the Auction process as a way to bring liquidity to the market. to encourage its use. The draft legislation stipulates pricing should create reserves necessary to protect taxpayers. but to help healthy institutions get liquidity for the troubled assets and for that liquidity to make its way back into the system. On the pricing issue. This clearly represents an attempt to encourage usage of the program. Furthermore. Critical to evaluating this alternative will again be the determination of price. Executive compensation limits scaled back. the Treasury will be severely informationally disadvantaged in determining the risk of the asset being insured relative to the financial institution seeking the insurance. executive compensation limits only apply to participation of greater than $300m. at a minimum in small size. 2009 35 participation. or receivership and would apply only to top 5 executives and only during the 2-year period of the fund (subject to a 1-year extension by the president). The bill’s language includes a provision excluding warrants for the first $100m of participation. the use of reverse auctions to set prices likely limits participation to institutions carrying assets at the lowest levels as they will Situation Room 16 . For purchases made under Auctions. Overall.Cross-Product Research January 2. through lessening the punitive nature of both warrants and executive compensation under that form of usage. if they are spread out over the expected life of the asset. The same issue exists under direct purchases. and intends in this version. For small sizes. Treasury stated that their thought process on this program was further behind that of the purchase program and as such they were unable to provide many details on how it would work. Further clarification on the call indicated the intent is not to put funds into failing institutions. executive compensation limits have been scaled back again to lessen the punitive nature and disincentive toward participation. However.

10% by Citi . and Federal Reserve Board on November 23. The Citi investment falls under the “Targeted Investment Program” as part of EESA and the AIG investment is classified under the “Systemically Significant 11 Failing Institutions Program” .Guarantee is in place for 10 years on residential and 5 years on non-residential assets . FDIC. 10 respectively.61 per share Source: Treasury. Company Specific Bailouts In addition to the government intervention and programs addressed above. passage of the bill will likely be treated as lowering systemic risks. if required. The Citi Bailout 12 The US Treasury.7 billion. US Government Announced Bailout for Citigroup Citigroup Bailout Summary Asset Guarantee: .Cross-Product Research January 2. This version of the bill appears to extend benefits to those using it for relatively small sizes (below the trigger thresholds for executive compensation and warrants).Treasury to get $4bn of preferred stock with 8% dividend rate. FDIC $3bn .$306 bn of loans and securities backed by residential and commercial real estate to be guaranteed . it remains to be seen how Treasury determines price in balancing the competing priorities to stabilize financial markets while at the same time protecting taxpayers before the longer-term impact will be clear. the Treasury also buys $20 billion in preferred stock under the Capital Purchase Plan (CPP) and receives warrants with exercise value of $2. Federal Deposit Insurance Corporation (FDIC). 2008 issued a joint statement announcing an agreement with Citigroup to guarantee specific residential and commercial real estate-based assets valued at $306 billion in exchange for $7 billion in preferred stock. Figure 17. Situation Room 17 . Near term.Citi is prohibited from paying common stock dividends of more than $0.The 90% US govt share of losses is split as follows: * Treasury takes second loss (after Citi's first loss) up to $5bn * FDIC takes third loss up to $10bn * Fed funds the remaining pool of assets. While several government agencies are involved we categorize these under “Treasury Interventions” as both received TARP capital injections and review the bailouts for Citi and AIG below.Treasury also gets 10 year warrants for exercise value of $2.Treasury to buy $20 bn of perpetual preferred stock paying cumulative dividend of 8% per annum .Citi takes the first $29bn in losses. 10 11 See: http://www.01 per share for three years TARP Capital Purchase Plan: .7 bn at strike of $10. thereafter losses shared 90% by US govt . Citi and AIG received company-specific bailout packages on November 23 and November 10.Assets to remain on Citi's books and get 20% risk weighting .gov/initiatives/eesa/program-descriptions/ssfip.treas. Federal Reserve. For the rest in between.html Please see: http://www.gov/initiatives/eesa/program-descriptions/tip. with a non-recourse loan at OIS + 300bps . 2008 Situation Room. easing the credit crisis with tighter spreads and higher stock prices a result. however.treas.shtml 12 Based on the November 24. 2009 35 be able to “offer” troubled assets at the lowest levels with no additional capital hit required. Besides the asset guarantee.

including for the bond insurers. 2008 Situation Room.$35 billion Collateralized Debt Obligations Facility * Limited liability company to purchase multi-sector CDOs on which AIGFP has written CDS contracts * Funded with a $30 billion loan from the New York Fed and $5 billion subordinated loan from AIG * Counterparties to unwind the related CDS transactions Source: Federal Reserve and AIG. The existing $85 billion credit facility with the Fed is restructured.8 billion existing securities lending facility with the Fed will be repaid and terminated . as well as extending the maturity to five years.5 billion loan from the New York Fed and $1 billion subordinated loan from AIG * $37. Figure 18. Situation Room 18 . AIG provides a $1 billion first loss piece for the former and $5 billion for the latter.Treasury to purchase $40 billion in preferred shares under TARP * 10% Coupon * Includes 10-year warrant for 2% of AIG common stock . where performance is sensitive to the developing default cycle.S. securities lending program * Funded with a $22.Cross-Product Research January 2. the government announced a restructured support package for AIG. securities lending program. Highlighting the broadening scope of TARP’s Capital Purchase Program (CPP). while the other $35 billion program is set to acquire ABS CDOs on which AIGFP has written CDS protection. Finally. the Fed is committing loan financing to two limited liability companies (LLC) designed to purchase troubled assets from AIG.Restructuring of existing credit facility with the Fed * Size reduced to $60 billion from $85 billion * Maturity of facility extended to 5 years from 2 * Interest rate on drawn funds reduced to L+300 from L+850 bps * Commitment fee for undrawn funds reduced to 75 bps from 850 .5 billion LLC will purchase RMBS from the company’s U. We note that the package does not address AIG’s $237 billion exposure to corporate CDOs. the Treasury is purchasing $40 billion in new preferred stock. 13 Based on the November 10. with 10% coupon from AIG. 2009 35 The AIG Bailout 13 In what may form a template for other bailouts. One $23.S. 2008 AIG Rescue Package . dramatically reducing the interest rate and commitment fees. Key Aspects of the New AIG Rescue Package New November 10.5 billion residential Mortgage-Backed Securities Facility * Limited liability company to purchase RMBS from AIG's U.$23.

gov/press/releases/hp1335.[and].8 Auto Bailout On December 19. Absent another source of financing..6 3. As part of the Automotive Industry Financing Program under EESA: 15 Please see the press release: http://www. 14 Situation Room 19 . Unlike regular DIP financing. 2008 GM and Chrysler announced they will receive secured bridge 14 loans facilities utilizing TARP in the amounts of $13.” Failure by this date (or after one extension of 30 days) by the “President’s Designee” to certify plan completion will result in the loan amounts becoming due and payable in 30 days. The focus of auto uncertainty now shifts to required stakeholder concessions by February 17 before the final March 31 deadline certifying “long term viability . 2009 35 Figure 19. 2008 press release: http://www.treasury. 2008 the Treasury separately will purchase $5bn in preferred stock from GMAC.0 67.4 and $4bn. DIPping Into the TARP 17 GM and Chrysler obtain a bridge loan to a restructuring that converts to a DIP loan if negotiations are unsuccessful The Administration announced utilizing the TARP to fund effectively a Debtor-InPossession (DIP) loan to GM and Chrysler.6 76. We republish our original thoughts below.5 32.Cross-Product Research January 2. using TARP funds as well as lend $1bn to GM to participate in a rights offering at GMAC in supporting the company’s transition as a 15 16 bank holding company ..federalreserve.htm 16 The Federal Reserve announced its conditional approval of GMAC as a bank holding company in a December 24.1 492. upon which these government loans may be converted into a true DIP facility. but with those provisions stated as “Targets” rather than hard requirements.achievement by the company of positive net present value. As announced on December 29. terms on the loan give the companies through first quarter 2009 to complete a restructuring outside of bankruptcy before triggering a default. Terms of the loan mirror those in the failed Senate bill including the Corker amendment.0 143.gov/newsevents/press/orders/20081224a. however. 2008 Situation Room.htm 17 Based on the December 19. respectively . such an action would precipitate a bankruptcy filing. 2008 Asset Class Regulatory Capital Relief Transactions Corporate Residential Mortgages Other Arbitrage Transactions Multi Sector CDO w/Subprime Multi Sector CDOs w/No Subprime Corporate debt/CLOs Total Source: AIG I3Q investor Presentation. Summary Statistics for Super Senior Credit Derivatives As of September 30. Notional Amount ($mm) 170.

Treasury receives warrants for 20% of the maximum loan amount up to 20% of common shares Source: Treasury Department.Restructuring targets (carried over from "Corker Amendment") * debt-to-equity swaps amounting to at least 2/3 of existing debt * Average compensation levels per labor hour and work rules must be similar toUS operations of Nissan. laid-off. The preferred stock will have an 8% dividend and warrants will be issued to Treasury in the form of additional preferred equity.00% . Highlights in the GMAC Investment TARP Investment in GMAC -Tre a sury w ill p urch a se $5 b n in p re fe rred st ock with a n 8 % divid e nd -W a rran ts will b e issu e d to Tre a sury in th e fo rm of a dd it io n al p fd st ock.Cross-Product Research January 2. 2009 * Elimination of benefits to employees that have been fired.Progress report to be submitted to Congress by March 31.4 bn cre d it fa cility (se e ab o ve ). LIBOR floor is 2.4 bn. the Treasury will lend up to $1bn to GM to help the company support GMAC’s transition to a bank holding co. 2011 (if in compliance with conditions of agreement) with full recourse financed using TARP funds * Secured by first lien on unencumbered assets or junior lien on encumbered assets * GM loan amount up to $13. $5. $4 bn on Dec 29. * Chrysler loan amount up to $4. In addition. rationalizing costs. 2008 that it will purchase from GMAC $5bn in senior preferred stock using TARP funds. e qu a l to 5% o f t he p fd st ock pu rch ase w ith a 9% d ivid en d if e xe rcise d -Tre a sury w ill len d G M $ 1 bn t o he lp G M su pp o rt G M A C's tra ns itio n to a B HC w it h te rm s s ub sta nt ia lly th e sa m e a s th e $1 3 . Highlights from the General Motors and Chrysler Secured Bridge Loan Facilities General Motors and Chrysler Secured Bridge Loan Facilities .0 billion. The GM loan will be exchangeable at any time at the Treasury’s option. 2009 .Term loan to Dec 29. 100% proceeds from asset sales and capital raisings directed to loan repayment . GMAC Bailout The Treasury announced on December 29.President's Designee need to approve any special business transaction exceeding $100 million.Companies submit long-term plan (including term sheet signed by all relevant parties) to President's Designee by Feb 17. equal to 5% of the preferred stock purchase. Toyota and Honda by Dec 31. into equity interests in GMAC acquired by GM in a rights offering. furloughed or idled (other than customary severance) * No less than half of contributions made to the voluntary employees beneficiary organization to be made in stock . restructuring existing debt and a competitive product mix .Loan facilities may be converted into DIP financing in the event of bankruptcy at lender's option . Situation Room 20 .0 bn on Feb 17 (last payment needs approval by Congress). exc ep t se cure d b y G M A C eq u ity Source: Treasury. . . 2009 35 Figure 20. 2009 including plans for * Repayment of the government * Complying with Federal fuel efficiency and emissions requirements and commencing production of advanced technology vehicles * Providing positive net present value.Cost is L+300 bps though spread increases to 800 bps in the event of default. which will pay a 9% dividend if exercised.Subject to executive privileges and compensation limitations in the EESA .Except for mandatory repayments under existing secured loans. Figure 21.4 bn on Jan 16 and $4.

2009 35 Three Steps to Complement Fannie/Freddie Conservatorship 18 – Senior Preferred Stock Purchase Agreement – Government-Sponsored Enterprise Credit Facility -. the Treasury Department announced three steps to complement the FHFA decision.pdf The FHFA will act as the conservator. GSE Capital Structure Outline Treasury Has Agreed To Inject Capital Into Fannie Mae and Freddie Mac as Needed at the Senior Preferred Stock Level S enior D ebt S ubordinated D ebt T reasury to inject up to $100 billion into each agency as needed to ensure positiv e net w orth S ubordinated to new preferred stock and div idends elim inated T reasury receiv es warrants for 79. The Senior Preferred Stock Purchase Agreement calls for a gradual 10% annual reduction in Fannie Mae and Freddie Mac’s retained portfolios from as much as $850 billion each as of December 31.Cross-Product Research January 2. The Treasury will purchase senior preferred stock as needed to maintain positive net worth at Fannie and Freddie up to $100 billion each. The final step by the Treasury Department involves direct purchases of agency MBS designed to complement modest increases in GSE retained portfolios until December 31.9% of com m on stock and div idends elim inated N ew 10% S enior P referred S tock E x isting P referred S tock C om m on S tock Source: U. While the above-described measures are designed to provide temporary support for the mortgage market as the Treasury Department’s authority expires December 31. Department of Treasury. 18 Based on the September 7. 2008 placed Fannie Mae and Freddie Mac under “Conservatorship”. officers. Simultaneously. Figure 22. the powers of the Company’s directors. This state.S. 2009 (without regards to capital requirements) to directly support the mortgage market. In a conservatorship. as defined below.gov/media/PDF/FHFACONSERVQA. it is up to Congress to define the structure and roles of the GSEs over the longer term. What Is a Conservatorship? “A Conservatorship is the legal process in which a person or entity is appointed to establish control and oversight of a Company to put it in a sound and solvent condition. and shareholders are transferred to the designated Conservator”. 2008 Situation Room. 2009. The Treasury also announced the Government Sponsored Enterprise Credit Facility (GSECF) to provide secured funding to Fannie Mae. Freddie Mac and the Federal Home Loan Banks. 2009 to $250 billion. —from www.ofheo.GSE Mortgage-Backed Securities Purchase Program The Federal Housing Finance Agency (FHFA) on September 7. Situation Room 21 . means the FHFA establishes control and oversight of the GSEs to put them in a sound and solvent condition and thus closely resembles bankruptcy.

Federal Reserve Bank of New York will act as agent .may increase to 12% for a period if dividends are not paid in cash . dealing with the root cause of the financial crisis—the uncertain asset values and solvency issues they raise—the time it needs to proceed. giving time for step two. Freddie Mac and the Federal Home Loan Banks (FHLB) on an as needed basis .S. The accumulated efforts of the Treasury and the Fed. Situation Room 22 .Maturing loans can be replaced with new loans .The Treasury purchased $5 billion of GSE MBS in September and $20.Up to $100 billion for each agency . stock . although the Money Market Investor Funding Facility (MMIFF) provides support for a small portion of CDs.Provide secured funding to the Fannie Mae. 2008 levels. so potentially “BCDLF” (Bank Certificate of Deposit Liquidity Facility) could be next.Authority expires on December 31.5 billion in October Source: U. 19 Based on the October 8. among other things . 2009 . 2008 the Treasury is paid a quarterly commitment fee in cash or sr. TAF and Discount Window borrowings From the Fed.9% of common stock .Cross-Product Research January 2.GSEs subject to several covenants restricting their abilities to pay dividends and increase debt beyond 110% of June 30. the CPFF.Independent asset managers to purchase and manage the portfolios under guidelines from the Treasury . pref.Can be pre-paid with two days notice . Three Steps Taken by the Treasury To Complement the FHFA’s Decision To Place Fannie Mae and Freddie Mac Into Conservatorship Senior Preferred Stock Purchase Agreement . now combine to support directly or indirectly more than 70% of banking system liabilities. Federal Reserve Interventions: Supporting Funding 19 Treasury and the Fed. initially LIBOR+50 bps GSE Mortgage Backed Securities Purchase Program . FHLB advances. The combined efforts so far should eventually reduce systemic bank funding risk.10% coupon on the senior preferred stock .Funded by the Treasury's general fund and expires Dec 31. 2009 after which the portfolios shall decline by 10% each year until it reaches $250 billion Government Sponsored Enterprise Credit Facility (GSECF) .Treasury to buy senior preffered stock to ensure that each Agency maintains positive net worth . The one large remaining area that could benefit from backstop liquidity is the Bank CD market. we estimate. Those efforts include expansion of FDIC guarantees by the Treasury. 2008 Situation Room.Subject to statutory debt limit . preferred stock and Warrants to purchase 79.Treasury to invest in agency MBS in the open market at the discretion of the Treasury Secretary .Collateral limited to agency MBS and advances made by the FHLBs .Beginning March 31. Department of Treasury. we estimate.Interest rate is set by the Treasury. 2009 .Scale determined by developments in the markets .Short term loans expected to be less than one month but at least one week based on individual requests .Caps each GSEs retained portfolio to $850 billion as of Dec 31. now combine to support directly or indirectly more than 70% of banking system liabilities Step one in combating systemic risk lies in securing funding markets.Treasury receives immediately from each GSE $1 billion of sr. 2009 35 Figure 23.

For simplicity of presentation.184 4. we collapse the details therein into high-level balance sheet accounts. long term). and Fed Funds and Security RPs.338 2. The notes to the tables detail our methodology. Checkable Deposits. (3) Other Short Term Borrowings include repos.) or maturity (short term.447 1. Figure 24.136 Note: Created using Table L.578 Other ST Liabilities Long term Liabilities Total Assets 13. company filings.469 Checkable and Small Time/Savings Non-Interest Bearing Deposits Large Time Deposits Short Term Borrowing Commercial Paper (2) $bn 7. etc.109 Commercial Banking and L. which is important for our purposes. we associate Bank and Thrift liabilities to their support sources.456 12. 2009 35 In Figure 24 below. please see detailed notes accompanying the table. To create the aggregate balance sheet.889 4. Situation Room 23 . (2) Estimated using liabilities' composition for a smaller sample of banks. US Bank and Thrift Assets and Liabilities Assets Cash or Near Cash Total Bank Credit Securities Loans Bank Loans Mortgages Consumer Credit Misc. Time and Saving Deposits.104 2.778 903 2. Banc of America Securities LLC estimates. we begin with the data in the Flow of Funds release from the Federal Reserve.427 850 (3) (2) 8. (1) Includes Vault Cash. which provides us the Banks’ and Savings’ levels separately.1 release for Second Quarter 2008.Cross-Product Research January 2. Reserves at Federal Reserve. Assets (1) $bn Liabilities 147 Deposits 10. In Figure 13.114 Savings Institutions of the Fed Flow of Funds Accounts Z. To estimate these details for the aggregate data we calculate the weighted average compositions of liabilities for a sample of 10 banks with the highest total outstanding liabilities and apply that to the aggregate data.749 2. However. we estimate the combined US Bank and Thrift assets and liabilities.895 2.791 2.146 Short Term Liabilities Other ST Borrowings 1. Source: Federal Reserve. Note that in this table we make several assumptions. Federal Funds and other interbank lending.511 Total Liabilities (2) 364 1. this release does not provide the break-up of liabilities by credit instruments (commercial paper.

we use in this analysis half of the potential size. However.716 (72%) MMIFF Other ST Liabilities Long term Liabilities Total Liabilities (2) 364 1.889 4. which provides us the Banks’ and Savings’ levels separately. Situation Room 24 . (4) An October 1. i. long term). For simplicity of presentation. To create the aggregate balance sheet. (6) Because most banks are Tier 1 we assume for simplicity that all outstanding bank commercial paper is eligible for the Commercial Paper Funding Facility (CPFF).4 trillion. (8) We used the peak potential size of the Term Auction Facility (TAF) over year-end of $900 billion and $50 billion in Discount Window borrowing consistent with the most recent reported numbers as of October 1. actual usage was $535 billion. 2008.109 Commercial Banking and L.100 billion FDIC insured amount. To estimate these details for the aggregate data we calculate the weighted average compositions of liabilities for a sample of 10 banks with the highest total outstanding liabilities and apply that to the aggregate data.100 450 180 850 1.. (7) Bank advances from the Federal Home Loan Banks (FHLB) totaled $914 billion as of June 30.578 Programs Listed Below FHLB (Short term portion) TAF. Additionally the FDIC estimated that $1.1 release for Second Quarter 2008.104 TLGP(5) 2. 2009 35 Figure 25. we collapse the details therein into high-level balance sheet accounts. (9) We assume that 30% of the $600 billion under the MMIF program is used to support CDs. Federal Funds and other interbank lending. The first $250.114 Savings Institutions of the Fed Flow of Funds Accounts Z. for example the CPFF and the TLGP.427 850 CPFF(6) 1. Banc of America Securities LLC estimates. The rest is available to support other short term liabilities.e. 2008.000 of large time deposits are also insured but we do not separate out the $5.456 FHLB (Long term portion)(7) 12.1 trillion from $4.136 Total Support Sources Note: Created using Table L.4 trillion in unsecured debt is eligible for refinancing under the TLGP.Cross-Product Research January 2.000 from $100. 2008 technical briefing that $400-500 billion in non-interest bearing bank accounts would be covered under the Temporary Liquidity Guarantee Program (TLGP). We classify the 39% of advances with maturities less than one year as short term borrowings and the remaining $61% as long term liabilities. Discount Window TLGP (5) (9) (8) (7) $bn 5. (3) Other Short Term Borrowings include repos.578 356 950 700 420 558 8.000 would raise the amount of FDIC insured deposits to $5. $700 billion.447 FDIC(4) 1. etc. company filings.) or maturity (short term. (5) The FDIC estimated in an October 14. this release does not provide the break-up of liabilities by credit instruments (commercial paper. Because there is overlap in coverage between the various government funding programs.791 2. (2) Estimated using liabilities' composition for a smaller sample of banks. we begin with the data in the Flow of Funds release from the Federal Reserve. Figures on the TAF and Discount window usage are peak numbers possible toward the end of the year. Source: Federal Reserve.338 MMIFF(9) 2. 2008 Congressional Budget Office report estimated that raising the limit for FDIC insured deposits to $250. Treasury and the Fed We Estimate Now Combine To Support Directly or Indirectly More Than 70% of Banking System Liabilities Liabilities Deposits Checkable and Small Time/Savings Non-Interest Bearing Deposits Large Time Deposits Short Term Liabilities Short Term Borrowing(2) Commercial Paper(2) Other ST Borrowings (3) $bn Support Sources 7. As of December 29. which is important for our purposes.

2008 Situation Room for details. the Fed provides unlimited amounts of dollars in currency swap arrangements with nine foreign central banks from the Bank of Japan to the ECB. -17 TAF. Figure 36 on page 32 provides a summary of these and other Fed liquidity facilities. the two commercial paper funding facilities set up by the Fed to support that market. Finally. and PDCF were extended to April 30. CPFF. 2008 Maiden Lane. The AMLF. The Fed also funds the originally $30 billion “Maiden Lane” portfolio of 20 assets from Bear Stearns as well as extends credit lines to AIG (see Figure 26 below for current usage). …a $36 Billion Increase From the End of November Change In December as of December 29. Figure 26. 332 AIG. 2009 on December 2. 44 TAF. 2008. 2008 Figure 27. 450 Discount Window. the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF). 87 AMLF. 2009 35 Funding From the Fed The Fed provides a variety of liquidity facilities including the CPFF and the TAF We review below the AMLF and CPFF. Fed Lending in Cash to Banks and Brokers Has Reached $1. Situation Room 25 . These swaps provide dollars for foreign central banks to distribute while the Fed does not distribute the foreign currency. 38 CPFF. 80 PDCF. 20 Notice that the Fed has written down this portfolio by nearly 10% due to deteriorating asset values.Cross-Product Research January 2.1 Trillion… As of December 29. 3 Source: Federal Reserve. Source: Federal Reserve. In addition the Fed provides access to emergency funding through a variety of programs including the Term Auction Facility (TAF). 85 Repos. 24 PDCF. please see the October 23. -25 CPFF. 9 AMLF. 28 Discount Window. 28 AIG.

$620 Billion in Emergency Dollar Currency Swap Arrangements With the Fed Currency Swap Arrangements With the Fed Banco Central do Brazil Banco de Mexico Bank of Canada Bank of England Bank of Japan Bank of Korea Danmarks National Bank ECB Monetary Authority of Singapore Norges Bank Reserve Bank of Australia Reserve Bank of New Zealand Sveriges Riksbank Swiss National Bank Total Source: Federal Reserve and Banc of America Securities LLC. the formulation of the CPFF—Commercial Paper Funding Facility—adding to the alphabet soup of liquidity backstops. The Fed bears all credit risk and banks get 0% risk weighing and amounts will be excluded from leveraged capital purposes. The program allows banks to borrow from the Boston Fed to fund purchases of ABCP from money market funds at amortized cost. as evidenced by the $140bn increase in Prime fund assets since inception. are helping to relieve the systemic risk of a funding breakdown. 2008. These “quiet” bailouts have helped to stem the pace of outflows in Prime funds and. the Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF). 2009 35 Figure 28. 2008. but indirectly they may still benefit from reduced funding costs in the Tier 1 market. Commercial Paper Funding Facility (CPFF) 22 The CPFF began October 27 and provides 3-month financing to Tier 1 issuers The Fed announced October 7. Expanding those programs to the CP market benefits mainly Tier 1 bank issuers. though the peak was $152 billion in October. Situation Room. statistical release. This effectively gives Money Market Funds key motivations of capital (amortized cost means no principal at risk) and liquidity (the Fed ensures a ready buyer for ABCP) to keep money market funds invested in ABCP. 2008.4. As of December 29 the CPFF program $332 billion outstanding according to the H. Credit Market Strategist. These actions signal the expansion of previously announced Guarantee Program for Money Market Funds and AMLF (Asset Backed Commercial Paper Liquidity Facility) efforts to stem the panic in wholesale funding markets.Cross-Product Research January 2. 21 22 Based on the September 29. but with subsidiary benefits to corporate issuers helping to alleviate any potential bank draw risks.1. ($ billions) 30 30 30 Unlimited Unlimited 30 15 Unlimited 30 15 30 15 30 Unlimited Unlimited Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF) 21 The Federal Reserve announced September 21. Situation Room 26 . The Fed disclosed $24 billion of loans had been made under the program as of December 29. 2008. Based on the October 7. 2008. The program excludes A2/P2 issuers.

2009 35 Figure 29. Figure 30. Situation Room 27 .For a single issuer the maximum amount of purchases by the CPFF is CP outstanding in August 2008. U. was tier 1.100 bps surcharge on unsecured lending .Size of program: Up to $1.SPV purchases 3-month commercial paper directly from issuers . the intent is by providing a guarantee of liquidity. For simplicity we assume that 85% of commercial paper in each category in this table is Tier 1. Description of the New Commercial Paper Funding Facility Commercial Paper Funding Facility . 2009 .Program Began October 27. set at a level of OIS plus 100 bps plus as unsecured credit surcharge of 100 bps. $1. As of August 27. Owned Domestic Financial.Still unclear what collateral is acceptable for secured lending .S.S. which by our figures for Tier 1 domestic CP programs totalled $1.492 of $1. as we assume for simplicity that these have no US subsidiary.3 trillion . Current Commercial Paper Market and What Is Eligible for the CPFF (estimated) Outstanding as of December 31 Represents the Total CP Market Tier 1 Commercial Paper Issued by a US Issuer Outstanding as of August Is Eligible for the CPFF CP Category Domestic Nonfinancial Foreign Nonfinancial Domestic Financial. 2008 (we do not know the precise date in August used by the Fed) total amount outstanding in the commercial paper market except foreign non-financial and financial. issuers (includes U. Foreign Nonbank Pare Foreign Financial Other Financial Asset-backed TOTAL Outstanding Eligible for as of Dec 31 ($bn) CPFF ($bn. Foreign Bank Parent Domestic Financial. or 85%.3 trillion. 2008 . est) 132 50 243 277 46 147 1 704 1.Pricing is 3-month OIS +100 bps and +300 for unsecured and asset-backed commercial paper.Federal Reserve to set up an SPV to Purchase Commercial Paper Until April 30. The Fed will meet its secured lending requirement through one of an upfront fee. private market participants will be more willing to extend term financing and that only a small fraction of this amount would actually need to be used. or collateral satisfactory to the Fed.Cross-Product Research January 2. guarantee.600 146 0 251 205 41 0 0 633 1. As a “backstop” facility.S.758 billion outstanding commercial paper.Initial fee of 10 bps on maximum amount of commercial paper the SPV may own . less CP held by investors other than the CPFF Source: Federal Reserve. Limits per issuer will be set at the amount outstanding as of August 2008.CPFF will purchase paper rated Tier 1 by one of the three rating agencies or at least two if rated by multiple agen . domiciled subsidiaries of foreign issuers) may use the program . Source: Federal Reserve and Banc of America Securities LLC. respectively .276 Note: We estimate commercial paper eligible for the CPFF from the August 27.Only U.The Fed Lends to the SPV at the target Fed Funds rate . ABCP is set at 3-month OIS + 300 bps. The CPFF in Short The Fed sets up an SPV to purchase from issuers 3-month CP.

Issuer 10 Source: Federal Reserve and Banc of America Securities LLC. . 2008 Situation Room. . The MMIFF should further contribute to a decline in funding costs and suggests extending liquidity support beyond money market funds to “over time include other money market investors”. That ABCP is a first-loss piece in the PSPV structure as it is subordinated the FRBNY funding. What this means is that the investor will end up holding a piece of the PSPV structure designed to absorb the first 10% of losses in the 24 entire PSPV. and given the relative lack of diversification in the PSPV.Cross-Product Research January 2. bank notes and commercial paper with maturities of 90 days or less into a private sector PSPV. if the underlying issuers have expected loss rates of 1% the 1% expected loss on the entire PSPV structure needs to be absorbed by only 10% of its capital structure. . PSPV Up to $120 Billion 90% Senior Piece Funded by the Federal Reserve Bank of New York 10% First Loss Piece: ABCP 23 24 Based on the October 21. a 2% default probability and a 50% expected recovery rate. 25 2a-7 funds may only hold up to 5% Tier 2 rated paper. The Federal Reserve announced another liquidity program. one might intuitively think about an expected loss rate for the ABCP in this example of 10%. For example. Based on merely the limited information we have. . 26 According to Bloomberg. For example. . totaling up to $600 billion of 26 assets and with each structure containing short term money market instruments issued by ten issuers. PSPV Structure Relies on Getting Tier 1 Rating for First Loss Piece CDs. Situation Room 28 . as large time deposits remains the one large portion of banking system liabilities until now unsupported by the government. Key to the importance of the MMIFF for supporting bank liabilities is the ability to sell bank CDs into the program. receiving in return 90% cash funded by the Federal Reserve Bank of New York (FRBNY) and 10% Asset-Backed Commercial Paper (ABCP). That brings our estimate of government support for banking system liabilities) to more than 70%. Investors will be able to sell Tier 1 rated CDs. Bank Notes & CP Issuer 1 Issuer 2 Issuer 3 . presumably the Federal Reserve has cleared with the rating agencies that this is consistent with the required Tier 1 rating as otherwise 2a-7 funds 25 may not be able to hold it. While not entirely true because of complications related to correlation between issuers. 2009 35 Money Market Investor Funding Facility (MMIFF) 23 The new MMIF provides support for CP. bank notes and large CDs with less than 90 days to maturity. The Federal Reserve plans on setting up five PSPVs. Whatever a more realistic expected loss rate is for the first loss ABCP piece. we would not be able to make that determination. Figure 31.

Price is amortized cost which means par . making it difficult to commit to purchasing the underlying collateral for the loan. this does not preclude another bank (a non-originating bank) For example. The original proposed auction process meant potential bidders would not know their loan amounts. but they did provide clarity they would be based on both the riskiness of the collateral and its maturity. Note that the eligible ABS collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower. Term Asset-Backed Securities Loan Facility (TALF) TALF program provides $200 billion in loans to lend against AAA-rated consumer ABS. Key Aspects of the Money Market Investor Funding Facility (MMIFF) Money Market Investor Funding Facility (MMIFF) . the borrower must first secure the assets. The program will provide $200 billion in loans to lend against AAA rated cash ABS backed by auto loans. student loans. On December 19. collateral fashion. in both pricing and allocation.Program runs until April 30.Establishes five private sector PSPVs to buy money market instruments from eligible investors . Haircuts. loan amounts will be requested by the borrower and proceeds will be distributed in a loan vs. May be expanded to include other money market investors over time . However. however. the Federal Reserve released additional details on the TALF. Simultaneous settlement of both the asset purchase and the TALF loan could effectively eliminate the requirement of an intermediate lender. Figure 33 below shows the highlights. bank notes and CDs with Less than 90 days to maturity . Eligible ABS criteria were also further clarified and eligible borrower definition was limited to corporations and a minimum loan size of $10M narrowed the borrower definition from the original proposal.Concencentration limit of 15% for each issuer . This criteria is designed to limit banks from originating deals and placing them on their own balance sheet.Each PSPV will buy up to $120 billion in US dollar denominated CP. remain to be specified. In order to do that another intermediate lender may be required. 27 Situation Room 29 . and SBA guaranteed small business loans. 2009 unless extended Source: Federal Reserve. In the revised approach. Figure 33 below summarizes the new terms.Cross-Product Research January 2.Each PSPV buys paper issued by 10 different Tier 1 issuers . The intermediate lender would then be paid off by the TALF loans upon receipt of those proceeds. That relieves uncertainty as to receipt of financing. but may still require for leverage users some intermediate 27 leverage provider. 2009 35 Figure 32.ABCP is a 10% first loss piece .Investors will receive 90% in cash and 10% in ABCP .Eligible investors include money market funds initially. in order to access the Fed loans.Federal Reserve Bank of New York lends 90% of purchase price to PSPV senior to the ABCP . Loan maturities were extended from 1 to 3 years and auctions were abandoned in lieu of specified loans. The Federal Reserve announced the Term Asset-Backed Securities Loan Facility (TALF) on November 25. Clarification on TALF The Federal Reserve put out clarification on the TALF program addressing most of the questions we had originally in a manner that may make the program highly effective. The Fed clarified key uncertainties regarding loan terms.

Figure 33. turning $20bn of that into upwards of $200bn of purchasing power. Assets include auto loans. SBA guaranteed loans after Jan. the language clearly contemplates expanding the program “later” to include these assets. That expansion suggests that corporate loans could also eventually be included. non-Agency residential mortgages or other asset classes .S.The Treasury will provide $20bn in credit protection to the Fed using TARP funds (10% 1st loss piece) . companies (including those that have a non-US.Sponsor of ABS must comply with executive compensation requirements of the EESA Source: Federal Reserve.S. providing critical liquidity support for C&I loans though at this point there has been no mention of such an extension to these assets from the Treasury Secretary.S. Situation Room 30 .Eligible collateral includes auto loans.The NY Fed provides $200bn in loans to lend against AAA rated (by at least two agencies) cash ABS . TALF contributes to financial system repair necessary to make QE (quantitative easing) effective. with non-recourse to the borrower . student loans. That could remove the balance-sheet constraint – a key reason for the freeze in these markets – but those conditions and others have not yet been specified.Not subject to mark-to-market or re-margining requirements . TALF is unique relative to other Fed lending programs in that its benefits extend to any US-domiciled investor [subsequently modified to be limited to US companies]. Treasury. credit card loans and small business loans. the release did not provide this guidance and this remains an open area. 2008 and student loans after May 1.Eligible borrowers under the TALF include all U.Loans ($10 million min size) will be allocated at the discretion of the New York Fed * Contingent on delivery of the eligible ABS collateral . 2009 * Substantially all underlying exposures must be U. 2009 35 from purchasing ABS assets and borrowing from the TALF against these assets. 2008 Situation Room. Banc of America Securities LLC. Leveraging the TARP 28 The Term ABS Loan Facility (TALF) program effectively leverages the TARP funds.TALF loans will have a 3 year term.Cross-Product Research January 2. 2007 * Eligible credit card ABS must be issued to refinance existing credit card ABS maturing in 2009 * May be expanded later to include commercial mortgages. the non-recourse nature of the loans coupled with no mark-to-market or remargining requirements means after accounting for the haircut. credit cards and student loans * Only U. However. domiciled * Underlying auto loans issued after Oct 1. the non-recourse nature of the loan and no re-margining suggest the potential for a zero risk weighting and an exclusion from leverage capital purposes much as in the AMLF. While commercial and residential mortgage loans have been excluded. Critically for banks accessing the program. 2007. parent company) .Borrowers must use a primary dealer as agent . We also reprint parts of our original summary analysis from the announcement date. dollar-denominated ABS originated after January 1.Haircuts to be established by the New York Fed for each class of eligible collateral based on riskiness . assets associated with the TALF loan could be treated with a zero risk weight for risk weighted assets purposes and could be excluded from leveraged capital purposes as was the treatment in the case of AMLF. 28 Based on the November 25. As we highlighted in our original summary announcements (portions of which we repeat below). Key Terms in the TALF Term Asset-Backed Securities Loan Facility (TALF) .

Timing -Purchases expected to start in early January 2009 -Purchases expected to occur over two quarters. REMICs. Freddie and Home Loan debentures as well as up to $500bn of Agency MBS -GSE direct obligations will be purchased from dealers through an auction process -Purchases of MBS will be conducted by four investment managers and a custodian Source: Federal Reserve. Figure 35 describes the details.Cross-Product Research January 2.4 billion in agency debentures as of December 19. Freddie Mac & Ginne Mae -Includes (but not limited to) 30 yr. timing and investment strategy. Additionally on December 30. The Fed has purchased $10. Security Eligibility -Only fixed rate agency MBS guaranteed by Fannie Mae. Investment Strategy -Will employ passive buy and hold strategies in accordance with guidelines from the Fed -Purchases will be guided by commonly referenced market indicies -Will be financed through creation of additional bank reserves -May involve use of dollar rolls as a supplemental tool (to smooth market supply & demand) Source: : Federal Reserve. 2008 MBS Purchase Program 1. Figure 34. Figure 35. by end of 2Q09 3. as it continues its program of effective quantitative easing. Freddie and Home Loan debentures as well as $500 billion of Agency MBS. 2008. 20 yr & 15 yr securities -Excludes CMOs. Here the Fed expands the monetary base. Highlights of the GSE Direct Obligation & MBS Purchase Program GSE Direct Obligation/MBS Purchase Program -The Fed will purchase up to $100bn of Fannie. Trust IPOs / Trust POs and other mortgage derivatives and cash equiv 2. and at the same time by directing those purchases at agency debt and MBS in lieu of typically using Treasuries will aid in reducing the cost of mortgages. Situation Room 31 . which purchases $100 billion of Fannie. $500 Billion Agency MBS Purchase Program Details on December 30. 2008 the Federal Reserve released further details regarding the MBS Purchase Program including security eligibility. 2009 35 GSE Direct Obligation & MBS Purchase Program The Federal Reserve also announced November 25 the GSE Direct Obligation & MBS Purchase Program.

Issuers of CP What are they borrowing? Funds Funds Funds Funds US Treasuries US Treasuries Funds What collateral can US Treasuries. Additionally for TSLF options typically 2 weeks or less Up to 120 days for Depository Institutions. ABS. 2008 Depository Institutions. Agencies. 2008 Who can borrow? Primary Dealers Depository Institutions Primary Credit-Eligible Depository Institutions Primary Dealers Primary Dealers Primary Dealers Primary Dealers. Source: Federal Reserve. Consumer Loans. ** Does not account for reverse repos. Federal Reserve Liquidity Facilities Excluding the Maiden Lane Portfolio. 2008 Securities Lending Term Securities Lending Facility (TSLF) March 11. 2009 35 Fed Liquidity Facilities Figure 36.7 billion $183 billion*** $24 billion * Includes US Treasuries. 2007 Primary Dealer Credit Facility (PDCF) March 16. 2008 $332 billion Maximum Allowed - - $900 billion - - $150 billion - What is the latest borrowing? $80 billion** $85 billion $450 billion $38 billion $5. the AIG Line of Credit and the Foreign Currency Swap Arrangements Regular Open Market Operations (Repos and Discount Window Reverse Repos) Announcement Date Term Auction Facility (TAF) December 12. How frequently are Once or more daily operations conducted? Typically overnight but authorized up to several weeks and added the Term 28 or 84 days Discount Window Program (up to 90 days) As requested Every other week Overnight Overnight 28 days. US Branches of Foreign Banks Funds Commercial Paper Funding Facility (CPFF) October 7. New single tranche program is 28 days. Agencies. 2008 ABCP MMF Liquidity Facility (AMLF) September 19. Up to remaining term of financed ABCP for NonDepository Institutions (ranges from overnight to 270 days) Once or more daily 3-month US denominated CP using financing provided by the NY Fed As requested Daily Weekly As requested Greatest amount outstanding by issuer b/t Jan 1 & Aug 31. *** Exceeds the maximum allowed because the number includes exercised TSLF options that come in addition to the maximum.Cross-Product Research January 2. CMOs. Bank Holding Companies. including ABCP Typically Term is overnight-14 days though What is the term of authorized for up to 65 loan? days. State/Political Subdivisions. Commercial Real Estate Loans. MM instruments. Situation Room 32 . Commercial Industrial Agricultural Loans. Agency MBS be pledged? Full Range of Discount Full Range of Discount Window Collateral* Window Collateral* Broadened to include types of collateral that can US Treasuries be pledged in the tri-party repo systems All IG Debt First-Tier ABCP First-Tier CP. Residential Real-Estate Loans. Corporate Bonds.

Kretzmer (646) 855 1046 Mickey Levy (646) 855 1045 Gary Bigg (646) 855 1980 Published January 2. home price declines have shown the impact of the sharp worsening in recessionary conditions. We expect this trend to continue while recent mortgage rate declines provide limited support. For the twenty Case-Shiller regions.8 but remained well above the record low of 35. Conference Board consumer confidence hit an all-time record low in December. new home sales fell 2. On a month-to-month basis.1% in 1Q 2009. and a large drop in the present situation index.7 set in October. Prominent in the computation of the present situation index is the closely watched job-market assessment. 29 Situation Room 33 . which fell to its lowest since April 1992. In recent months. before any tapering begins.9% in November. off 18.2%. both at levels last seen in 4Q 1992. five months of decline in inflation-adjusted consumer spending ended in November. But we do not expect a quick consumer-led recovery. sixteen posted larger month-to-month declines in October than in September. the index fell 2. as sales plummeted and home price declines reaccelerated.1% in 3Q. More Housing Declines but Hope for Spending? published earlier today. a sign that the huge declines in energy costs are providing some consumer relief and the worst of the adjustment to large wealth declines may be past.000 jobs and a rise to 7.0%. After declining 16.0% versus its year-ago level. reflecting the sharp worsening in the recession The pace of residential construction decline picked up in 4Q and will be maintained this quarter Highlight from the U. The October Case-Shiller Home Price Index. while existing home sales fell 8. we project that residential investment fell an annualized 26. pointing to another dismal employment report Home price declines have accelerated in recent months. However. with a prominent place in the Conference Board survey. With labor market conditions dismal. The Conference Board’s consumer confidence index.2% decline in October. More Housing Declines but Hope for Spending? 29 The year 2008 ended with the U. For the second consecutive month. The decline was composed of a small drop in consumer expectations in December.0% in August. while the share reporting jobs hard to get rose to 42. which deteriorated markedly in December. The number of homes for sale and under construction fell 7. which fell to 43. Home sales also worsened in November: after posting a 5. the deteriorating labor market. compiled since February 1967. The long fall in housing also continued late in the year.3% in November. We foresee an 8. 2009 Economics Record Low Confidence. was behind December’s surprise decline. in severe recession. and were down an annualized 43% versus 3Q 2008. The Conference Board’s consumer confidence index fell to a 41-year record low in December.1% peak jobless rate in late-2009.0 in December. We expect the loss of 475.S. versus a 1. While other sentiment indices have improved slightly in the past month or so. We forecast a decline of 28. fell to a 41-year record low of 38.Cross-Product Research January 2. none of the twenty Case-Shiller regions posted month-on-month home price increases. Economic Weekly: Record Low Confidence.S. The share of respondents reporting jobs plentiful fell to 6.8% decline in September and only 1. 2009 for week of January 5.0% in the unemployment rate.0% last quarter.6%. declined at an accelerating pace in the month.2% in December. 2009 35 Economists: Peter E. The results point to another dismal employment report for December.

6% in November. as the index fell to 35.2 in November). with the index falling to 25. inflation-adjusted consumer spending rebounded 0. lasting into 2010.7 (versus 27. well below the 35. Moreover. job cuts and tight credit will continue to constrain spending in 2009. However.4 in December (versus 36. a bit of solace in a quarter of rapidly falling economic activity. also an all-time record low. there was no sign in the December report that the pace of decline is yet bottoming. We estimate that consumer spending fell at a 1. Economic Data and Policy Commentary was published earlier today.4 median of analysts’ forecasts (according to Bloomberg). there is no sign in the December report that the pace of manufacturing decline is yet bottoming.9 (versus 34. 16 indicated declining economic activity.2 in the previous month). sixteen industries indicated declining economic activity. The previous records that were shattered last month had been set during the credit control period of June 1980. while nondurable consumption jumped 1. No industries showed growth last month. following 5 consecutive monthly declines.0 in December. Production also continued to plummet. while 66% reported declines.Cross-Product Research January 2.1% respectively in November. Notably.5%. Notably.5 at the end of its 21st year of compilation. The ISM manufacturing survey fell to 32.8% annualized pace last quarter versus a 3.5). the pace of decline should diminish in 1H 2009 relative to the second half of last year Manufacturing Recession Continued to Worsen in December 30 No industries showed growth last month. Situation Room 34 . The price index fell to 18.9 in November). while two indicated no change. as the ISM manufacturing index recorded a 5th consecutive below-50 reading.5 in December (versus November’s 31. lowest since June 1949! Only 2% of respondents indicated rising input prices. Following a roughly 3% pace of decline in the second half of last year. The break in the downward trend in real spending implies a softer 4Q consumption decline than previously estimated. Export orders also continued to weaken at an accelerating pace last month as did input prices.S. This result is indicative of the worldwide nature of the current economic decline. 30 This U.8% rate of decline in 3Q 2008. its first monthly gain since May. The new orders index set an all-time record low of 22. while 64% reported declines. while 2 indicated no change. we forecast about a 1% pace of decline in the first half of 2009. A stunningly low 5% of respondents indicated rising orders in December. While consumer spending will remain weak all year. Durable and service spending rose 0. The share of respondents indicating lower payrolls hit 50% for the first time since early-1958! Export orders worsened significantly in December.4.6% and 0. The employment index also gapped lower to 29. high levels of consumer debt point to a prolonged period of below-trend consumption. The pace of decline should diminish as household spending falls into line with new lower levels of household net worth. Peter Kretzmer Economist (646) 855 1046 The manufacturing recession continued to worsen in December. The composite index fell to 32. while new orders fell at a record-setting pace. 2009 35 Aided by the boost to real disposable personal income provided by falling energy prices.

5 52. ISM Manufacturing ISM Manufactur ing: New Or der s Index SA. 0 52. 5 30. 5 Source: Institute for Supply Management /Haver Analytics. 5 60.Cross-Product Research January 2. 0 22. 0 60. 5 37. 0 37. 5 06 07 08 22. 0 30. 2009 35 Figure 37. 0 45. 50+=Incr easing 67. 5 45. 50+=Incr easing ISM Manufactur ing: New Expor t Or der s Index SA. 5 67. Situation Room 35 .

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