Emergency Economic Stabilization Act of 2008: US Government Capital Injections

This post comes to us from Davis Polk & Wardwell partners Samuel Dimon, Randall D. Guynn, Michael Kaplan, Mark Mendez, Margaret E. Tahyar, and William L. Taylor who advised the Federal Reserve Bank of New York on the plan discussed in the memo.

In the wake of intense pressure in the global credit markets and continued turmoil in the stock markets, the US Treasury Department, in coordination with other G-7 governments, recently expanded its plan to restore confidence in the US banking system.

Wielding the extraordinary discretion recently granted to it by Congress, the US government announced a plan to inject $250 billion of capital directly into the US banking system, to guarantee the short-term debt of most US banks and thrifts and to eliminate FDIC insurance limits for noninterest bearing accounts. Under the plan, the Secretary of the Treasury, the Chairman of the FDIC and the Chairman of the Federal Reserve Board jointly announced the following:

  • Treasury will use the full $250 billion it currently has available under the Troubled Asset Relief Program (“TARP”) to purchase preferred stock and warrants for common stock of the nine US bank holding companies that are systemically important and of other healthy regional and community banks;
  • The FDIC will use its emergency powers to guarantee through June 30, 2012 certain senior unsecured debt issued by eligible banking institutions; and
  • The FDIC will provide unlimited insurance through 2009 for non-interest bearing deposit accounts, a move primarily designed to protect the payroll and working capital accounts of small and medium-sized businesses.

This memorandum analyzes the implications of these developments and the federal government’s evolving response to the financial crisis.

The memo is available here.

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