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WASHINGTON, DC-The Treasury Department has released more details about its capital purchase program--the $250-billion capital injection it revealed last week. Some $125 billion is being made available to banks and financial institutions beyond the top nine institutions that initially signed on. Secretary Henry Paulson is urging all of the participating institutions to "deploy" the capital--i.e. lend it instead of using it to shore up balance sheets. Qualifying institutions can apply now; the deadline is Nov. 14.

The minimum subscription amount available is 1% of risk-weighted assets; the maximum subscription amount is the lesser of $25 billion or 3% of risk-weighted assets. Treasury will fund the senior preferred shares purchased under the program by year-end 2008. These senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu. They will pay a cumulative dividend rate of 5% per annum for the first five years and will reset to a rate of 9% per annum after year five. They will be non-voting and callable at par after three years.

Prior to the end of three years, the senior preferred may be redeemed with the proceeds from an offering of any Tier 1 perpetual preferred or common stock. Treasury may also transfer the senior preferred shares to a third party at any time. For its part, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution's common stock at the time of issuance, calculated on a 20-trading day trailing average. Companies participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance.

Foreign-owned banks or to non-bank financial firms such as insurance companies or hedge funds are not eligible for the program – but they can still take part in other elements of the Treasury's Troubled Asset Relief Program. The newly created Office of Financial Stability will decide which eligible banks that apply ultimately get the cash infusions; considerable weight given to the recommendations of bank regulators, according to Paulson.

It will be telling how many institutions wind up participating. Especially for local banks, receiving this cash infusion could be seen as a stigma. At the same time, anecdotal reports suggest that more banks than expected may be queuing up for the program, prompting Paulson to give assurance that the plan is sufficient to meet market demand. "Sufficient capital has been allocated so that all qualifying banks can participate," he said at a press conference Monday. "This program is designed to attract broad participation by healthy institutions and to do so in a way that attracts private capital to them as well.''

Instant Insights /

Treasury Implements Capital Purchase Program

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