The FDIC has announced that it will now guarantee:
- Newly issued senior unsecured debt issued between October 14, 2008, and June 30, 2009, including promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. Prepayment of term debt instruments expiring during this period and replacement with FDIC-guaranteed debt will not be allowed. The amount of debt covered by the guarantee may not exceed 125 percent of debt that was outstanding as of September 30, 2008, that was scheduled to mature before June 30, 2009. For eligible debt issued on or before June 30, 2009, coverage would only be provided until June 30, 2012, even if the liability has not matured.
- Effective immediately, funds held by FDIC-insured banks in non-interest-bearing transaction deposit accounts until December 31, 2009.
… with fees …
Fees for coverage would be waived for the first 30 days. After the first 30 days, a fee would be imposed as follows
- For eligible senior unsecured debt, an annualized fee will be collected equal to 75 basis points multiplied by the amount of debt guaranteed under this program.
- For non-interest bearing transaction deposit accounts, a 10 basis point surcharge on the institution’s current assessment rate would be applied to deposits not otherwise covered by the existing deposit insurance limit of $250,000. Fees for the 10 basis point surcharge on the non-interest bearing transaction accounts over $250,000 will be collected through the normal assessment cycle.
- These fees will be accounted for separately on the books and records of the FDIC.
- A special assessment will be collected to cover any losses not covered by the fees to ensure no impact on the Deposit Insurance Fund or the U.S. taxpayer.
… and additional bureaucratic box-ticking …
Banks availing themselves of the guarantee program will be subject to supervisory oversight to prevent rapid growth or excessive risk-taking. Eligibility and use will be determined by the FDIC in consultation with the institution’s primary regulator.
Wow. The initial announcement by Paulson caused financials to tighten massively yesterday:
A rally in bank bonds spurred by U.S. Treasury Secretary Henry Paulson’s rescue plan may ease the way for financial companies to refinance $89 billion of debt maturing through the end of the year.
Bonds of Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. soared yesterday, reducing yields to an average of 6.46 percentage points more than Treasuries, after Paulson said the government would invest $250 billion in equity and guarantee new issues for three years. The so-called spread was a record 7.25 percentage points on Oct. 13, according to Merrill Lynch & Co. index data.
This broadens and deepens the Weekend Bank Rescues announced in Europe. I still feel that capital injection via preferred shares is preferable to the government writing a Credit Default Swap for a lousy 75bp.
Update: This is on top of the Commercial Paper rate guarantee:
Fed officials yesterday set the yield they will pay for commercial paper at about 1.1 percentage points less than the average cost for financial companies, weekly central bank data show. Policy makers last week announced emergency plans to buy the securities after the market shrank to a three-year low.
The discount indicates a potential cut in the cost of cash to 3.1 percent, or 2.1 percent if collateral is posted. General Electric Co.’s financing arm currently offers 3.85 percent, and Citigroup Inc. 4.6 percent, data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out.
The plan has been derided as insufficient:
Japan’s Prime Minister Taro Aso said the U.S. government must accelerate steps to prop up financial institutions or face mounting consequences that include slumping stock values.
The Bush administration said this week it plans to spend $250 billion buying stakes in thousands of financial firms to help halt a credit freeze.
“People think the $250 billion plan is insufficient and that’s why markets are falling,” Aso told lawmakers in parliament in Tokyo today. “They need to make a quick decision to inject capital.”