The Treasury Department outlined details of its plan to purchase up to $250 billion of senior preferred shares in financial institutions. Under the Capital Purchase Program, the minimum subscription amount available to a participating institution is 1% of risk-weighted assets, while the maximum is the lesser of $25 billion or 3% of risk-weighted assets.
The senior preferred shares will qualify as Tier 1 capital, will rank senior to common stock, will pay a cumulative dividend rate of 5% annually for the first five years, and will reset to an annual rate of 9% after year five. The shares will be nonvoting, other than class voting rights on matters that could adversely affect the shares.
The shares will be callable at par after three years. The Treasury Department can also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, the Treasury Department will receive warrants to purchase common stock with an aggregate market price equal to 15% of the senior preferred investment.
Companies participating in the program must adopt the Treasury Department’s standards for executive compensation and corporate governance for the period during which the department holds equity issued under the program. These standards generally apply to the CEO, CFO and the next three most highly compensated executive officers. Participants must meet certain standards regarding senior executive compensation, including the requirement of a clawback of any bonus or incentive compensation paid based on inaccurate statements and prohibitions against golden parachutes.
The program is available to qualifying U.S.-controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate by Nov. 14. The Treasury Department will fund the senior preferred shares purchased under the program by the end of 2008 after consultation with the appropriate federal banking agency. A term sheet is available here.