Major Bank Transactions in 2008 Involving the FDIC

John F. Bovenzi Deputy to the Chairman & Chief Operating Officer Federal Deposit Insurance Corporation February 26, 2009 Overview

• Background • Bank Resolutions in 2008 •Majjgor Transactions Involving FDIC – IndyMac Bank – Washington Mutual Bank – Wachovia – Citigroup

2 Priority of Claims In a Receivership*

1. Administrative Expenses 2. Depos it Lia bilities 3. General Creditor Claims 4. Subordinated Obligations 5. Shareholders

*Secured creditor claims are paid to the extent there is adequate collateral 3 Resolution Strategies

• Closed Bank Options – Deposit Payoff – Purchase and Assumption Transaction (Bank Merger) – Bridge Bank/Conservatorship

•Open Bank Assistance – Financial Assistance – Bank Merger – Bridge Bank/Conservatorship

4 Least Cost Test

• A legal requirement

• FDIC must use the resolution alternative that results in the least cost to the Deposit Insurance Fund when compared to other resolution alternatives.

5 Systemic Risk Determination

• The Least Cost Test must be met except when such a transaction “would have serious adverse effects on economic conditions or financial stability” and an alternative resolution “would avoid or mitigate such adverse effects.”

• A Systemic Risk Exemption requires a two thirds majority vote by the Board of Directors of the FDIC and by the Board of Governors of the Federal Reserve System and the concurrence of the Secretary of the Treasury (in consultation with the President) . 6 2007 Reveals Problems in the Subprime Mortgage Market

July 3rd. Quarter

Major U. S. commercial banks Two Bear Stearns report substantial losses in hedge funds lose subprime mortgage and almost all their leveraged lending activities. assets when subprime mortgage Leading U.S. Investment banks values plummeted. disclose losses related to collateralized debt obligations (CDOs), and subprime mortgages.

7 2008

January March June July

More than 1 % of U. S. households in foreclosure in Fed lends $30 billion 2007, up from to JPMorgan Chase B of A buys 0. 6 % in 2006 to buy Bear Stearns. Countrywide.

Fed creates Primary Dealer IndyMac Credit Facilityy( (PDCF) fails. to aid market liquidity. 8 IndyMac Bank FSB

• $30 Billion Total Assets • $19 Billion Total Deposits • The 7th largest S&L and the 2nd largest independent mortgage lender in the U.S. • 33 branches in Southern California • 182 Loan Production Offices across the USU.S. 9 IndyMac Bank FSB

• Major lender in Alt-A, jumbo, subprime loans, and reverse mortgages. • Bank was funded by high cost deposits and Federal Home Loan Bank (FHLB) advances. • Securitization market vanished in late 2007. Increasing delinquencies and losses on loans eroded capital and lowered bond ratings for securitized loans.

10 IndyMac Bank FSB

IndyMac Residential Mortgage Loan Portfolio $ Billions •ALT-A $6.9 • Jumbo $3.3 • Subprime $2.0 • HELOC $1.5 • Reverse Mtgs. $1.1 • Agency Conforming $0.8 •Other $0.4 Total Mtg. Loans $16.0

11 IndyMac Bank FSB

• IndyMac failed rapidly and FDIC is appointed its receiver. IndyMac Federal Bank is created and placed into conservatorship. • $600 Million in Uninsured Deposits – FDIC pays 50% Advanced Dividend to uninsured depositors • Estimated Cost: $10.7 Billion • FDIC bears brunt of losses since IndyMac Bank’s funding consisted of: – $10 Billion in fully secured FHLB Advances – $19 Billion high-cost deposit base with little franchise value •Primarily brokered/money desk/internet deposits •Offered highest rates in U.S.

12 IndyMac Bank FSB Estimated Cost (()$ Billions)

Distribution of Claims Distribution of Losses • Sec. Claims $10.0 • Sec. Claims $0 • FDIC $18.4 • FDIC $10.7 • Uninsured Dep. $0.6 • Uninsur. Dep. $0.3 • Gen’l Creditors $0.3 • Gen’l Creditors $0.3 • Senior Notes $0. 0 • Senior Notes $0. 0 • Sub. Creditors $0.0 • Sub. Creditors $0.0

Total Claims $29.3 Total Losses $11.3

13 Sale of IndyMac Federal Bank

New IndyMac FSB consists of: • Retail bank – 33 branches with $6. 5 billion deposits • $16 billion loan por tfo lio an d $6. 9 billion securities • $157.7 billion of mortgage servicing • Financial Freedom & $20. 2 billion of reverse mortgage servicing

14 Sale of IndyMac Federal Bank

• IMB Management Holdings will pay FDIC $13. 9 billion • Loss sharing structure on covered assets • IMB will use FDIC’ s Loan Modification Program • Participation on $2 billion of Construction loans

15 September 2008

7th 15th 16th 19th

Conservatorships for Fannie Mae and Freddie Mac Lehman Bros. files bankruptcy.

B of A agrees to AIG obtains $85 billion purchase from the Federal Merrill Lynch Reserve Bank of NYkNew York. Treasury tiltemporarily guarantees money market funds against losses of u p to $50 billion 16 September 2008

21st 25th 29th

Fed approves applications of Goldman ShSachs and Morgan Stanley to become bank Washington holding companies. Mutual is closed and sold to JPMorgan Chase. FDIC approves financial assistance for Citigroup to acquire Wachovia. Wachovia is later purchased by Wells Fargo without government assistance. 17 Washington Mutual Bank September 2008 • $298. 8 Billion To ta l Asse ts • $151.2 Billion Total Deposits • The largest S & L and the 6th largest financial institution in the U.S. • Operat ed over 2 ,300 branc hes in 15 s ta tes • 3rd largest mortgage lender in U.S. • Was losing $3 billion in deposits per day bidby mid-Sep temb er 2008 18 Washington Mutual Bank

WAMU’s probl em mort gage portf oli o: • Option ARMs • Subprime • Home Equity Lines of Credit • Centered in California (49%) and Florida (10%) • Unseasoned portfolio – 50% of loans originated since 1-1-2006 • Poor underwriting – stated income , low documentation and/or high loan to value ratios

19 WhitWashington MtlBkMutual Bank

• WAMU became the largest bank/thrift failure in U.S. history • Resolution Transaction: Whole Bank Purchase and Assumption Transaction • No losses to the FDIC or to uninsured depositors

20 Washington Mutual Bank FDIC Marketing The FDIC off ered bidd ers fi ve diff eren t Who le Bank P&A options: 1. All li abiliti es assume d excep t pre ferre d s toc k 2. All liabilities assumed except preferred stock and su bor ditddbtdinated debt 3. All liabilities assumed except preferred stock, subditddbtdbordinated debt and sen ior dbtdebt 4. All deposits and secured liabilities assumed 5. All insured deposits and secured liabilities are assumed

21 Washington Mutual Bank

• JP Morgan Chase acquired the assets, deposits, secured liabilities and most general creditor claims • JPMC paid the FDIC $1.9 Billion • Claims of equity, subordinated and senior debt holders were not acquired

22 Washington Mutual Bank EtiEstimat tdCed Cos t ($ Billions)

Distribution of Claims Distribution of Losses • Sec. Claims $87. 0 • Sec. Claims $0 • FDIC $159.7 • FDIC $0 • Uninsured Dep. $8. 5 • Uninsured Dep. $0 • Gen’l Creditors $8.7 • Gen’l Creditors $0* • Senior Notes $7.1 • Senior Notes $5.1 • Sub. Creditors $11.8 • Sub. Creditors $11.8 Total Claims $282. 6 Total Losses $16. 9

*JPMC did not assume borrower and senior bondholder claims

23 Wacho vi a Cor por ati on September/October 2008 Wachovia Corp. • $781.9 billion total assets • $475.2 billion deposits Wachovia Bank, N.A. • $671 billion total assets • $450. 9 total deposits • The 4th largest bank in the U.S. • Operated 3,400 branches in 21 states. • Financial condition deteriorated due to its portfolio of pay-option adjustable rate mortgages (ARMs), commercial real estate portfolio, and weakened liquidity. • Acquired $65 billion in pay-option ARMs from World Savings in 2007. These loans had deteriorating values, increasing delinquencies, and were requiring greater loss provisions.

24 Wachovia Corporation

On F rid ay S ept emb er 26 , 2008 mar ke t accep tance of Wachovia liabilities ceased as: • Stock pri ce pl unge d • Credit default spreads widened by 1,400 points • Some parties declined to advance overnight funds to Wachovia Bank • Others advised they needed greater collateral for transactions with Wachovia Bank • Additional funding commitments/outflows were rapidly approaching

25 Wachovia Corporation

PdltiProposed resolution: • The syypstemic risk exemption was invoked. • A resolution transaction was arranged with Citicorp. – Loss sharing on $312 billion asset pool – Citigroup to absorb up to $42 billion of losses – Any additional losses assumed by FDIC – FDIC granted $12 billi on in pre ferre d stoc k and warrants for bearing this risk.

26 Wachovia Corporation

• WhiWachovia was itdinstead acqu idbWllFired by Wells Fargo, who was able to buy Wachovia without FDIC assistance.

• On S ept emb er 30 T reasury i ssued No tice 2008- 83, which gave acquiring banks a greater tax break for acquiring troubled banks. This ruling lifted the cap on losses that could be deducted for tax purposes, thereby shielding future income, and possibly past income, from taxes.

27 October 2008

3rd 7th

Congress passes the Emergency Economic FDIC adopts a restoration plan for the Stabili za tion A ct of 2008 , DiIDeposit Insurance F Fdund. which authorizes the $700 billion Temporary Depppyosit insurance temporarily increases Asset Relief Program to $250,000 in the Emergency Economic (TARP). Stabilization Act of 2008.

Fed creates the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop to U.S. issuers of commercial paper. 28 October –November 2008

Oct 14th Nov 23rd

The FDIC announces the Temporary Liquidity Guarantee Program (TLGP) to free up bank liquidity. .

Treasury announces the Capital The FDIC , Treasury and the Purchase Program where Federal Reserve announce $250 billion of the $700 billion an assistance package for Citigroup. TARP money will be used to purchase bank stock, $125 billion of which will be provided to the nine largest U.S. banks. 29 Citi gr oup In c. November 2008

• $2.1 trillion total assets • $803 billion total deposits (including foreign deposits) • The largest consumer finance lender in the world • A world leader in credit card lending, mortgage serviiicing, s tdtuden tlt len ding, pr iva te ban king, an d private wealth management

30 Citigroup Inc.

Citiban k N. A. (represen ts 63% asse ts o f Citigroup Inc.) • Operates in > 100 countries •Opp,erates > 1,000 branches in U.S. • $1.2 Trillion Total Assets • $749 Billion Total Deposits • $612 Billion Foreign Assets* • $554 Billion Foreign Deposits* *Held in Citibank or in foreign entities

31 Citigroup Inc.

• Transaction: Open Bank Assistance involving the U.S. Treasury’s Troubled Asset Relief Progg(ram (TARP ), the FDIC and the Federal Reserve

• The systemic risk exemption was invoked.

32 Citi gr oup In c.

Key Features of Open Bank Assistance Package: • Guarantee on specific asset pool ($301 Billion) • Loss sharing protocol (10 yr. residential real estate / 5 yr. commercial real estate loans) – Citigroup absorbs first loss of $39.5 billion, then – USG & Citigroup share losses 90%/10%

33 Citigroup Inc. • USG (U. S. Government) Loss Positions: -TARP assumes 2nd loss up to $5 Billion -FDIC assumes 3rd loss up to $10 Billion -Federal Reserve funds remaining assets if necessary •Citiggppyroup pays for these guarantees: -$4 billion in preferred stock with 8% rate to Treasury -$3 billion in preferred stock with 8% rate to FDIC

34 Citigroup Inc.

• Citigroup issues $20 Billion preferred stock with 8%%y rate to U.S. Treasury

• Citigroup will use FDIC’ s Mortgage Modification Program; will restrict dividends and executive compensation

• Expected cost to Treasury, FDIC is $0

35 Bank Resolutions in 2008

25 Bank/Thrift Failures • $361 Billion Total Failed Bank Assets • $303 Billion Assets Assumed at Resolution • $194 Billion Total Deposits – $681 Million Uninsured Deposits – $390 million Uninsured Deposits (net of dividends paid as of year end 2008) • $17. 9 Billion Projected Loss to FDIC – Equals 4.95% of total failed bank assets

36 Bank Resolutions in 2008

24 failures without Washington Mutual Bank Transaction • $62. 5 Billion To ta l Asse ts • $45.9 Billion Assets Assumed at Resolution • $42. 9 Billion Total Deposits – $681 Million Uninsured Deposits – $390 million Uninsured Deposits (net of dividends paid as of EOY 2008) • $17.9 Billi on P roj ect ed L oss to FDIC – Equals 28.58% of total failed bank assets

37 Thank You!

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