I 111th CONGRESS 1st Session H. R. 710 IN THE HOUSE OF REPRESENTATIVES January 27, 2009 Mr. Ackerman introduced the following bill; which was referred to the Committee on Financial Services, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To secure additional Tier I capital for the United States banking system from parties other than the Federal Government by providing authority to the Secretary of the Treasury to guaranty certain new preferred stock investments made by public pensions acting in a collective fashion, and for other purposes.

1.

Short title

This Act may be cited as the Public Retiree’s Investment Act of 2009.

2.

Findings

Congress finds the following: (1)The United States banking system’s ability to extend credit on a basis consistent with healthy economic activity is restricted by a need or desire to conserve capital in the face of anticipated losses. (2)A shortage of banking capital may continue to exist because private investors are generally unwilling to provide such capital given their inability to accurately assess the risk exposure of any individual institution while the Federal Government’s ability to function as a capital provider may be constrained by concerns regarding Federal control of the banking system as well its desire to use Federal funds in numerous areas besides capitalization of the banking system. (3)State and local public pension funds are long term investors whose constituents benefit from a well-capitalized banking system with the ability to extend credit broadly at all levels of the economy. (4)Certain State and local pension plans have broad investment powers under State law which would include the ability to form cooperative business endeavors solely owned by them or in concert with public pension plans in other States. (5)Certain of these public pension plans have indicated their willingness and ability to rapidly form and fund a vehicle to be mutually owned by them for the sole purpose of investing in preferred stocks of United States banking institutions subject to certain guaranties provided by the Secretary of the Treasury or other appropriate Federal Government officer or agency.

3.

Definitions

For purposes of this Act, the following definitions shall apply: (1)

Eligible investments

The term eligible investment means any preferred stock investment which meets the requirements of this Act by any public pension bank capital infusion fund. (2)

Public pension plans

The term public pension plan means any State and local pension plan that has broad investment powers and authority under State law, including the authority to establish, administer, and participate in cooperative business endeavors solely owned by the plan or other public pension plans. (3)

Public pension bank capital infusion fund

The term public pension bank capital infusion fund means any investment vehicle mutually owned by public pension plans for the sole purpose of investing in preferred stocks of United States banking institutions, subject to certain guarantees provided by the Secretary of the Treasury or other appropriate Federal Government officer or agency, that meets the requirements of this Act for such capital infusion funds. (4)

Qualified equity offering

The term qualified equity offering means the sale for cash, by a financial institution after the date of an investment by a public pension bank capital infusion fund in any eligible investment issued by such institution, of perpetual preferred stock or common stock which qualifies as Tier 1 capital of such financial institution. (5)

Reguarantee

The term reguarantee means a guarantee issued by a guarantor of the payment of, or the fulfillment of any other obligation under, a guarantee issued by another guarantor. (6)

Secretary

The term Secretary means the Secretary of the Treasury.

4.

Public pension plan investments in certain bank preferred stock instruments

(a)

Guarantee and reguarantee authority

The Secretary may guarantee eligible investments or reguarantee a guarantee of eligible investments. (b)

Requirements and procedures for guarantees

(1)

Term and other conditions of guarantees

Any guarantee or reguarantee provided by the Secretary under subsection (a) with respect to an eligible investment shall— (A)be an unconditional guarantee for the life of the eligible investment; and (B)shall cover the timely payment of dividends on, and the ultimate return of principal of, such eligible investment, in accordance with the terms of the eligible investment. (2)

Procedures

The process by which the Secretary shall be notified of a need to perform under a guarantee or reguarantee issue under subsection (a) and the manner in which the Secretary shall perform the duties of guarantor or reguarantor shall be mutually agreed to by the Secretary, the other guarantor, in the case of a reguarantee from the Secretary, and the public pension bank capital infusion fund. (c)

Terms of eligibility for public pension plans

(1)

Authorized under state law

The Secretary may not guarantee or reguarantee eligible investments of a public pension bank capital infusion fund under subsection (a) unless each public pension plan which has a mutual ownership interest in such capital infusion fund is authorized under State law to establish, or participate in the formation of, a wholly owned mutual fund or a limited liability corporation, in the case of joint ownership with other public pension plans. (2)

Choice of law issue

The powers of any public pension plan for purposes of this subsection shall— (A)in all instances be determined by the law of the domicile State of such public pension plans; and (B)in the case of a joint endeavor among public pension plans from different States, by a choice of law agreement (among the participating public pension plans) to which each State represented by a plan has granted full faith and credit. (d)

Terms of eligibility for eligible investments by a public pension bank capital infusion fund

(1)

Maximum amount per fund

The eligible investments of a public pension bank capital infusion fund shall be eligible for a guarantee or reguarantee under this section only if the aggregate amount of such investments by the fund do not exceed $50,000,000,000. (2)

Institution eligible for investments

Only an investment in preferred stock that meets the requirements of subsection (e) and has been issued by a financial institution which meets the definition of a qualifying financial institution under the TARP Capital Purchase Program established under the authority of the Emergency Economic Stabilization Act of 2008 may be treated as an eligible investment for purposes of this Act. (e)

Preferred stock requirements

Preferred stock meets the requirements of this subsection if the following terms and conditions are met by such stock: (1)

Security

The stock bears senior preferred status with a liquidation preference of $1,000 per share or higher as provided in the TARP Capital Purchase Program. (2)

Ranking

The stock is senior to common stock and pari passu with existing preferred shares other than preferred shares which by their terms rank junior to any existing preferred shares. (3)

Regulatory capital status

The preferred stock meets the requirement for treatment as Tier I capital for the financial institution which issued it. (4)

Term

The term of the stock is perpetual. (5)

Dividends

(A)

In general

The stock pays cumulative dividends at— (i)an initial rate of 8.5 percent per year; and (ii)after the end of the 1-year period beginning on the date of the enactment of this Act, at the prevailing reset rate determined in accordance with subparagraph (B). (B)

Reset rate

The term reset rate means the rate determined at the end of the 1-year period beginning on the date of the enactment of this Act and each 1-year period thereafter by adding together— (i)the yield prevailing as of the close of business of the date of the determination on 10-year United States treasury notes; and (ii)the difference between 8.5 percent and the yield prevailing as of the close of business on the date of the enactment of this Act on 10-year United States treasury notes. (6)

Redemption

(A)

Timing

The redemption of the stock is subject to the following conditions: (i)The stock may not be redeemed for a period of 3 years from the date of the initial investment by the public pension bank capital infusion fund, except with the proceeds from a qualified equity offering which results in aggregate gross proceeds to the financial institution which issued the stock of not less than 25 percent of the issue price of the stock. (ii)After the third anniversary of the date of the investment, the stock may be redeemed, in whole or in part, at any time and from time to time, at the option of the financial institution. (B)

Amount

All redemptions of the stock are at 100 percent of the issue price, plus any accrued and unpaid dividends and shall be subject to the approval of the primary Federal financial regulator of the issuing financial institution. (7)

Restrictions on Dividends

For as long as the preferred stock is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the preferred stock, or common shares (other than in the case of pari passu preferred shares’ dividends on a pro rata basis with the preferred stock) nor may the financial institution which issued the preferred stock repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the preferred stock, or common shares until such time as the preferred stock has been redeemed in whole. (8)

Voting Rights

The preferred stock is nonvoting, other than class voting rights on— (A)any authorization or issuance of shares ranking senior to the preferred stock; (B)any amendment to the rights of the preferred stock; or (C)any merger, exchange or similar transaction which would adversely affect the rights of the preferred stock. (9)

Appoint of directors

The stock instrument provides that if dividends on the preferred stock are not paid in full for more than 4 consecutive dividend periods, the Secretary may elect 2 directors to serve on the board of directors of the issuing financial institution until such time as full dividends have been paid for 4 consecutive dividend periods. (10)

Timing of guaranty payments

The payment of guaranty payments under this Act shall be pursuant to a policy mutually agreed to by the Secretary, the other guarantor, in the case of a reguarantee from the Secretary, and the public pension bank capital infusion fund which policy shall be consistent with the intent of the guarantee, as specified in section 4(b). (f)

Effective period of guarantee authority

Notwithstanding any other provision of this section, any guarantee or reguarantee under this subsection may only be provided on an eligible investment whose initial issuance is made before the end of the 3-year period beginning on the date of the enactment of this Act . (g)

Treatment under other law

A public pension bank capital infusion fund that is a mutual fund vehicle or limited liability corporation owned by one or more public pension plans and managed under contract by an appropriate service vender (as approved by the Secretary) who reports to the fund directly or through its chief investment officer shall be deemed to be a political subdivision of a State as that term is defined in section 414(d) of the Internal Revenue Code of 1986 and shall be exempt from taxation pursuant to section 115 of such Code. (h)

Reports

(1)

In general

In the case of any guarantee or reguarantee issued by the Secretary, under subsection (a), with respect to eligible investments, the guarantor of such eligible investments shall submit a report to the Congress (and to the Secretary, in any case in which the Secretary is the reguarantor) on the status of the guarantee or reguarantee. (2)

Contents

Each report submitted under paragraph (1) shall include, at a minimum— (A)the name of any institution issuing eligible investments for which a guarantee is in effect; (B)the face amount of each eligible investment covered by the guarantee; (C)the amount of dividends paid, declared and due under the terms of the eligible investment; and (D)the amount of any payments made by the guarantor as a result of the enactment of this Act.