The recently-enacted Emergency Economic Stabilization Act (“EESA”), combined with the September 22, 2008 private equity policy statement from the Federal Reserve (12 CFR Part 225.144; the “PE Statement”), and IRS Notice 2008-83 (the “IRS Notice”) which provides tax incentives for acquisitions of “troubled” banking institutions, all combine to provide enhanced M&A opportunities for financial services companies.

As always, consideration of some or all of these opportunities must be reviewed and analyzed on a case-by-case basis and is dependent on the specific individual circumstances and strategic plans of the institution.

Enhanced Balance Sheet Liquidity Opportunities

The EESA provides a ready vehicle for disposition of problem assets and a corresponding ability of financial institutions to divest themselves of impediments to potential acquisition transactions as buyer and as seller. Not that participation in the program doesn’t come with some significant baggage, but that “baggage” may be more transitory when compared to the potential long-term opportunities that participation in the loan sale program may provide. With Treasury as a ready buyer or guarantor, institutions may be more free to adjust their balance sheets to accommodate potential transactions. Postacquisition EESA disposition opportunities may also contribute to enhanced survivor profitability for acquisitions of troubled institutions as noted below.

While each institution needs to assess and analyze the impact of participation in the programs provided by the EESA on an individual basis, participation may provide benefits to the institution from an M&A perspective if M&A opportunities are part of the institution’s strategic plan.

Enhanced Opportunities for Private Equity

The expanded private equity opportunities envisioned in the PE Statement provide enhanced situations for institutions to secure investor equity participation on a short or long-term basis without triggering Federal Reserve bank holding company regulation (and restrictions) for the investor. These expanded opportunities are available for large or for small investors, but may have particularly significant implications for large investors as set forth below. Again each institution needs to carefully analyze and assess its particular situation and strategic plans, but the new Fed guidance expands opportunities for institutions to seek and to obtain equity participation from investors who may have been reluctant to do so previously.

Enhanced Tax Incentive: Built-in Losses

The IRS Notice provides a significant impetus for healthy banking institutions to look closely at potential “troubled” bank targets with built-in unrealized potential portfolio losses (loans and other “bad debt”) that the acquirer will now be able to use in a post-acquisition environment. Eligible loans and debt are not limited to mortgage-related assets, and straight asset purchases are not covered. The new opportunities provided by the IRS Notice are intended to stimulate interest in acquisitions of institutions with asset quality issues, and may change the math significantly for prospective acquirers. Note that the IRS Notice applies only to “banks,” which includes thrifts as well as special purpose banks and trust companies. The changes will help healthy banking institutions take advantage of losses otherwise surrendered in an acquisition to offset post-acquisition operating income, and may make deals with “troubled” banking institutions potentially far more attractive. Tax treatment of potential postmerger sales of troubled assets to Treasury under the EESA may also enhance the impact of the Notice.

Combined Effect

A combination of some or all of the opportunities available under the new EESA, the recent PE Statement, and the recent IRS Notice make potential acquisitions of (or significant investments in) “troubled” institutions far more palatable and more viable for healthy survivors.