On Friday, the FDIC Board of Directors adopted as final a previous interim rule that extends the Temporary Liquidity Guarantee Program (TLGP) and imposes new fees on guaranteed debt and a final rule with only minor changes from the interim rule that includes mandatory convertible debt (MCD) in the TLGP.

Under the first final rule, the TLGP's Debt Guarantee Program (DGP) is extended to permit depository institutions participating in the DGP to continue issuing debt after March 31, 2009 (the original expiration date) until October 31, 2009, with the FDIC's guarantee on debt issued after April 1, 2009, expiring on December 31, 2012 (as compared to June 30, 2012, for debt issued before April 1. Other participating entities (such as bank holding companies and certain savings and loan holding companies) that did not issue FDIC guaranteed debt before April 1, 2009, must submit an application and receive FDIC approval to receive an extension. The final rule also imposes surcharges on certain debt issued after April 1, 2009..

Although the FDIC received comments suggesting a number of improvements to its interim rule regarding MCD, the FDIC Board chose not to make any significant revisions to the rule as proposed, clarifying only the FDIC's obligation to pay principal and interest through the mandatory conversion date, rather than “through maturity” as provided in the interim rule. The FDIC Board largely ignored comments received by the public that requested that the FDIC:

  • Permit structural enhancements that would allow interest payments on MCD to be tax deductible;
  • Eliminate the prior application requirement for issuing MCD;
  • Coordinate with the Federal Reserve to permit MCD to qualify as Tier 1 capital; and
  • Allowing entities that issue MCD to use the proceeds of the issuance to replace other non-FDIC guaranteed debt and other regulatory capital instruments, including Capital Purchase Program obligations .

The FDIC's refusal to make the TLGP more hospitable to issuers of MCP may indicate deep ambivalence about inclusion of MCP in the TLGP in the first place. As it stands, the MCP component of the TLGP is highly inefficient and unlikely to attract much issuer or investor interest.