On December 31, 2008, the Treasury Department unveiled guidelines for the Asset Guaranty Program (AGP) forming part of the massive Emergency Economic Stabilization Act (EESA). Pursuant to the EESA, Treasury was required to establish "a program to guarantee troubled assets originated or issued prior to March 14, 2008, including mortgage backed securities . . . if Treasury also establishes an asset purchase program." Treasury included guarantee provisions within the November 2008 agreement with Citigroup, assuming a second-loss position after Citigroup on a number of mortgage-related assets. The guidelines released by the Treasury addressed the scope of these guarantees in the context of establishing the AGP.
Treasury's guidelines implicitly reject a proposal made to the department by Aon that would have used the statutory language to establish a large insurance pool, backstopped by Treasury to provide insurance to financial institutions guaranteeing the payment of principal and interest on their troubled assets, specifically mortgages and mortgage-backed securities. The Treasury stated that the fundamental purpose of the AGP is to "foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security." Notably, the Treasury indicated that the AGP would be applied only with "extreme discretion" in order to improve market confidence in a "systemically significant institution" and in the financial markets generally. Moreover, according to the Treasury, "it is not anticipated that the program will be made widely available."
The AGP provides guarantees for assets held by "systemically significant financial institutions" that face a considerable risk of losing market confidence due primarily to risky assets. In accordance with the program, the Treasury would assume a loss position on certain assets held by the qualifying financial institution. The assets assumed by Treasury would be selected through consultation between Treasury and the financial institution receiving the guarantee. Treasury will collect a premium for the assets, and, as mandated by the EESA, an actuarial analysis will be performed to ensure that the premium is no less than the expected value of the losses to the Troubled Assets Recovery Program from the guarantee. The government will also provide the institution receiving the guarantee with a set of portfolio management guidelines. On a case-by-case basis, Treasury is permitted to use the AGP in coordination with a broader guarantee involving additional agencies of the government.
Treasury established guidelines for the determination of eligible financial institutions. In determining eligibility, Treasury may consider the following: (1) the extent to which destabilization of the institution would threaten the viability of creditors and parties exposed to the institution; (2) the extent to which the institution faces a loss of confidence stemming from the risky assets; (3) the number and size of similarly situated financial institutions; (4) whether the financial institution is "sufficiently important to the nation's financial and economic system" so that a loss of confidence would cause "major disruptions" to credit markets and uncertainty; and (5) the extent to which the institution has access to other sources of capital and liquidity. Eligibility of financial institutions for asset guarantees will be determined by Treasury on a case-by-case basis.