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Document Type

Case Studies

Abstract

Following the collapse of Lehman Brothers in September of 2008, banks faced extreme difficulty in issuing new debt and finding affordable sources of funds due to heightened fears over counterparty solvency and liquidity risk. By the end of September, the TED spread had spiked to 464 basis points, and issuance of commercial paper fell 88%. On October 14th, to boost confidence and lower short-term financing costs, the Federal Deposit Insurance Corporation announced the Debt Guarantee Program (DGP) as part of the Temporary Liquidity Guarantee Program (TLGP). Under the DGP, the FDIC guaranteed in full a limited amount of senior unsecured debt newly issued by insured depository institutions and certain bank holding companies that did not opt out of the program. Other affiliates of insured depositories were also able to apply to the FDIC for eligibility on a case-by-case basis. If an institution defaulted on a guaranteed bond, the FDIC would cover all payments on interest and principal. In exchange for receiving the guarantee, institutions paid a fee based on the bond’s maturity. The issuance window was set to expire on June 30, 2009, but was extended to October 31, 2009. An additional Emergency Guarantee facility, created at the time of extension, had an issuance window that expired on April 30, 2010, but was never used. Over the course of the program, the 122 participating institutions raised over $600 billion in guaranteed debt. The FDIC paid out about $153 million due to defaults from six institutions, and collected $10.2 billion in fees.

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