Zhenyu Wang and Paul Glasserman*

The Capital Assistance Program (CAP) was announced on February 10, 2009, in a joint statement by the U.S. Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision outlining a financial stability plan.
The Capital Assistance Program (CAP) was announced on February 10, 2009, in a joint statement by the U.S. Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision outlining a financial stability plan. The first phase of the plan called for a stress test to assess the capital needs of nineteen major U.S. financial institutions in the event of a worse-than-expected recession. In the second phase, banks requiring additional capital that were unable to raise sufficient private capital would sell to the Treasury convertible preferred securities and warrants on common shares. The combination of the stress test, which provided information about the downside risk faced by the largest U.S. banks, and the CAP securities, which provided backup capital to mitigate this downside risk, was an unprecedented regulatory response to a financial crisis. In this post, we discuss the valuation of CAP securities. The valuation described in our 2009 New York Fed staff report is aligned with the stock market reaction to the announcement of the CAP terms.