BOARO OF GOVERNORS
 

OF'THE
 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D. C. C!OSSI 

SCOTT G. ALVAREZ 

GENERAL COUNSEL· 

July 18, 2007 

B. Robbins Kiessling, Esq.
 

Cravath, Swaine & Moore LLP
 

Worldwide Plaza
 

825 Eighth Avenue
 

New York, New York 10019-7475
 

Dear Mr. Kiessling: 

This responds to your letter of July 13,2007, and related correspondence,
 

requesting confirmation that each ofPerry Capital LLC ("Perry"), Marathon Asset
 

Management LLC ("Marathon"), Tennenbaum Capital Partners, LLC ("Tennenbaum"),
 

and D. E. Shaw & Co. L.P. and D. E. Shaw & Co., L.L.C. ("D. E. Shaw" and,
 

collectively with Perry, Marathon, and Tennenbaum, the "Investors")' would not be
 

deemed to control Doral Financial Corporation ("Doral Financial"), San Juan, Puerto
 

Rico, or any Doral Investment Entity (as defined below) for purposes ofthe Bank
 

Holding Company Act ("BHC Act") on consummation of a proposed investment by the
 

Investors in Doral Financial.
 

The Proposal 

Bear Stearns has arranged a proposed transaction to provide Doral Financial with 

a significant amount of new equity financing. Under the proposal, numerous investors, 

including Bear Stearns and the Investors, would invest a total of approximately 

$627 million in Doral Holdings, L.P. ("Holdings LP"), a limited partnership that is 

organized under the laws ofthe Cayman Islands. The sole general partner ofHoldings 

LP would be Doral GP Ltd. ("Holdings GP"), a company organized in the Cayman 

Islands.2 Holdings LP then would contribute approximately $627 million to Doral 

Holdings Delaware, LLC ("Holdings LLC" and, collectively with Holdings LP and 

Holdings GP, the "Doral Investment Entities"), a limited liability company organized 

under the laws ofDelaware, in return for 99.5 percent of the limited liability interests of 

1 For purposes of this letter, the term Investor includes, with respect to any of Perry, 

Marathon, Tennenbaum, and D. E. Shaw, the investment fund or funds advised or 

controlled by it that will be making the proposed investment in Doral Financial. 

2 Holdings GP will not have an equity investment in Holdings LP. 
2
 

Holdings LLC. 3 Holdings LLC then would purchase approximately $610 million of 

newly issued voting common stock ofDoraI Financial, which would represent 

approximately 90 percent ofthe voting shares ofDoraI Financial. Each Doral Investment 

Entity would become a bank holding company. 

Under the proposal, each ofthe Investors would acquire voting limited partner 

interests in Holdings LP that represent between approximately 9.1 and 9.5 percent ofthe 

total equity and between approximately 9.6 and 9.9 percent of the voting securities of 

Holdings LP. Bear Stearns would acquire approximately 4.5 percent ofthe total equity of 

Holdings LP in the form ofnonvoting limited partner interests, and limited partner 

investors in certain Bear Stearns partnerships, all unaffiliated with Bear Stearns and the 

Investors, would own voting limited partner interests in Holdings LP that represent 

approximately 16 percent ofthe total equity and voting interests ofHoldings LP. 

Each ofthe Investors proposes to own not more than 9.9 percent ofthe voting 

shares of Holdings GP. An affiliate ofBear Stearns would own 4.9 percent ofthe voting 

shares ofHoldings GP. The remaining voting shares of Holdings GP would be owned by 

[' .Jlimited partner investors in Holdings LP that are not affiliated with the 

Investors or Bear Stearns. Each Investor in Holdings GP would be party to a 

shareholders agreement" under which each Investor and Bear Stearns (the "Designating 

Members") would have the ability to designate one member ofthe five-member board of 

directors of Holdings GP.S Actions by the board ofdirectors of Holdings GP generally 

would be by majority vote, and in no circumstance would a single director be able to 

block an action by the board ofdirectors ofHoldings GP. After consummation ofthe 

proposal, the board of directors ofDoraI Financial would have eleven members, 

including the five directors ofHoldings GP designated by the Designating Members. 

3 Holdings LP also will be the managing member of Holdings LLC. Several investment 

partnerships controlled by the merchant banking group ofBear Stearns would acquire the 

remaining 0.5 percent of the limited liability interests of Holdings LLC. 

4 The Investors have represented that the shareholders agreement conforms to the 

Board's interpretation on voting trusts and buy-sell agreements. Letter dated May 4, 

1972, from Tynan Smith, Secretary of the Board, to the Presidents ofthe Federal Reserve 

Banks (Federal Reserve Regulatory Service 4-185.5). The agreement relates only to the 

equity of a single bank holding company; terminates within 25 years; serves no function 

other than to impose certain transfer and voting restrictions on equity holders in 

Holdings GP; and involves parties who are not, and will not become, parties to any 

similar agreement with respect to any other banking or nonbank organization. 

S In the event that one ofthe five Designating Members reduces its interest in 

Holdings LP by 50 percent or more, the remaining Designating Members will select a 

replacement designating investor that is not affiliated with any ofthe remaining 

Designating Members. 
., 

.) 

E
 

The Investors have made certain passivity commitments with respect to the Doral 

Investment Entities, Doral Financial, and their subsidiaries (collectively, the "Doral 

Entities") that are substantially similar to the passivity commitments that the Board has 

relied on in previous cases in finding that an investment was non-controlling," Under 

these commitments, among other things, each Investor commits not to take any action 

that may cause the Doral Entities to become a subsidiary ofthe Investor; not to acquire or 

retain shares ofthe Doral Entities that would cause the Investor, together with its officers, 

directors, and affiliates, to own 10 percent or more of a class ofvoting securities ofthe 

Doral Entities; not to exercise or attempt to exercise a controlling influence over the 

management or policies ofthe Doral Entities; not to have or seek to have more than one 

representative serve as a director ofthe Doral Entities; and not to have or seek to have 

any representative serve as an officer, agent, or employee ofthe Doral Entities. Each 

Investor also commits that it will not enter into any business relationships with Doral 

Financial and its subsidiaries, except that the Investor (i) may establish one or more 

deposit accounts on market terms with a subsidiary depository institution of Doral 

Financial in an aggregate amount up to $500,000; and (ii) may purchase assets from 

Doral Financial and sell assets to Doral Financial in amounts up to 10 percent ofthe 

assets originated or purchased by Doral Financial in any two-year period (so long as the 

Investor also complies with the 5 percent asset purchase limit in section 4(f)(2)(A)(ii) of 

the BHe Act as ifit were subject to such section). 

Each ofthe Investors also has made certain representations regarding its 

independence from the other investors in the Doral Investment Entities. Among other 

things, each Investor has represented that it: (i) is not an affiliate of any other investors in 

the Doral Investment Entities; (ii) reached its decision to invest in the Doral Investment 

Entities independently from the other investors; (iii) has entered into no agreements with 

the other investors for the purpose of controlling the Doral Investment Entities (other 

than as set forth in the organizational documents of the Doral Investment Entities and in 

the Holdings GP shareholders agreement); (iv) has entered into no agreements with the 

other investors regarding voting its interest in the Doral Investment Entities in concert 

with the other investors, or otherwise to act in concert with the other investors with 

respect to the Doral Investment Entities (other than as set forth in the organizational 

documents ofthe Doral Investment Entities and in the Holdings GP shareholders 

agreement); and (v) will not consult with the other investors regarding the voting of its 

interest in the Doral Investment Entities (other than as provided in the Holdings GP 

shareholders agreement regarding the election of directors). In addition, none ofthe 

Investors can restrict any other investor's ability to transfer its interests in the Doral 

Investment Entities. 

6 These passivity commitments are set forth in the attachment to this letter. 
4
 

Legal Framework 

For purposes of the BHC Act, a company has control over another company if the 

company (i) directly or indirectly or acting through one or more other persons O\\11S, 

controls, or has power to vote 25 percent or more of any class of voting securities ofthe 

other company; (ii) controls in any manner the election of a majority of the directors of 

the other company; or (iii) directly or indirectly exercises a controlling influence over the 

management or policies ofthe other company.i The Board's Regulation Y also sets forth 

a set ofrebuttable presumptions of control.8 

Under the proposal, an Investor only would be deemed to control a Doral Entity 

for purposes ofthe BHC Act ifthe Board were to find that the Investor exercised a 

controlling influence over the management or policies ofthe Doral Entity. No Investor 

would own, control, or hold with power to vote 25 perce~t or more of any class of voting 

securities of, or control the election of a majority of the directors of, any Doral Entity." 

In addition, no Investor would trigger any of the rebuttable presumptions of control in 

Regulation Y with respect to any Doral Entity. 

Discussion and Analysis 

The size and nature ofthe equity investment by each Investor in the Doral 

Investment Entities, when combined with each Investor's director representation at the 

Holdings GP and Doral Financial level, raise the issue ofwhether each Investor would 

have a controlling influence over the management or policies of any Doral Entity. 

A number ofmitigating features, described above, constrain the ability of each 

Investor to influence the management and policies of the Doral Entities, including: 

•	 The investment by each Investor would represent less than 10 percent of 

the voting interest and total equity of each Doral Entity. 

•	 Each Investor has provided passivity commitments that the Board has 

relied on previously to make non-control determinations in the context of 

similar investments. Although the commitments would pennit each 

Investor to engage in the business relationships with Doral Financial 

described above, these relationships would be limited in amount, nonexclusive, and on ann's length terms, 

7 12 U.S.C. § 1841(a)(2); 12 CFR 225.2(e). 

8 See 12 CFR 225.31(d). 

9 There is no agreement among the investors in Holdings GP regarding the selection of 

directors ofHoldings GP, other than as set forth in the Holdings GP shareholders 

agreement. [ .. 
5
 

•	 Each Investor has provided substantial representations regarding its 

independence from the other investors in the Doral Investment Entities. 

In view of all the facts of record in this case - including in particular the attached 

passivity commitments made by each Investor and the small relative size of the voting 

and equity investment by each Investor in the Doral Entities - staff would not at this time 

recommend that the Board find that the proposal would allow any Investor to exercise a 

controlling influence over the management or policies of any Doral Entity for purposes of 

the BHC Act. 

This opinion is limited to the transactions described above and is based on the 

facts, representations, and commitments included in your letter and related 

correspondence. The commitments are deemed to be conditions imposed in writing by 

the Federal Reserve System in connection with its findings and decision on the 

applications and notices filed by the Doral Investment Entities to obtain prior approval of 

the Federal Reserve System pursuant to sections 3 and 4 of the BHC Act to acquire Doral 

Financial and its subsidiaries. Any material change in the facts presented may result in a 

different conclusion and should be reported to Board staff. 

Sincerely, 
APPENDIX 

Investor Commitments 

Investor commits to the Board that, for so long as such investment shall be in effect, the 

Investor will not, directly or indirectly: 

(1) take any action that may cause Holdings GP, Holdings LP, Holdings LLC, Doral
 

Financial or any oftheir subsidiaries to become a subsidiary ofthe Investor;
 

(2) acquire or retain shares that would cause the Investor, together with its officers, 

directors and affiliates, to have an interest that would equal to or exceed 10% of the 

outstanding voting shares of Holdings GP, Holdings LP, Holdings LLC, Doral Financial 

or any oftheir subsidiaries; 

(3) exercise or attempt to exercise a controlling influence over the management or
 

policies ofHoldings GP, Holdings LP, Holdings LLC, Doral Financial or any oftheir
 

subsidiaries;
 

(4) have or seek to have any representative serve as an officer, agent or employee of
 

Holdings GP, Holdings LP, Holdings LLC, Doral Financial or any oftheir subsidiaries;
 

(5) enter into any other banking or non-banking transaction with Holdings GP, Holdings 

LP, Holdings LLC, Doral Financial or any oftheir subsidiaries, except that (i) the 

Investor may establish and maintain deposit accounts with Doral Bank or Doral Bank, 

FSB, provided that the aggregate balances of all such accounts for the Investor do not 

exceed $500,000 and that the accounts are maintained on substantially the same terms as 

those prevailing for comparable accounts of persons unaffiliated with Doral Bank or 

Doral Bank, FSB, (ii) the Investor may purchase from Doral Financial and its 

subsidiaries, and sell to Doral Financial and its subsidiaries, mortgages and mortgagebacked securities (including those serviced by Doral Financial or its subsidiaries) in 

transactions in which Doral Financial or its subsidiary receives no less than three 

competitive bids from nationally recognized financial institutions, provided that, on a 

trailing twenty four month basis, such transactions do not exceed 10% ofthe dollar value 

of all loans originated or purchased from third parties by Doral Financial and its 

subsidiaries, and (iii) the Investor may enter into transactions with Doral Financial and its 

subsidiaries not involving mortgages or mortgaged-backed securities (such as purchases 

or sales of govenunent securities, agency securities or derivative transactions), provided 

that such other transactions do not constitute, on a trailing twenty four month basis, more 

than 10% of the dollar value of such transactions entered into by Doral Financial and its 

subsidiaries; provided further that all such transactions between the Investor, on the one 

hand, and Holdings GP, Holdings LP, Holdings LLC, Doral Financial or any of their 

subsidiaries, on the other hand, will be on an arm's length basis and will not restrict 

Holdings GP, Holdings LP, Holdings LLC, Doral Financial or any of their subsidiaries 

from entering into transactions of the same type with other parties. In connection with the 

foregoing, and although the Investor does not own or control an institution that would 
7
 

cause it to be subject to Section 4(f)of the BHC Act, the Investor agrees to comply with 

the asset acquisition limitations of Section 4(f)(2)(A)(ii) ofthe BHC Act with respect to 

the insured depository institution subsidiaries ofDoral Financial; 

(6) seek or accept representation on the board ofdirectors ofHoldings GP, Holdings LP, 

Holdings LLC, Doral Financial or any of their subsidiaries, except that the Investor may 

be represented on the board ofdirectors ofHoldings GP by one director, who may also 

serve on the board of directors of Doral Financial; 

(7) propose a director or slate ofdirectors in opposition to a nominee or slate ofnominees 

proposed by the management or board of directors ofHoldings GP, Holdings LP, 

Holdings LLC, Doral Financial or any oftheir subsidiaries; 

(8) solicit or participate in soliciting proxies with respect to any matter presented to the 

shareholders of Holdings GP, Holdings LP, Holdings LLC, Doral Financial or any of 

their subsidiaries, except to the extent that the Investor may be deemed to solicit or 

participate in soliciting proxies as a result of being represented by one director on the 

board of directors ofDoraI Financial as described in paragraph 6 above; 

(9) attempt to influence the dividend policies; loan, credit, or investment decisions or 

policies; pricing of services; personnel decisions; operations activities, including the 

location of any offices or branches or their hours of operation, etc.; or any similar 

activities or decisions ofHoldings GP, Holdings LP, Holdings LLC, Doral Financial or 

any of their subsidiaries, except to the extent the Investor may be deemed to have such 

influence as a result of being represented by one director on the board of directors of 

Holdings GP and Doral Financial as described in paragraph 6 above; or 

(l0) dispose or threaten to dispose of shares of Holdings GP, Holdings LP, Holdings LLC 

or Doral Financial directly or indirectly held by it in any manner as a condition of 

specific action or nonaction by Holdings GP, Holdings LP, Holdings LLC or Doral 

Financial.