BOARD or GDV[RNDRS
 

Of'THE
 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D. L ~0551

SCOTT G. ALVAREZ 

GENERAL COUNSEL· 

July 18, 2007 

Gary Rice, Esq. 

Simpson Thacher & Bartlett LLP 

425 Lexington Avenue 

New York, New York 10017-3954 

Dear Mr. Rice: 

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

requesting confirmation that a proposed investment in Doral Financial Corporation
 

("Doral Financial"), San Juan, Puerto Rico, a registered bank holding company, would
 

not cause The Bear Steams Companies, Inc. ("Bear Steams"), New York, New York, to
 

lose certain grandfather rights that it has under section 4(f) ofthe Bank Holding
 

Company Act ("BHC Act"). J You also have requested confirmation that Bear Steams
 

would not be deemed to control Doral Financial or any Doral Investment Entity (as
 

defined below) for purposes of the BHC Act as a result of its proposed investment in, and
 

business relationships and interlocks with, 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 Steams, would invest a total of approximately $627 million in Doral 

Holdings, L.P. ("Holdings LP"), a limited partnership that is organized under the laws of 

the Cayman Islands. The sole general partner of Holdings 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 of Delaware, in return for 

99.5 percent of the limited liability interests ofHoldings LLC. 3 Holdings LLC then 

would purchase approximately $610 million of newly issued voting common stock of 

See 12 U.S.C. § 1843(f). 

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

J Holdings LP also will be the managing member ofHoldings LLC. Bear Stearns, 

through B8MB (as defined below), would acquire the remaining 0.5 percent ofthe 

limited liability interests ofHoldings LLC, in the form of nonvoting securities. 

I 
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Doral Financial, which would represent approximately 90 percent ofthe voting shares of 

Doral Financial. Each Doral Investment Entity would become a bank holding company. 

Under the proposal, several investment partnerships controlled by the merchant 

banking group of Bear Steams (collectively, "BSMB") would own in the aggregate about 

4.3 percent ofthe total equity of Holdings LP in the form of nonvoting limited partner 

interests. Bear Steams Merchant Capital III (Cayman), L.P. ("BSMC"), the general 

partner ofBSMB, also would own about 0.2 percent of the total equity of Holdings LP in 

the form of nonvoting limited partner interests. 

Limited partner investors in BSMB (the "BSMB Investors"), all unaffiliated with 

Bear Steams, would own approximately 16 percent ofthe total equity and voting interests 

ofHoldings LP in the form of voting limited partner interests. Each BSMB Investor has 

made an independent decision to invest in Holdings LP, would not make its investment in 

Holdings LP through BSMB (or any other Bear Steams-affiliated entity), and would not 

have agreements or understandings with any Bear Steams-controlled entity regarding the 

voting or transfer of its interest in Holdings LP. Through its limited partner interest in 

Holdings LP, BSMC would receive a carried interest that would be charged to the BSMB 

Investors and certain other limited partner investors in Holdings LP.4 

Bear Steams Merchant Banking III AIV (Cayman) Ltd., a company that is a 

general partner ofBSMC and is controlled by Bear Steams, would invest in 4.9 percent 

ofthe voting interests and total equity of Holdings GP. The remainder ofthe equity of 

Holdings GP would be owned b£· Jother limited partner investors in Holdings LP 

that are not affiliated with each ~tner or with Bear Steams and are not BSMB Investors. 

Each ofthese other investors would own at least 7 percent and not more than 9.9 percent 

of the voting interests and total equity of Holdings GP. Each investor in Holdings GP 

would be party to a shareholders agreement' under which Bear Steams and four ofthe 

4 Bear Steams had originally proposed that any carried interest paid by a B5MB Investor 

to Bear Steams as a result ofthe performance ofBSMB would be subject to a "clawback" 

in the event that the investment by the BSMB Investor in Holdings LP did not meet a 

contractually promised rate ofreturn. In light of concerns raised by Board staff about 

whether an agreement to link economically the Doral Financial investment to unrelated 

investments made through BSMB indicates that Bear Steams and the BSMB Investors 

were acting as an association or that Bear Steams was acting indirectly through the 

BSMB Investors, Bear Steams agreed to revise the proposal to remove the cross-fund 

carried interest clawback. 

5 Bear Steams has 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 ofthe Board, to the Presidents of the 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. 
.., - :J -

other investors (the "Designating Members") would have the ability to designate one 

member ofthe five-member board of directors ofHoldings GP.6 Actions by the board of 

directors ofHoldings GP generally will be by majority vote, and in no circumstance will 

a single director be able to block an action by the board of directors ofHoldings GP. The 

Bear Stearns representative on the board of Holdings GP would be designated by Bear 

Stearns and not by the BSMB Investors. No Bear Stearns entity will designate a 

representative of any ofthe othe{Jnvestors. Upon consummation ofthe proposal, the 

board of directors ofDoraI Financial would have eleven members, including the five 

directors designated by the Designating Members ofHoldings GP. 

Bear Steams also proposes to have several material business relationships with 

Doral Financial going forward. Doral Financial expects to enter into an advisory services 

agreement with Bear Stearns Merchant Manager III (Cayman), L.P. ("BSMM"), pursuant 

to which BSMM would provide advice to Doral Financial regarding acquisitions and 

dispositions, financings, procurement, information technology, accounting, and tax 

matters. BSMM would make recommendations to Doral Financial but would not have 

authority to take any actions on behalf of Doral Financial, and Doral Financial would be 

under no obligation to act in accordance with any recommendation provided by Bear 

Steams. BSMM would receive an advisory fee for its services under the agreement, and 

the arrangement would be on nonexclusive terms and could be terminated by Doral 

Financial without material penalty on 60 days notice. In addition, Bear Stearns may act 

as a financial adviser with respect to a proposed purchase by Doral F~ancial of a third 

party's retail banking operations in Puerto Rico; may maintain ar Jmillion line of 

credit previously extended to Doral Financial; and may purchaseassets 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 those 

purchases are consistent with the 5 percent of assets limitation set forth in 

section 4(f)(2)(A)(ii) of the BHC Act.' 

Bear Steams has made certain passivity commitments with respect to the Doral 

Investment Entities, Doral Financial, and the subsidiary insured depository institutions of 

Doral Financial (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 

6 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 of the remaining 

Designating Members. 

7 As discussed in more detail below, section 4(f)(2)(A)(ii) of the BHC Act prohibits Bear 

Steams from acquiring more than 5 percent ofthe assets of an additional insured 

depository institution. To comply with this provision, assets held by Bear Steams at any 

one time that were previously purchased from a subsidiary insured depository institution 

ofDoraI Financial may not represent more than 5 percent ofthe assets ofsuch depository 

institution. 
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investment was noncontrolling.! Under these commitments, among other things, Bear 

Steams commits not to take any action that may cause the Doral Entities to become a 

subsidiary of Bear Steams; not to acquire or retain shares of the Doral Entities that would 

cause Bear Steams (including its affiliates, members of its executive committee, its 

directors, and any of its employees involved in the proposed transaction) to own 

5 percent or more of the outstanding shares of any Doral Emiry;" 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 of 

the Doral Entities; and not to have or seek to have any representative serve as an officer, 

agent, or employee ofthe Doral Entities. 

Bear Steams also has made certain representations regarding its independence 

from the other investors in the Doral Investment Entities. Among other things, Bear 

Steams has represented that it: (i) is not affiliated with any other investor in 

Holdings LP; (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 that were provided to Board staff); (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 of the Doral Investment Entities and in the Holdings GP 

shareholders agreement that were provided to Board staff); and (v) will not consult with 

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

(except as provided in the Holdings GP shareholders agreement regarding the election of 

directors). In addition, Bear Steams cannot restrict any other investor's ability to transfer 

its interests in the Doral Investment Entities. 

Legal Framework and the Grandfather Status of Bear Steams 

Bear Steams owns Custodial Trust Company ("CTC"), a New Jersey-chartered 

state nonmember bank that engages primarily in custody and securities portfolio 

servicing. Although CTC is a bank for purposes of the BHC Act, Bear Steams is not 

treated as a bank holding company under the BHC Act because it qualifies for the 

grandfather rights provided by section 4(f) ofthe BHC Act. Under section 4(f) ofthe 

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

9 Doral Entity securities held by these officers, directors, and employees over which a 

third-party manager has investment and voting discretion would not be attributed to Bear 

Stearns for purposes ofdetermining compliance with this commitment so long as the 

securities were not acquired by the third-party manager in order to evade this 

commitment. Bear Steams also has committed that it will not influence or attempt to 

influence how Bear Steams officers, directors, or employees vote any securities issued by 

a Doral Entity. 
----------

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BHC Act, Bear Steams may continue to avoid treatment as a bank holding company only 

if, among other things, Bear Steams abides by the conditions set forth in section 4(f)(2) 

of the BHC Act. Under these conditions, Bear Steams generally may not, directly or 

indirectly, acquire more than 5 percent ofthe shares or assets - or control- of an 

additional insured depository institution.i'' 

Discussion and Analysis 

A. The 5% Test - Section 4(f)(2)(A)(ii) ofthe BHC Act 

As noted above, to preserve its grandfather rights, Bear Steams may not directly 

or indirectly acquire control of more than 5 percent ofthe shares or assets of an additional 

insured depository institution. Accordingly, Bear Steams may not directly or indirectly 

acquire control ofmore than 5 percent ofthe shares or assets of any ofthe Doral Entities. 

On consummation of the proposal, neither Bear Steams nor any subsidiary of 

Bear Stearns directly would acquire any voting or equity interest in Doral Financial or in 

any insured depository institution subsidiary of Doral Financial. Bear Stearns and its 

subsidiaries would, however, acquire 4.9 percent ofthe voting equity ofHoldings GP, 

4.4 percent ofthe nonvoting equity ofHoldings LP, and 0.5 percent ofthe nonvoting 

equity of Holdings LLC, each bank holding companies. Accordingly, Bear Stearns 

would not, directly or indirectly, own more than 5 percent ofthe shares ofany additional 

insured depository institution or bank holding company as a result of the proposal. 

Moreover, Bear Stearns and its subsidiaries would own less than 5 percent ofthe total 

equity ofthe Doral Investment Entities viewed on a consolidated basis. 

Although the BSMB Investors would own approximately 16 percent ofthe voting 

interest and total equity ofHoldings LP, and BSMC would receive a carried interest from 

the B8MB Investors based on the performance ofthe Doral Financial investment, staff 

has concluded that the investments in Holdings LP by the BSMB Investors should not be 

attributed to Bear Stearns for purposes of section 4(f)(2)(A)(ii) ofthe BHC Act. As noted 

above, although the BSMB Investors are existing advisory clients of Bear Steams, they 

are not affiliates of Bear Stearns and they have made an independent decision to invest in 

Holdings LP. In addition, they would not make their investment in Holdings LP through 

any Bear Stearns-affiliated entity and would not have agreements or understandings with 

any Bear Steams-controlled entity regarding the voting or transfer oftheir limited partner 

interest in Holdings LP. Moreover, the carried interest does not represent an interest in 

any shares ofa Doral Entity. 

Based on all the facts ofrecord, staff would not recommend at this time that the 

Board determine that consummation ofthe proposal would cause Bear Steams to lose its 

grandfather rights as a result of a violation of section 4(f)(2)(A)(ii) of the BHC Act. 

10 12 U.S.C. § 1843(f)(2)(A)(i) and (ii). 
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B.	 The Control Test - Section 4CO(2)(A)(i) ofthe BHC Act 

As noted above, to preserve its grandfather rights, Bear Stearns may not directly 

or indirectly acquire control of an additional insured depository institution. Accordingly, 

Bear Steams may not directly or indirectly acquire control of any Doral Entity. 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 owns, controls, or
 

has power to vote 25 percent or more of any class ofvoting securities ofthe other
 

company; (ii) controls in any marmer 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. II The Board's Regulation Y also sets
 

forth a set of rebuttable presumptions of control. 12
 

Under the proposal, Bear Steams only would be deemed to control a Doral Entity 

for purposes ofthe BHC Act ifthe Board were to find that Bear Stearns exercised a 

controlling influence over the management or policies ofthe Doral Entity. Bear Steams 

would not own, control, or hold with power to vote 25 percent or more of any class of 

voting securities of, or control the election of a majority ofthe directors of, any Doral 

EntityY In addition, Bear Stearns would not trigger any ofthe rebuttable presumptions 

of control in Regulation Y with respect to any Doral Entity. 

The size and nature of the equity investment by Bear Stearns in the Doral 

Investment Entities - when combined with the substantial business relationships between 

Bear Stearns and Doral Financial, the Bear Stearns representation on the boards of 

directors of Holdings GP and Doral Financial, and the important role of Bear Stearns in 

arranging the proposal - raise the issue of whether Bear Steams would have a controlling 

influence over the management or policies of Doral Financial. 

A number of mitigating features, described above, constrain the ability of Bear
 

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

•	 The investment by Bear Stearns would represent less than 5 per-cent of the 

voting interest and total equity of each Doral Entity. 

•	 The BSMB Investors (i) are not affiliates of Bear Stearns; (ii) have made 

an independent decision to invest in Holdings LP; (iii) would not make 

their investment in Holdings LP through any Bear Steams-affiliated entity; 

11	 12 U.S.c. § 1841(a)(2); 12 CFR 225.2(e). 

12 See 12 CFR 225.31(d). 

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

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

agreement. [ 

J
 
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and (iv) would not have agreements or understandings with Bear Stearns 

regarding the voting or transfer oftheir interests in Holdings LP. 

•	 Bear Stearns would not be the largest shareholder of any ofthe Doral 

Entities. Eleven sophisticated institutional investors unaffiliated with Bear 

Stearns (and other than the BSMB Investors) each would own between 7 

and 9.9 percent ofthe voting interest and total equity ofHoldings GP, and 

four ofthese other investors each would own between 9.1 and 9.9 percent 

ofthe voting interest and total equity ofHoldings LP. 

•	 Bear Stearns 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 permit Bear Steams and 

Doral Financial to engage in the business relationships described in this 

letter, these relationships are limited in amount, non-exclusive, and on 

arm's length terms. 

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

passivity commitments made by Bear Stearns, the small relative size ofthe voting and 

equity investment by Bear Stearns in the Doral Entities, the presence of several other 

larger investors, and the independence of the BSMB Investors - staff would not at this 

time recommend that the Board find that the proposal would allow Bear Stearns to 

exercise a controlling influence over the management or policies of Doral Financial or 

any ofthe Doral Investment Entities for purposes ofthe BHC Act or result in a violation 

of section 4(f)(2)(A)(i) ofthe BHC Act. 

Ibis 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 ofthe 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 

Commitments by Bear Stearns 

Bear Stearns commits that it will not directly or indirectly, take any of the actions
 

referred to in the commitments below.
 

1. Bear Stearns will not take any action that may cause Holdings GP, Holdings LP,
 

Holdings LLC, Doral Financial or any of their subsidiaries to become a subsidiary of
 

Bear Stearns.
 

2. Bear Stearns will not acquire or retain shares that would cause it, its affiliates, its 

directors, Executive Committee members, and officers and employees of BSMB who are 

involved in the proposed transaction, to own 5 percent or more of the outstanding shares 

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

subsidiaries, provided that shares owned by directors of Bear Stearns, Bear Stearns 

Executive Committee members, and officers and employees of BSMB who are involved 

in the proposed transaction in accounts or funds which are managed by third parties or for 

which third parties have investment discretion shall not be considered as owned by such 

persons as long as such shares are not placed in such accounts or funds for the purpose of 

evading this commitment. In addition, Bear Stearns will place the shares of Doral 

Financial on its restricted list and will not influence or attempt to influence how Bear 

Steams officers, directors or employees vote any shares they may hold of Holdings GP, 

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

3. Bear Stearns will not exercise or attempt to exercise a controlling influence over the 

management or policies of Holdings GP, Holdings LP, Holdings LLC, Doral Financial or 

any of their subsidiaries. 

4. Bear Stearns will not have or seek to have any representative serve as an officer, agent 

or employee ofHoldings GP, Holdings LP, Holdings LLC, Dora1 Financial or oftheir 

subsidiaries. 

5. Bear Steams will not enter into any other banking or non-banking transaction with 

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

except that (i) BSMM may maintain the Advisory Services Agreement; (ii) Bear Stearns' 

investment banking group may act as financial adviser with respect to the proposed 

purchase by Doral Financial of( .:Jr~ail banking operations in Puerto Rico, (iii) 

Bear Stearns may maintain the existingl- Jrnillion line of credit it has provided to 

Doral Financial, (iv) Bear Stearns may continue to purchase from Doral Financial and its 

subsidiaries and sell to Doral Financial and its subsidiaries mortgage loans 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% of the dollar value of all loans 

originated or purchased from third parties by Doral Financial and its subsidiaries; and (v) 

Bear Stearns may enter into transactions with Doral Financial and its subsidiaries not 

involving mortgage loans (such as purchases or sales of securities or derivative 
-9­

transactions), provided that such other transactions do not constitute, on a trailing twenty 

four month basis, more than 10% ofthe dollar value ofsuch transactions entered into by 

Doral Financial and its subsidiaries. AU transactions between Bear Steams on the one 

hand and Holdings GP, Holdings LP, Holdings LLC, Doral Financial or any oftheir 

subsidiaries on the other, will be on an ann's length basis and shall not restrict Holdings 

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

entering into transactions of the same type with other parties. 

6. Bear Steams will not seek or accept representation on the board of directors of
 

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

except that it may be represented on the board of directors ofHoldings GP by one
 

director, who may also serve on the board of directors ofDoraI Financial.
 

7. Bear Steams will not propose a director or slate of directors in opposition to a
 

nominee or slate ofnominees proposed by the management or board of directors of
 

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

8. Bear Steams will not solicit or participate in soliciting proxies with respect to any 

matter presented to the shareholders ofHoldings GP, Holdings LP, Holdings LLC, Doral 

Financial or any oftheir subsidiaries, except to the extent Bear Steams 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. Bear Steams will not attempt to influence the dividend policies; loan, credit, or 

investment decisions or policies; pricing ofservices; personnel decisions; operations 

activities, including the location of any offices or branches or their hours of operation, 

etc.; or any similar activities or decisions of Holdings GP, Holdings LP, Holdings LLC, 

Doral Financial or any oftheir subsidiaries; provided that the director designated by Bear 

Steams to serve on the Holdings GP board ofdirectors and the Doral Financial board of 

directors will be permitted to fully participate as a director on such boards of directors, 

and BSMM will be permitted to provide advisory services in accordance with the terms 

ofthe Advisory Services Agreement. 

10. Bear Steams will not dispose or threaten to dispose ofshares 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.