Federal Reserve System seal 

BOARD OF GOVERNORS 

OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

DIVISION OF BANKING 

SUPERVISION AND REGULATION 

October 31, 2005 

Mark J. Welshimer, Esq. 

Sullivan & Cromwell LLP 

125 Broad Street 

New York, New York 10004-2498 

FAX: (212) 558-3353 

Dear Mr. Welshimer: 

This is in response to your inquiry on behalf of Wachovia Corporation (“Wachovia”), 

Charlotte, North Carolina, regarding the appropriate risk-based capital treatment for Wachovia’s 

indirect equity investment in a consolidated financial guarantee reinsurance subsidiary, 

BluePoint Re Limited (“BluePoint”), a Bermuda-based company. Specifically, you have 

requested that the Board permit Wachovia to deconsolidate BluePoint for risk-based capital 

purposes and to deduct Wachovia’s equity investment in BluePoint 50 percent from tier 1 capital 

and 50 percent from tier 2 capital. 

Wachovia has made an equity investment of $300 million in BluePoint and is BluePoint’s 

only equity investor. BluePoint is a consolidated subsidiary of Wachovia for purposes of U.S. 

generally accepted accounting principles (“GAAP”). BluePoint engages in the business of 

reinsuring financial guarantees issued principally by the major U.S. monoline insurance 

companies to support municipal bonds and asset-backed securities. 

Under the Board’s existing risk-based capital adequacy guidelines for bank holding 

companies (“Capital Guidelines”), a bank holding company (“BHC”) generally must hold riskbased capital against the assets and relevant off-balance-sheet items of the parent BHC and each 

GAAP consolidated subsidiary of the BHC.footnot e 1The Capital Guidelines apply to BHCs on a GAAP 

consolidated basis because the Board believes that a BHC generally would support its GAAP 

consolidated subsidiaries as if the exposures of the subsidiaries were direct exposures of the 

parent BHC. The Capital Guidelines contain an exception, however, for “subsidiaries that, while 

consolidated for accounting purposes, are not consolidated for certain specified supervisory or 

regulatory purposes, such as to facilitate functional regulation.”footnote2 The Capital Guidelines require 

a BHC to deconsolidate the assets of such a subsidiary for risk-based capital purposes and to 

deduct the BHC’s capital investments in such a subsidiary 50 percent from tier 1 capital and 

footnote1 12 CFR part 225, App. A, section I. 

footnote2 12 CFR part 225, App. A, section II.B.2.b. 

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50 percent from tier 2 capital. Wachovia is requesting an interpretation of the existing risk-based 

guidelines that would allow it to apply such a treatment to its BluePoint subsidiary. 

Wachovia has offered a number of arguments and commitments in support of its request. 

Wachovia has argued that the risk-based capital requirements imposed by the Capital Guidelines 

on the types of financial guarantee reinsurance transactions that BluePoint engages in vastly 

exceed the economic capital requirements for the transactions. In this regard, Wachovia has 

indicated that at least 98 percent of the municipal bonds and asset-backed securities underlying 

BluePoint’s reinsurance transactions will be externally rated at least investment grade and, on 

average, the underlying securities will have external ratings of A+/A1. Wachovia also has 

represented that historical losses incurred on the financial guarantees that BluePoint reinsures 

have been minimal. 

In addition, BluePoint’s financial condition and operations will be subject to review by 

Moody’s and S&P. BluePoint currently has a Aa3 stand-alone financial strength rating from 

Moody’s and a AA stand-alone financial strength rating from S&P, and Wachovia has 

committed that BluePoint’s stand-alone financial strength rating will always be at least A.footnote3 

BluePoint also would be subject to governmental supervision and review (beyond the umbrella 

supervision exercised by the Board) in its licensing jurisdiction. BluePoint would be regulated 

by the Bermuda Monetary Authority, a regulator of a significant number of global reinsurance 

companies. Wachovia argues that this supervision and review should significantly limit the 

amount of risk BluePoint may incur, and, hence, should limit the ability of Wachovia to abuse 

the deconsolidate-and-deduct approach. 

To alleviate any supervisory concern that Wachovia’s ultimate exposure to BluePoint 

might exceed its current equity investment in BluePoint, Wachovia has indicated that it does not 

intend to make available any additional financial support to BluePoint in the event BluePoint 

were to be in troubled financial condition. Wachovia may desire to provide additional capital to 

BluePoint if BluePoint’s operations are profitable, but Wachovia has committed that it would not 

invest additional capital in, or extend credit to, BluePoint without obtaining the approval of the 

Board. 

Wachovia also has separated BluePoint from the rest of the Wachovia organization in 

other significant ways. Importantly, unlike most of Wachovia’s other major subsidiaries, 

BluePoint is not branded with the Wachovia name. In addition, three members of BluePoint’s 

nine-member board of directors do not have any positions with Wachovia (outside of BluePoint). 

Moreover, although BluePoint and Wachovia will have some dual employees, BluePoint’s chief 

executive officer, President, and chief underwriting officer do not hold any positions with 

Wachovia (outside of BluePoint). Wachovia also has indicated that BluePoint employees, when 

they interface with customers or other third parties on behalf of BluePoint, will be identified only 

as BluePoint employees and will act only on behalf of BluePoint. 

footnote3 Although Wachovia believes Moody’s and S&P generally have assessed the financial strength of BluePoint on a 

stand-alone basis, both Moody’s and S&P have considered Wachovia’s ownership of BluePoint as part of their 

rating process. 

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Wachovia also has provided information about the relationships between the business 

operations of Wachovia and BluePoint. Wachovia proposes to provide tax, accounting, legal, 

and other support services to BluePoint and may provide limited cross-marketing services for 

BluePoint. In addition, BluePoint has and will continue to reinsure financial guarantees 

supporting (i) municipal bonds or asset-backed securities underwritten by a securities brokerdealer subsidiary of Wachovia; and (ii) asset-backed securities the underlying assets of which 

were originated by Wachovia (collectively, “Wachovia-connected exposures”). Wachovia has 

indicated to the Board, however, that BluePoint would be able to limit its Wachovia-connected 

exposures to (a) 12 percent of total exposures during 2005; (b) 10 percent of total exposures 

during 2006; and (c) 7.5 percent of total exposures after 2006. BluePoint would not provide 

financial guarantees directly to Wachovia. 

Wachovia has indicated that at least one European bank regulator has permitted one of its 

banks to deconsolidate and deduct equity investments in a consolidated financial guarantee 

subsidiary for risk-based capital purposes. Wachovia also contends that none of the 1988 Basel 

Capital Accord, the Revised Basel Capital Accord, or the Capital Guidelines are designed to 

address the insurance or reinsurance operations of banking organizations. Notably, the most 

recent version of the Revised Basel Capital Accord specifically provides for a deconsolidate-anddeduct approach to risk-based capital requirements for insurance subsidiaries of internationally 

active banking groups.footnote4 Although BluePoint’s reinsurance operations primarily reinsure credit 

risk, they are subject to insurance regulation by the Bermuda Monetary Authority and would be 

subject to insurance regulation in the United States if BluePoint were domiciled in the United 

States. 

Based on all the facts of record in this case – including in particular the nature of 

BluePoint’s business, BluePoint’s external credit ratings, and the general independence of 

BluePoint from the remainder of the Wachovia organization – staff has determined that 

Wachovia may deconsolidate BluePoint for purposes of the Capital Guidelines so long as 

Wachovia deducts its equity investment in BluePoint 50 percent from tier 1 capital and 

50 percent from tier 2 capital.footnote5 Staff believes that such a treatment is a reasonable interpretation 

of the existing risk-based capital guidelines. This determination is based on the specific facts 

and circumstances of Wachovia’s investment in BluePoint described in your correspondence 

with Board staff and this letter, including all the commitments and representations made by 

Wachovia and BluePoint in connection with this request. Any material change in those facts and 

circumstances or any failure by Wachovia or BluePoint to observe any of its commitments or 

representations may result in a different determination. Moreover, staff notes that the risk-based 

footnote4 Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital 

Standards: A Revised Framework, paragraph 30. The deconsolidate and deduct approach for insurance subsidiaries set forth 

in the Revised Basel Capital Accord may or may not be available to U.S. banking organizations under any U.S. 

implementation of the Revised Basel Capital Accord. 

footnote5 The deduction from tier 1 capital will be taken not only for purposes of the Capital Guidelines, but also for 

purposes of the tier 1 leverage measure. In accordance with the rules governing that measure, Wachovia may deduct 

from the total assets used in the denominator of that measure the amount of its investment in Bluepoint that it has 

deducted from its tier 1 capital (12 CFR part 225, App. D, section II.b.). 

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capital treatment set forth in this letter may not be available to Wachovia at such time as the 

Revised Basel Capital Accord is implemented in the United States. 

If you have any questions about this letter, please direct them to Norah Barger, Associate 

Director in the Division of Banking Supervision and Regulation, at (202) 452-2402, or to Mark 

E. Van Der Weide, Senior Counsel in the Legal Division, at (202) 452-2263. 

Sincerely yours, 

Richard Spillenkothen 

Director 

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