May 19, 2008 

 

A. Patrick Doyle, Esq. 

Arnold & Porter LLP 

399 Park Avenue 

New York, New York 10022 

Dear Mr. Doyle: 

 This is in response to the request by Merrill Lynch Bank & Trust Co., 

FSB (“MLFSB”), New York, New York, for a limited exemption from section 23A 

of the Federal Reserve Act and the Board’s Regulation W to facilitate a one-time 

corporate reorganization. 

 MLFSB acquired First Franklin Financial Corporation (“First 

Franklin”), San Jose, California, from National City Bank, Cleveland, Ohio, on 

December 30, 2006. First Franklin originated primarily subprime mortgage loans 

for sale in the secondary market. The documents for the loan sales and 

securitization transactions included representations and warranties that, if 

breached, would obligate First Franklin to repurchase the loans in certain 

circumstances. In some cases, MLFSB provided guarantees of First Franklin’s 

performance under these transaction documents (“Guarantees”). 

 

 Because of the deterioration of the subprime mortgage market, Merrill 

Lynch & Co. (“Merrill Lynch”), the parent of MLFSB, announced that it would 

discontinue mortgage operations at First Franklin in March 2008. Merrill Lynch 

now proposes to have MLFSB transfer its entire ownership interest in First 

Franklin to Merrill Lynch Mortgage Services Corporation (“MLMSC”), an 

indirect, wholly owned subsidiary of Merrill Lynch. [REDACTED.] At present, 

the potential obligations of First Franklin related to loans sold total approximately 

$[REDACTED]. [REDACTED]. 

 
- 2 -

 

 Section 23A and Regulation W limit the amount of “covered 

transactions” between a bank (including a federal savings bank) and any single 

affiliate to 10 percent of the bank’s capital stock and surplus, and limit the amount 

of covered transactions between a bank and all its affiliates to 20 percent of the 

bank’s capital stock and surplus.1

 “Covered transactions” include the purchase of 

assets by a bank from an affiliate, the extension of credit by a bank to an affiliate, 

the issuance of a guarantee by a bank on behalf of an affiliate, and certain other 

transactions.2 The statute and regulation also require a bank to secure its 

extensions of credit to, and guarantees on behalf of, affiliates with prescribed 

amounts of collateral.3

 

 As noted, MLFSB guaranteed the performance of certain obligations 

of First Franklin to one or more beneficiaries. The Guarantees were put in place in 

connection with, and in support of, First-Franklin-originated whole loans or 

securitizations and total approximately $[REDACTED]. The Guarantees were not 

subject to the limitations on transactions between a bank and its affiliates because 

First Franklin was a subsidiary of MLFSB, and section 23A does not apply to 

transactions between a bank and its operating subsidiaries. On consummation of 

the proposed transaction, First Franklin would no longer be a subsidiary of MLFSB 

and would become an affiliate of MLFSB. As a result, the Guarantees would 

become guarantees by a bank on behalf of an affiliate, which are covered 

transactions under section 23A and Regulation W.4

 MLFSB has requested that the 

Board grant MLFSB an exemption from section 23A and Regulation W to allow 

the Guarantees to continue until maturity. No new guarantees would be originated 

by MLFSB on behalf of First Franklin. 

 As noted, section 23A and Regulation W specifically authorize the 

Board to exempt transactions or relationships from the requirements of the statute 

and rule if the Board finds an exemption to be in the public interest and consistent 

with the purposes of section 23A. A number of factors support exempting the 

1

 12 U.S.C. § 371c(a)(1); 12 CFR 223.11 and 223.12. 

2

 12 U.S.C. § 371c(b)(7); 12 CFR 223.3(h). 

3

 12 U.S.C. § 371c(c); 12 CFR 223.14. 

4

 12 CFR 223.3(h)(5). 
- 3 -

 

Guarantees from the requirements of section 23A and Regulation W. First, the 

Guarantees were not covered transactions at the time they were entered into 

because First Franklin was not then an affiliate of MLFSB. Nor did MLFSB issue 

the Guarantees in contemplation of First Franklin becoming an affiliate of MLFSB. 

It is only as a result of the proposed reorganization that the Guarantees would 

become covered transactions. 

 In addition, the proposed reorganization appears to reduce the risk 

exposure of MLFSB because it would no longer bear the sole risk of the assets of 

First Franklin. The proposed reorganization also would substantially increase the 

regulatory capital ratios of MLFSB. 

 

 [REDACTED.] 

 

 MLFSB has represented that the proposed reorganization is in the 

public interest because it would improve MLFSB’s risk profile and because the 

cost and operational efficiencies that would result from the reorganization would 

allow MLFSB to provide more competitive product offerings to its customers. For 

the reasons stated above, and in light of all the facts you have presented, the 

transactions appear to be consistent with the public interest and the purposes of 

section 23A. Accordingly, the Board hereby grants the requested exemption. 

 Because the proposed transaction would involve the sale by a bank of 

assets to an affiliate, the transaction must also meet the requirements of 

section 23B of the Federal Reserve Act,5

 which requires that financial transactions 

between a bank and its affiliates be conducted on terms that are at least as 

favorable to the bank as a similar transaction with a third party. Merrill Lynch has 

represented that the sale price of First Franklin would be the greater of the fair 

5

 12 U.S.C. § 371c-1(a)(2). 
- 4 -

market value or book value of the company. First Franklin’s current book value, 

$[REDACTED], exceeds the company’s fair market value. A sale at book value 

appears to be at least as favorable to MLFSB as a sale of First Franklin to a third 

party and, accordingly, would conform to the requirements of section 23B. 

 These determinations are specifically conditioned on compliance by 

Merrill Lynch and MLFSB with all the commitments and representations they 

made to the Board in connection with the exemption request. These commitments 

and representations are deemed to be conditions imposed in writing by the Board 

in connection with granting the request and, as such, may be enforced in 

proceedings under applicable law. These determinations are based on the specific 

facts and circumstances described in your correspondence and this letter. Any 

material change in those facts or circumstances or any failure by Merrill Lynch, 

MLFSB, or any other company relying on the exemption granted in this letter to 

observe any of their commitments or representations may result in a different 

conclusion or in a revocation of the exemption. The Board also reserves the right 

to rescind this exemption if it is used by MLFSB to evade section 23A or 

Regulation W. 

Sincerely yours, 

(signed) 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Federal Reserve Bank of New York 

 Federal Deposit Insurance Corporation 

 Office of Thrift Supervision