Joint and Several Liability Reallocation Agreement, 51061-51072 [2010-20372]

Agencies

• Farm Credit Administration

[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Notices]
[Pages 51061-51072]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20372]


=======================================================================
-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

RIN 3052-AC64


Joint and Several Liability Reallocation Agreement

AGENCY: Farm Credit Administration.

ACTION: Notice of joint and several liability reallocation agreement; 
request for comments.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA or we) is publishing for 
comment a Joint and Several Liability Reallocation Agreement 
(Agreement) to be entered into by all of the banks of the Farm Credit 
System (Farm Credit or System) and the Federal Farm Credit Banks 
Funding Corporation (Funding Corporation). The Agreement is designed to 
establish a procedure for nondefaulting banks to pay maturing System-
wide debt on behalf of defaulting banks prior to a statutory joint and 
several call by the FCA.

DATES: You may send comments on or before September 17, 2010.

ADDRESSES: There are several methods for you to submit your comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by e-mail or through the FCA's Web site. As facsimiles 
(faxes) are difficult for us to process and achieve compliance with 
section 508 of the Rehabilitation Act (29 U.S.C. 794d), we are no 
longer accepting comments submitted by fax. Please do not submit your 
comment multiple times via different methods. You may submit comments 
by any of the following methods:
     E-mail: Send us an e-mail at reg-comm@fca.gov.
     FCA Web site: https://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal E-Rulemaking Web site: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Send mail to Gary K. Van Meter, Deputy Director, 
Office of Regulatory Policy, Farm Credit Administration, 1501 Farm 
Credit Drive, McLean, VA 22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or on our Web site at https://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. We will attempt to remove e-mail 
addresses from comments (other than those submitted in a ``.pdf'' 
format) to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Chris Wilson, Financial Analyst, 
Office of Regulatory Policy, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4204, TTY (703) 883-4434, or Rebecca S. Orlich, 
Senior Counsel, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objective

    Our objective in publishing the Agreement is to seek public comment 
on the Agreement before the FCA Board determines whether or not to 
approve it.

II. Background

    System associations obtain funding by means of direct loans from 
their affiliated Farm Credit Banks or Agricultural Credit Bank 
(collectively, System Banks or Banks). The Banks in turn obtain their 
funding primarily by issuing System-wide obligations to investors 
through the Funding Corporation.\1\ The Banks' authority to issue 
System-wide obligations is provided in section 4.2(d) of the Farm 
Credit Act of 1971, as amended (Act).\2\ Section 4.2(c) of the Act also 
authorizes the Banks to obtain funding by issuing consolidated 
obligations with other Banks operating under the same title of the Act, 
but all of the System's joint funding at the present time is through 
System-wide obligations. Consolidated and System-wide obligations (also 
referred to as insured obligations) are insured by the Farm Credit 
System Insurance Corporation (FCSIC) using

[[Page 51062]]

funds in the Farm Credit Insurance Fund (Insurance Fund).
---------------------------------------------------------------------------

    \1\ The Funding Corporation is the fiscal agent of the System 
established under section 4.9 of the Farm Credit Act of 1971, as 
amended (12 U.S.C. 2160). The Farm Credit Act is set forth in 12 
U.S.C. 2001-2279cc.
    \2\ Section 4.2 of the Act is codified at 12 U.S.C. 2153.
---------------------------------------------------------------------------

    Investors in consolidated and System-wide obligations have three 
levels of repayment sources. The first level is each Bank's own primary 
liability under section 4.4(a)(2)(A) of the Act \3\ for its portion of 
any consolidated or System-wide obligation from which it received the 
proceeds. The second level is payments made by the FCSIC out of the 
Insurance Fund under section 4.4(d) of the Act if the Bank that is 
primarily liable (defaulting Bank) is unable to pay. The third level is 
joint and several calls made by the FCA on nondefaulting Banks under 
section 4.4(a)(2) of the Act as follows:
---------------------------------------------------------------------------

    \3\ Section 4.4 of the Act is codified at 12 U.S.C. 2155.
---------------------------------------------------------------------------

     The FCA will make calls on nondefaulting Banks in 
proportion to each Bank's proportionate share of the aggregate 
available collateral held by all nondefaulting Banks. A Bank's 
``aggregate available collateral'' is defined in section 4.4(a)(2)(C) 
of the Act as ``the amount (determined at the close of the last 
calendar quarter ending before such call) by which a bank's collateral 
* * * exceeds the collateral required to support the bank's outstanding 
notes, bonds, debentures, and other similar obligations.''
     If the aggregate available collateral does not fully 
satisfy the insured obligations of the defaulting Bank, the FCA will 
make calls on all nondefaulting Banks in proportion to each Bank's 
remaining assets.
Section 4.4(d) of the Act prohibits the FCA from making joint and 
several calls ``before the Farm Credit Insurance Fund is exhausted, 
even if the Fund is only able to make a partial payment because of 
insufficient amounts in the Fund.''
    The Act provides subrogation rights \4\ to both the Banks and the 
FCSIC for payments of insured obligations made under the Act on behalf 
of a defaulting Bank. With respect to System Banks, section 
4.4(a)(2)(E) provides:
---------------------------------------------------------------------------

    \4\ A right of subrogation means to stand in the place or 
``shoes'' of another with regard to a legal right or claim.

    Any System bank that, pursuant to a call by the [FCA], makes a 
payment of principal or interest to the holder of any consolidated 
or System-wide obligations issued on behalf of another System bank 
shall be subrogated to the rights of the holder against such other 
---------------------------------------------------------------------------
bank to the extent of such payment.

With respect to the FCSIC, section 5.61(c)(1) and (2) of the Act \5\ 
provides:
---------------------------------------------------------------------------

    \5\ Section 5.61 is codified at 12 U.S.C. 2277a-10.

    [O]n the payment to an owner of an insured obligation issued on 
behalf of an insured System bank in receivership, the [FCSIC] shall 
be subrogated to all rights of the owner against the bank to the 
extent of the payment. * * * Subrogation * * * shall include the 
right on the part of the [FCSIC] to receive the same dividends from 
the proceeds of the assets of the bank as would have been payable to 
---------------------------------------------------------------------------
the owner on a claim for the insured obligation.

    In 2007, the FCA amended the priority of claims regulation in Sec.  
627.2750 of our regulations \6\ to give priority rights to System Banks 
for payments made under a joint and several reallocation agreement to 
holders of insured obligations on behalf of a defaulting Bank (72 FR 
54527 (September 26, 2007)). That provision now accords the priority, 
prior to payment of the claims of general creditors, as follows:
---------------------------------------------------------------------------

    \6\ The FCA's regulations are in Title 12, Chapter VI, Parts 
600--end of the Code of Federal Regulations.

    (h) All claims of holders of consolidated and System-wide bonds 
and all claims of the other Farm Credit banks arising from their 
payments on consolidated and System-wide bonds pursuant to 12 U.S.C. 
2155 [section 4.4 of the Act] or pursuant to an agreement among the 
banks to reallocate the payments, provided that agreement is in 
---------------------------------------------------------------------------
writing and approved by the Farm Credit Administration.

This regulation means that System Banks will have the same subrogation 
rights for payments made under a reallocation agreement that they would 
have if they made payments under joint and several calls by the FCA as 
provided for in section 4.4 of the Act.

III. System Banks' and Funding Corporation's Request for Approval of 
the Agreement

    The System Banks and the Funding Corporation (collectively the 
``parties'') have informed us that they have reached a consensus on a 
formula for allocating a defaulting bank's portion of consolidated or 
System-wide obligations (after exhaustion of the Insurance Fund) based 
on each Bank's percentage of insured obligations and accrued interest 
outstanding to the total amount of insured obligations outstanding 
(debt-based method) and have drafted an agreement (Agreement) to that 
effect. The parties indicated they believe the debt-based method of 
allocation is more equitable than the collateral-based allocation 
method provided in the Act. The boards of directors of all the Banks 
and the board of directors of the Funding Corporation have each adopted 
resolutions authorizing their institutions to enter into the Agreement, 
and the boards of the Banks have authorized the issuance of insured 
obligations to satisfy joint and several payments under the Agreement. 
The parties have submitted the proposed Agreement to the FCA for our 
approval under Sec.  627.2750(h) and have requested the FCSIC to 
provide an expression of non-objection to the Agreement.
    The boards of directors of the parties have also authorized their 
institutions to make conforming amendments to the Amended and Restated 
Market Access Agreement (MAA) to allow certain actions under the 
Agreement.\7\ The MAA is an agreement among the Banks and the Funding 
Corporation that establishes criteria and procedures to provide 
oversight and control of a Bank's access to System-wide debt funding if 
the creditworthiness of the Bank declines below specified levels. Banks 
not meeting the criteria are placed in one of three categories 
depending on the severity of the problems. A Category I Bank has 
additional reporting requirements. A Category II Bank's ability to 
participate in issuances of System-wide obligations may be restricted. 
A Category III Bank may be prohibited from participating in System-wide 
obligations. The proposed amendments to the MAA provide that, in a 
circumstance where the joint and several payment provisions of the 
Agreement have been triggered, all nondefaulting Banks will be able to 
issue System-wide obligations to fund payments under the Agreement. 
This means that even Banks in Category II and III could participate in 
such issuances. Therefore, the Banks and the Funding Corporation have 
proposed amendments to the MAA to permit this. Should the FCA approve 
the Agreement, the FCA expects also to approve the amendments to the 
MAA and will publish the amendments in the Federal Register.
---------------------------------------------------------------------------

    \7\ The MAA is available at https://www.farmcredit-ffcb.com/pdfs/MarketAccessAgreement.pdf. The FCA published the original version of 
the MAA in the Federal Register (59 FR 25644 (May 17, 1994)), and 
also published the Restated MAA (68 FR 2037 (January 15, 2003)).
---------------------------------------------------------------------------

IV. Effect of the Agreement

    In general, the alternative debt-based methodology requires System 
Banks with higher relative amounts of outstanding debt to pay a 
proportionately larger share under the Agreement. In contrast, under 
the statutory collateral-based method, Banks that maintain higher 
levels of excess collateral are required to pay a proportionately 
greater amount under a joint and several call.
    We believe the likelihood of the Agreement actually being used is 
remote. For a joint and several call to be issued to nondefaulting 
System Banks, a System Bank would first have to default

[[Page 51063]]

on a maturing insured obligation and the amount of such obligation 
would have to exceed the amounts in the Insurance Fund available to pay 
defaulted insured obligations. In our judgment, it is reasonable to 
believe that the Banks may build more capital under the Agreement. 
Consequently, we believe that holders of consolidated and System-wide 
debt obligations are unlikely to be harmed by the alternative debt-
based methodology. However, we are asking commenters to specifically 
comment on the comparisons and differences of each method in terms of 
how they benefit the Banks in their ability to pay insured obligations 
when one or more of the Banks default.

V. Description of the Agreement

    Article I sets forth defined terms. An included term is ``Funding 
Certificate,'' which is a notification by the FCSIC to the Banks and 
the Funding Corporation that the Insurance Fund will not have enough 
funds to make an upcoming payment on maturing insured obligations that 
is due on behalf of a defaulting Bank. This will be the FCSIC's signal 
that the Insurance Fund is about to be exhausted, and the notification 
is intended to start the allocation payment procedure specified in the 
Agreement before the actual exhaustion of the Fund (and before the FCA 
is required by the Act to commence joint and several calls in 
accordance with the statutory collateral-based method). Another key 
definition is ``Initial Allocation Percentage,'' which is a 
nondefaulting Bank's proportion of a defaulting Bank's insured 
obligation. This percentage is calculated by dividing a nondefaulting 
Bank's insured obligations by an amount equal to the sum of all 
nondefaulting Banks' insured obligations.
    Article II sets forth the steps of the Agreement's allocation 
procedure, including providing for the Funding Corporation to issue new 
insured obligations to pay the maturing obligations of a defaulting 
bank under certain circumstances.
    Article III contains the parties' representations and warranties, 
as well as certain covenants.
    Article IV describes the effect of the Agreement. It states that 
the parties agree that nothing in the Agreement or the FCA's approval 
of the Agreement or the FCSIC's non-objection restricts or qualifies 
the authority of the FCA or the FCSIC to exercise any of their powers, 
rights, or duties, including the FCA's power to make joint and several 
calls under section 4.4 of the Act and to appoint conservators and 
receivers under section 4.12 of the Act. Furthermore, the parties agree 
that the Agreement does not provide any grounds for challenging the 
actions of the FCA and the FCSIC with respect to the creation or 
conduct of conservatorships or receiverships.
    Article V provides that the parties will arbitrate any disputes 
relating to the Agreement.
    Article VI provides indemnification for the Banks, the Funding 
Corporation, and their directors, officers, stockholders, employees, 
and agents.
    Article VII sets forth how the Agreement can be terminated. Some of 
the termination events are unanimous agreement by the parties (other 
than defaulting Banks not entitled to vote) to terminate; and 
withdrawal of the FCA's approval of, or withdrawal of the FCSIC's non-
objection to, the Agreement. Should the Agreement terminate, the FCA 
would make any subsequent joint and several calls according to the Act.
    Article VIII contains confidentiality provisions, and Article IX 
contains miscellaneous provisions.
    The FCA is now seeking public comment on the Agreement, which is 
set forth below:
JOINT AND SEVERAL LIABILITY REALLOCATION AGREEMENT
    This JOINT AND SEVERAL LIABILITY REALLOCATION AGREEMENT (the 
``Agreement'') is made as of the [------] day of [--------------] (the 
``Effective Date''), by and among AgFirst Farm Credit Bank; AgriBank, 
FCB; CoBank, ACB; the Farm Credit Bank of Texas; and the U.S. AgBank, 
FCB (each, a ``Bank,'' and collectively, the ``Banks''), and the 
Federal Farm Credit Banks Funding Corporation (the ``Funding 
Corporation'').
    WHEREAS, Section 4.4 of the Farm Credit Act of 1971, as amended 
(the ``Act''), sets forth a collateral-based allocation methodology 
(the ``Collateral Method'') for addressing the joint and several 
obligations of the Banks to make, as called upon by the Farm Credit 
Administration (the ``FCA''), payments of principal and interest due on 
Insured Debt Obligations (as defined herein) for which the Bank that is 
primarily liable thereon is unable to pay;
    WHEREAS, the parties hereto desire to adopt the debt-based 
allocation methodology (the ``Debt-Based Method'') set forth herein for 
allocating, prior to a statutory call by the FCA pursuant to Section 
4.4 of the Act, the joint and several obligations of the Banks to make 
payments of principal and interest due on Insured Debt Obligations for 
which the Bank that is primarily liable thereon is unable to pay;
    WHEREAS, the boards of directors of the Banks and of the Funding 
Corporation gave approval to the Agreement subject to certain 
conditions;
    WHEREAS, the Agreement was submitted to FCA for approval and to the 
Farm Credit System Insurance Corporation (the ``Insurance 
Corporation'') for an expression of no objection;
    WHEREAS, the FCA published this Agreement in the Federal Register 
on [----------------] and sought comments thereon;
    WHEREAS, after receiving comments, the FCA, on ------, approved 
this Agreement subject to modifications, if any, that are acceptable to 
the parties and a notice of such approval was published in the Federal 
Register on [----------------];
    WHEREAS, pursuant to the letter dated [--------------], from the 
FCA to the Banks and the Funding Corporation, the FCA approved this 
Agreement and confirmed, based on its statutory authority, that for the 
purpose of causing payment as set forth in this Agreement, it will 
consider a Bank Notice or Alternative to the Bank Notice relating to a 
Bank not in receivership as a request to make the determinations needed 
for a Default Certificate, and will consider a Bank Notice or an 
Alternative to the Bank Notice as a request to make the determinations 
needed for an MPI Certificate, and, if any such determinations are 
made, to provide notice of such to the Banks and the Funding 
Corporation;
    WHEREAS, the Insurance Corporation, pursuant to the letter dated 
[--------], from the Insurance Corporation to the Banks and the Funding 
Corporation, expressed no objection to this Agreement and confirmed 
that for the purposes of causing payment as set forth in this 
Agreement, it will consider a Bank Notice or Alternative to the Bank 
Notice relating to a Bank in receivership as a request to make the 
determinations needed for a Default Certificate, and a Bank Notice or 
Alternative to the Bank Notice as a request to make the determinations 
needed for a Funding Certificate, and, if any such determinations are 
made, to provide notice of such to the Banks and the Funding 
Corporation;
    WHEREAS, the parties hereto are entering this Agreement in reliance 
on Sec.  611.1270, Sec.  627.2750, and Sec.  627.2755 of FCA's 
regulations in their present form, respectively;
    WHEREAS, the parties are mindful of FCA's independent authority 
under Section 5.17(a)(10) of the Act to ensure the safety and soundness 
of banks, FCA's independent authority under

[[Page 51064]]

Sections 4.2 and 4.9 of the Act to approve the terms of specific 
issuances of debt securities, the Insurance Corporation's independent 
authority under Part E of Title V of the Act, and the banks' 
independent obligations under Section 4.3(c) of the Act to maintain 
necessary collateral levels for debt securities;
    WHEREAS, the Banks are entering into this Agreement pursuant to 
Section 1.5, Section 3.1, Section 4.2(c), and Section 4.2(d) of the 
Act; and
    WHEREAS, the Funding Corporation is entering into this Agreement 
pursuant to Section 4.9(b) of the Act;
    NOW THEREFORE, in consideration of the foregoing, the mutual 
promises and agreements herein contained, and other good and valuable 
consideration, receipt of which is hereby acknowledged, the parties, 
intending to be legally bound hereby, agree as follows:

Article I. Definitions

    As used in this Agreement, the following defined terms shall have 
the meanings described below:
    Section 1.01 ``Act'' shall have the meaning set forth in the 
Recitals hereto.
    Section 1.02 ``Agreement'' shall have the meaning set forth in the 
Preamble hereto.
    Section 1.03 ``Allocation Payment(s)'' shall have the meaning set 
forth in Section 2.01 hereof.
    Section 1.04 ``Allocation Payment Debt'' shall have the meaning set 
forth in Section 2.03(a) hereof.
    Section 1.05 ``Allocation Payment Investments'' shall mean the 
assets or investments, including but not limited to cash or cash 
equivalents, of a Bank that is a Category II or Category III Bank under 
the Market Access Agreement (as defined herein), to the extent those 
assets may be sold at market value (as defined in Sec.  615.5045 of the 
FCA Regulations).
    Section 1.06 ``Alternative to the Bank Notice'' shall have the 
meaning set forth in Section 2.02(b) hereof.
    Section 1.07 ``Assertion'' shall have the meaning set forth in 
Section 6.04(a) hereof.
    Section 1.08 ``Average Insured Debt Obligations'' shall mean a 
Bank's twelve (12) month average daily balance of principal and 
interest accrued on Insured Debt Obligations, with the average daily 
balance for each Bank calculated in accordance with generally accepted 
accounting principles (``GAAP''), on the basis of the 12-month period 
ending on the last day of the last month prior to the receipt of the 
Bank Notice or the findings of an Alternative to the Bank Notice.
    Section 1.09 ``Bank'' or ``Banks'' shall have the meaning set forth 
in the Preamble hereto.
    Section 1.10 ``Bank Notice'' shall have the meaning set forth in 
Section 2.02(a)(ii) hereof.
    Section 1.11 ``Business Day'' shall mean any day other than (1) a 
Saturday or Sunday, (2) a day on which the Federal Reserve Bank of New 
York is closed for business, or (3) with respect to any payment in 
respect of any book-entry security, a day on which the Federal Reserve 
Bank maintaining the book-entry account relating to such book-entry 
security is closed for business.
    Section 1.12 ``Collateral Method'' shall have the meaning set forth 
in the Recitals hereto.
    Section 1.13 ``Debt-Based Method'' shall have the meaning set forth 
in the Recitals hereto.
    Section 1.14 ``Default Certificate'' shall mean a certificate 
prepared by the FCA, in the case of a Bank not in receivership, or the 
Insurance Corporation (acting in its corporate capacity), in the case 
of a Bank in receivership, in such form as the FCA or the Insurance 
Corporation may, in their respective discretion, provide, determining 
that a Bank is a Defaulting Bank, and specifying the Defaulted Maturing 
Obligation Amount.
    Section 1.15 ``Defaulted Maturing Obligation'' shall mean a 
Maturing Obligation for which the Bank primarily liable thereon is 
unable to pay in full when due.
    Section 1.16 ``Defaulted Maturing Obligation Allocation Amount'' 
shall mean the amount of the Defaulted Maturing Obligation Amount that 
remains unpaid after exhausting the Fund, as specified in the Funding 
Certificate, reduced by the amount of any payment by a Bank, as 
required pursuant to Sec.  611.1270, to make provision for such Bank's 
joint and several liability.
    Section 1.17 ``Defaulted Maturing Obligation Amount'' shall mean 
the amount due on a Defaulted Maturing Obligation that the Defaulting 
Bank primarily liable for such Defaulted Maturing Obligation is unable 
to pay.
    Section 1.18 ``Defaulting Bank'' shall mean a Bank that is unable 
to make full payment on a Maturing Obligation for which it is primarily 
liable.
    Section 1.19 ``Effective Date'' shall have the meaning set forth in 
the Preamble hereto.
    Section 1.20 ``FCA'' shall have the meaning set forth in the 
Recitals hereto.
    Section 1.21 ``Fund'' shall mean the Farm Credit Insurance Fund 
established under the Act.
    Section 1.22 ``Funding Certificate'' shall mean a certificate 
prepared by the Insurance Corporation (acting in its corporate 
capacity), in such form as the Insurance Corporation may, in its 
discretion, prescribe, specifying (i) that the Fund will have 
insufficient funds to pay a Defaulted Maturing Obligation Amount in 
full, and (ii) the amount of the Defaulted Maturing Obligation Amount 
that remains unpaid after exhausting the Fund in making payment of the 
Defaulted Maturing Obligation Amount.
    Section 1.23 ``Funding Corporation'' shall have the meaning set 
forth in the Preamble hereto.
    Section 1.24 ``Funding Notice'' shall have the meaning set forth in 
Section 2.03(b) hereof.
    Section 1.25 ``Initial Allocation Amount'' shall have the meaning 
set forth in Section 2.01 hereof.
    Section 1.26 ``Initial Allocation Percentage'' shall mean the 
percentage that (i) a single Non-Defaulting Bank's Average Insured Debt 
Obligations represents of (ii) the sum of all Non-Defaulting Banks' 
Average Insured Debt Obligations.
    Section 1.27 ``Insurance Corporation'' shall have the meaning set 
forth in the Recitals hereto.
    Section 1.28 ``Insured Debt Obligation(s)'' shall mean an ``insured 
obligation'' as defined in Section 5.51(3) of the Act.
    Section 1.29 ``Market Access Agreement'' shall mean the Amended and 
Restated Market Access Agreement, dated July 1, 2003, by and among 
AgFirst Farm Credit Bank; AgriBank, FCB; CoBank, ACB; the Farm Credit 
Bank of Texas; and U.S. AgBank, FCB (as successor to the Farm Credit 
Bank of Wichita and the Western Farm Credit Bank under Section 7.12 of 
the Amended and Restated Market Access Agreement); and the Federal Farm 
Credit Banks Funding Corporation, as the same may be supplemented, 
amended, or restated from time to time as provided for therein.
    Section 1.30 ``Maturing Obligation(s)'' shall mean the principal 
and/or interest on an Insured Debt Obligation payable on a specific 
date for which one Bank is primarily liable.
    Section 1.31 ``Maximum Permitted Indebtedness'' shall mean the 
maximum amount of Insured Debt Obligations that a Bank is permitted to 
issue on the basis of its available collateral as defined in Sections 
4.3 and 4.4 of the Act.
    Section 1.32 ``MPI Adjustment'' shall have the meaning set forth in 
Section 2.02(b)(iv) hereof.
    Section 1.33 ``MPI Bank(s)'' shall mean a Non-Defaulting Bank that 
has

[[Page 51065]]

previously reached its Maximum Permitted Indebtedness, or would exceed 
its Maximum Permitted Indebtedness without an ``MPI Adjustment'' as 
provided in Section 2.02(b)(iv) hereof.
    Section 1.34 ``MPI Certificate'' shall mean a certificate prepared 
by the FCA, in such form as the FCA may, in its discretion, prescribe, 
specifying the Maximum Permitted Indebtedness for each of the Non-
Defaulting Banks.
    Section 1.35 ``Non-Defaulting Bank(s)'' shall mean, with respect to 
a Defaulted Maturing Obligation for which such Bank(s) is jointly and 
severally liable under the Collateral Method, a Bank other than a 
Defaulting Bank.
    Section 1.36 ``Notice'' shall have the meaning set forth in Section 
9.07 hereof.
    Section 1.37 ``Payment Conditions'' shall have the meaning set 
forth in Section 2.02(c) hereof.
    Section 1.38 ``Payment Date'' shall be the date that a payment on a 
Defaulted Maturing Obligation is due.
    Section 1.39 ``Preliminary Bank Notice'' shall have the meaning set 
forth in Section 2.02(a) hereof.
    Section 1.40 ``System'' shall mean the Farm Credit System.
    Section 1.41 ``Systemwide Debt'' shall mean debt issued under 
Section 4.2(d) of the Act.
    Section 1.42 ``Termination Date'' shall have the meaning set forth 
in Section 7.01 hereof.
    Section 1.43 ``U.S. Arbitration Act'' shall mean 9 U.S.C. 1 et 
seq., as amended from time to time.
    Section 1.44 ``Voting Bank(s)'' shall have the meaning set forth in 
Section 7.01(a) hereof.

Article II. Terms of Reallocation

Section 2.01 Debt-Based Allocation

    With respect to each Defaulted Maturing Obligation for which the 
Payment Conditions have been met, each Non-Defaulting Bank shall make 
joint and several liability payments pursuant to the Debt-Based Method 
as described herein (in lieu of application of the Collateral Method) 
through the Funding Corporation of a portion of the Defaulted Maturing 
Obligation Allocation Amount equal to such Non-Defaulting Bank's 
Initial Allocation Percentage, calculated as of the date on which the 
Payment Conditions under Section 2.02(c) hereof have been satisfied, 
multiplied by the total amount of such Defaulted Maturing Obligation 
Allocation Amount (each an ``Initial Allocation Amount''), as adjusted 
pursuant to Section 2.02(b)(iv) if any adjustment is required 
thereunder (each Initial Allocation Amount, adjusted if required 
pursuant to Section 2.02(b)(iv), an ``Allocation Payment'').

Section 2.02 Allocation Procedure

    (a) Each Bank shall make a good faith effort to determine as 
promptly as practicable whether it will be able to make full payment 
when due on each Maturing Obligation for which it is primarily liable. 
As promptly as practicable after a Bank determines that there is a 
reasonable likelihood that it will not be able to make full payment on 
a Maturing Obligation for which it is primarily liable, such Bank shall 
deliver a notice to each of the other Banks, the Funding Corporation, 
the FCA, and the Insurance Corporation indicating that it anticipates 
not being able to make full payment when due on such Maturing 
Obligation (each, a ``Preliminary Bank Notice'').
    (i) As promptly as practicable after such determination, such Bank 
shall make a good faith effort to determine the amount of such Maturing 
Obligation as to which it will not be able to make payment when due.
    (ii) After a Bank has determined the amount of the Maturing 
Obligation for which it is primarily liable but for which such Bank 
will not be able to make payment when due, such Bank shall promptly 
deliver a notice to each of the other Banks, the Funding Corporation, 
the FCA, and the Insurance Corporation indicating the amount of the 
Maturing Obligation that it will be unable to pay (the ``Bank 
Notice'').
    (b) Upon the delivery of a Bank Notice under Section 2.02(a)(ii) 
hereto, or, in the absence of delivery of a Bank Notice, if the FCA or 
the Insurance Corporation (acting in its corporate capacity) believes 
there is a reasonable basis that a Bank will be unable to make full 
payment on a Maturing Obligation for which it is primarily liable (an 
``Alternative to the Bank Notice''), the following steps shall occur in 
the following order for each such Maturing Obligation:
    (i) The Funding Corporation shall determine the Defaulted Maturing 
Obligation Allocation Amount. Before such determination shall be made, 
the following shall have been delivered to the Banks and the Funding 
Corporation:
    (1) A Default Certificate with respect to the Bank primarily liable 
for such Maturing Obligation;
    (2) A Funding Certificate with respect to the Defaulted Maturing 
Obligation Amount; and
    (3) An MPI Certificate.
    (ii) The Funding Corporation shall determine the Initial Allocation 
Percentage for each Non-Defaulting Bank with respect to the Defaulted 
Maturing Obligation Allocation Amount, and the Initial Allocation 
Amount for each such Bank, pursuant to Section 2.01 hereto.
    (iii) The Funding Corporation shall determine whether an MPI 
Adjustment shall be made pursuant to Section 2.02(b)(iv) hereof. In the 
event no Non-Defaulting Banks are MPI Banks, or would become MPI Banks 
as a result of making full payment of their respective Initial 
Allocation Amounts, no MPI Adjustment shall be made to any Non- 
Defaulting Bank's Allocation Payment, and each Non-Defaulting Bank's 
Initial Allocation Amount shall be its Allocation Payment. In the event 
any Non-Defaulting Bank is an MPI Bank, or would become an MPI Bank as 
a result of making full payment of its Initial Allocation Amount, an 
MPI Adjustment shall be made to each Non-Defaulting Bank's Initial 
Allocation Amount pursuant to Section 2.02(b)(iv) hereof. Any Bank that 
has terminated its System status shall be deemed to be an MPI Bank for 
purposes of calculating the MPI Adjustment, and any such Bank's 
Allocation Payment shall be zero.
    (iv) If there is one (or more) MPI Bank, the Funding Corporation 
shall determine the MPI Adjustment for each Non-Defaulting Bank, as 
follows (the adjustment as calculated under this subsection, the ``MPI 
Adjustment''):
    (1) Such adjustment shall be made by first reducing the amount of 
the Defaulted Maturing Obligation Allocation Amount allocated to each 
MPI Bank such that each MPI Bank's allocation does not cause each such 
Bank to exceed its Maximum Permitted Indebtedness.
    (2) An increase equal to the amount of the reduction described in 
Section 2.02(b)(iv)(1) above shall be made by increasing the amount of 
the Defaulted Maturing Obligation Allocation Amount allocated to each 
remaining Non-Defaulting Bank that is not an MPI Bank before such 
adjustment, in proportion to the ratio of such remaining Non-Defaulting 
Bank's Average Insured Debt Obligations compared to the sum of the 
Average Insured Debt Obligations for each Non-Defaulting Bank that is 
not an MPI Bank before such adjustment.
    (3) In the event the adjustment in Section 2.02(b)(iv)(2) shall 
cause any Non-Defaulting Bank to become an MPI Bank, the steps in 
Section 2.02(b)(iv)(1) and Section 2.02(b)(iv)(2) shall be repeated 
with respect to the amount of the Defaulted Maturing Obligation 
Allocation Amount allocated to such MPI Bank in excess of its Maximum 
Permitted Indebtedness, until the entire Defaulted Maturing Obligation

[[Page 51066]]

Allocation Amount has been allocated among the Non-Defaulting Banks or 
cannot be so allocated because each Non-Defaulting Bank would exceed 
its Maximum Permitted Indebtedness.
    (4) In the event the entire Defaulted Maturing Obligation 
Allocation Amount cannot be so allocated under the Debt-Based Method, 
the Funding Corporation shall promptly notify the FCA and Insurance 
Corporation that a default on a payment of principal or interest on 
Insured Debt Obligations is imminent. Notwithstanding any such 
notification, this Agreement shall continue in effect unless terminated 
pursuant to Section 7.01.
    (c) Payment Conditions. Each of the following conditions must be 
satisfied before a Non-Defaulting Bank shall be obligated to make an 
Allocation Payment (collectively, the ``Payment Conditions'') pursuant 
to this Agreement:
    (i) Default Certification. A Default Certificate has been delivered 
to each of the Banks and the Funding Corporation.
    (ii) Funding Certification. A Funding Certificate has been 
delivered to each of the Banks and the Funding Corporation.
    (iii) MPI Certification. An MPI Certificate has been delivered to 
each of the Banks and the Funding Corporation.
    (iv) No Call. The FCA shall not have invoked its statutory call 
authority under Section 4.4 of the Act with respect to the Defaulted 
Maturing Obligation.

Section 2.03 Satisfaction of Allocation Payment

    (a) With respect to a Defaulted Maturing Obligation Allocation 
Amount, each Non-Defaulting Bank hereby authorizes the Funding 
Corporation, for the purpose of making such Non-Defaulting Bank's 
Allocation Payment, to issue Systemwide Debt on such Non-Defaulting 
Bank's behalf on the Payment Date in the amount of the Non-Defaulting 
Bank's Allocation Payment, increased by the amount of any dealer 
concessions and other applicable fees required to issue Systemwide Debt 
(``Allocation Payment Debt''); provided that (i) the Payment Conditions 
have been satisfied as of the date and time of such issuance, (ii) the 
Funding Notice has been given as provided herein, and (iii) such Non-
Defaulting Bank that is eligible to make an election under Section 
2.03(c) hereof has not made such an election with respect to funding 
such Allocation Payment with cash, or, if such election has been made 
such Bank making the election has not fully paid its Allocation Payment 
in cash by the agreed upon date and time under Section 2.03(c). Each 
Non-Defaulting Bank hereby irrevocably authorizes the Funding 
Corporation to apply the net proceeds of any issuance pursuant to the 
preceding sentence to the payment of such Non-Defaulting Bank's 
Allocation Payment, provided that the Payment Conditions have been 
satisfied at the Payment Date. Each Non-Defaulting Bank for which 
Allocation Payment Debt will be issued may propose to the Funding 
Corporation preferred terms and conditions for such Allocation Payment 
Debt. After consultation on an individual basis with each Non-
Defaulting Bank for which Allocation Payment Debt will be issued, the 
Funding Corporation, acting for each Non-Defaulting Bank, shall issue 
Allocation Payment Debt on behalf of each Non-Defaulting Bank in 
accordance with Section 4.9 of the Act, taking into consideration the 
preferred terms and conditions proposed by such Non-Defaulting Bank. 
Each Non-Defaulting Bank liable for an Allocation Payment under this 
Agreement shall fund such Allocation Payment, or any portion thereof, 
with cash upon its election under Section 2.03(c) or if required to do 
so under Section 2.03(d) hereof.
    (b) The Funding Corporation shall give each Bank, the FCA and the 
Insurance Corporation notice no later than the Payment Date of its 
intent to exercise its authority under Section 2.03(a) hereto to issue 
Allocation Payment Debt (each a ``Funding Notice''), which Funding 
Notice shall also state the applicable Allocation Payment for each Non-
Defaulting Bank, and the Payment Date.
    (c) A Non-Defaulting Bank may elect to make its Allocation Payment 
in cash in lieu of issuing Allocation Payment Debt. Each Non-Defaulting 
Bank must deliver notice of its election under this Section 2.03(c) to 
the Funding Corporation within time limits prescribed by the Funding 
Corporation, which time limits shall be set in accordance with the 
Funding Corporation's deadlines for issuing Insured Debt Obligations. 
Each Non-Defaulting Bank funding its Allocation Payment with cash and 
the Funding Corporation shall use reasonable and timely efforts to 
agree on a date and time by which such Non-Defaulting Bank must deliver 
the cash to the Funding Corporation. If the Funding Corporation does 
not receive the cash by the agreed upon date and time, the Funding 
Corporation shall issue Allocation Payment Debt in accordance with 
Section 2.03(a) hereto.
    (d) Notwithstanding the provisions of Section 2.03(c) hereto, any 
Non-Defaulting Bank that is in Category II or Category III under the 
Market Access Agreement shall be required to submit a cash payment to 
the Funding Corporation, in an amount equal to the lesser of (i) such 
Bank's Allocation Payment, or (ii) such Bank's Allocation Payment 
Investments. Any such Non-Defaulting Bank that is in Category II or 
Category III under the Market Access Agreement shall submit such a cash 
payment to the Funding Corporation to be held in escrow on the later of 
(i) the date such Bank is notified of its Allocation Payment or (ii) 
two (2) Business Days prior to the Payment Date. A Non-Defaulting Bank 
that is obligated to make a cash payment under this Section 2.03(d) in 
an amount less than its full Allocation Payment shall nevertheless be 
liable for the full amount of its Allocation Payment. The Funding 
Corporation shall be permitted to issue Allocation Payment Debt on 
behalf of any Bank making a cash payment pursuant to this Section 
2.03(d) in an amount not to exceed the excess of such Bank's Allocation 
Payment (increased by the amount of any dealer concessions and other 
applicable fees required to issue Allocation Payment Debt) over such 
Bank's Allocation Payment Investments.
    (e) The proceeds of Allocation Payment Debt or any cash delivered 
pursuant to Section 2.03(c) or Section 2.03(d) shall be used by the 
Funding Corporation solely to satisfy the Defaulted Maturing Obligation 
Allocation Amount with respect to which it was issued and for no other 
purpose, except that any portion of Allocation Payment Debt issued to 
cover dealer concessions and other applicable fees required to issue 
Allocation Payment Debt may be used for that limited purpose.
    (f) The inability or failure of the Funding Corporation to issue 
Allocation Payment Debt shall not relieve the Non-Defaulting Banks from 
the obligation to make their respective Allocation Payments.
    (g) Any Bank that makes an Allocation Payment to a holder of a 
Defaulted Maturing Obligation, directly or indirectly pursuant to this 
Agreement, shall have a priority of claim in accordance with Sec.  
627.2750 and Sec.  627.2755 of FCA's regulations.

Section 2.04 Market Access Agreement

    The limitations under the Market Access Agreement on the amount of 
Insured Debt Obligations that a Bank is permitted to issue shall not be 
applicable to Allocation Payment Debt.

[[Page 51067]]

Section 2.05 Provision of Information

    Each Bank shall provide to the Funding Corporation pertinent 
materials and information requested by the Funding Corporation with 
respect to the calculations to be performed by the Funding Corporation 
under this Article II, as the Funding Corporation shall reasonably 
request in writing from the Banks. All Banks shall summarize, 
aggregate, or analyze data, as well as provide raw data, in such manner 
as the Funding Corporation may reasonably request. Such information 
shall be promptly updated or supplemented as the Funding Corporation so 
requests in writing of the Banks by such deadlines as the Funding 
Corporation may reasonably specify. Each Bank attests that any 
information delivered to the Funding Corporation pursuant to this 
Section 2.05 is true to the best of such Bank's knowledge. The Funding 
Corporation shall be entitled to rely on information provided to it 
pursuant to this Section without independently verifying the 
information.

Article III. Representations and Warranties and Certain Covenants

Section 3.01 Representations and Warranties of Each Bank to Every Other 
Bank and the Funding Corporation

    Each Bank represents, warrants and acknowledges to each of the 
other parties to this Agreement that:
    (a) Organization. Such Bank is an instrumentality, duly organized 
and validly existing under the laws of the United States. Such Bank has 
all requisite power and authority (corporate and other) to own, lease 
and operate the properties used in its business as now being conducted.
    (b) Corporate Authority. Such Bank has the corporate power and 
authority to enter into contracts and to exercise such other incidental 
powers as are necessary to carry out its powers, duties and functions 
in accordance with its charter and the Act. The execution, delivery and 
performance of this Agreement and the consummation of the transactions 
contemplated hereby have been duly authorized and approved by such 
Bank's board of directors and no other corporate proceedings on the 
part of such Bank are necessary to authorize or approve this Agreement 
and the transactions contemplated hereby.
    (c) Agreement Binding and Enforceable. This Agreement has been duly 
executed and delivered by such Bank and is a valid and binding 
agreement of such Bank, enforceable against it in accordance with its 
terms, except that (i) such enforcement may be subject to those 
provisions of the Act and the regulations thereunder relating to the 
liquidation, receivership or conservatorship of institutions of the 
System and to other bankruptcy, insolvency, reorganization, moratorium 
or other similar laws now or hereafter in effect relating to creditors' 
rights, and (ii) the remedy of specific performance and injunctive and 
other forms of equitable relief may be subject to equitable defenses 
and to the discretion of the court before which any proceeding thereof 
may be brought.
    (d) Compliance with Law. The execution, delivery and performance by 
such Bank of this Agreement and the performance by it of the 
transactions contemplated hereby do not and will not violate or 
conflict with any other applicable law or regulation, or any order, 
judgment, injunction or decree of any court or governmental authority 
of competent jurisdiction which is binding on such Bank or by which the 
assets of such Bank are bound.
    (e) Compliance with Obligations. The execution, delivery and 
performance by such Bank of this Agreement and the performance by it of 
the transactions contemplated hereby do not and will not violate, 
conflict with or constitute breach of or a default under its charter or 
bylaws or any other agreement or instrument to which it is a party (or 
which is binding on its assets), such that any such violation, 
conflict, breach or default, after giving effect to the transactions 
contemplated hereby, is reasonably likely to have a material adverse 
effect on such Bank's observance or performance of this Agreement or 
the performance of the transactions contemplated hereby.
    (f) Claims, Suits. There is no governmental or non-governmental 
action, suit, or proceeding (or claim of which it has been notified) 
which is pending or, to the best knowledge of such Bank, threatened 
against or affecting such Bank that would (i) materially and adversely 
affect the ability of such Bank to conduct its business as presently 
conducted, or (ii) prevent, hinder or delay the consummation of the 
transactions contemplated hereby.
    (g) Funding Resolution. Such Bank has amended its current standing 
funding resolution adopted by its board of directors to authorize 
issuances of Allocation Payment Debt without any limitation on the 
amount of Allocation Payment Debt that could be issued to the fullest 
extent permitted by applicable law.

Section 3.02 Representations and Warranties of the Funding Corporation 
to each Bank

    The Funding Corporation hereby represents, warrants and 
acknowledges to each of the other parties to this Agreement that:
    (a) Organization. The Funding Corporation is an instrumentality, 
duly organized and validly existing under the laws of the United 
States. The Funding Corporation has all requisite power and authority 
(corporate and other) to own, lease and operate the properties used in 
its business as now being conducted.
    (b) Corporate Authority. The Funding Corporation has the corporate 
power and authority to enter into contracts and to exercise such other 
incidental powers as are necessary to carry out its powers, duties and 
functions in accordance with its charter and the Act. The execution, 
delivery and performance of this Agreement and the consummation of the 
transactions contemplated hereby have been duly authorized and approved 
by the board of directors of the Funding Corporation and no other 
corporate proceedings on the part of the Funding Corporation are 
necessary to authorize or approve this Agreement and the transactions 
contemplated hereby.
    (c) Binding Agreement. This Agreement has been duly executed and 
delivered by the Funding Corporation and is valid, binding and 
enforceable against the Funding Corporation in accordance with its 
terms, except that (i) such enforcement may be subject to those 
provisions of the Act and the regulations thereunder relating to the 
liquidation, receivership or conservatorship of institutions of the 
System and to other bankruptcy, insolvency, reorganization, moratorium 
or other similar laws now or hereafter in effect relating to creditors' 
rights, and (ii) the remedy of specific performance and injunctive and 
other forms of equitable relief may be subject to equitable defenses 
and to the discretion of the court before which any proceeding thereof 
may be brought.
    (d) Compliance with Law. The execution, delivery and performance by 
the Funding Corporation of this Agreement and the performance by it of 
the transactions contemplated hereby do not and will not violate or 
conflict with any applicable law or regulation, or any order, judgment, 
injunction or decree of any court or governmental authority of 
competent jurisdiction which is binding on the Funding Corporation or 
by which the assets of the Funding Corporation are bound.

[[Page 51068]]

    (e) Compliance with Obligations. The execution, delivery and 
performance by the Funding Corporation of this Agreement and the 
performance by the Funding Corporation of the transactions contemplated 
hereby do not and will not violate, conflict with or constitute breach 
of or a default under the charter or bylaws of the Funding Corporation 
or any other agreement or instrument to which the Funding Corporation 
is a party (or which is binding on its assets), such that any said 
violation, conflict, breach or default, after giving effect to the 
transactions contemplated hereby, is reasonably likely to have a 
material adverse effect on the Funding Corporation's observance or 
performance of this Agreement or the performance by the Funding 
Corporation of the transactions contemplated hereby.
    (f) Claims, Suits. There is no governmental or non-governmental 
action, suit, or proceeding (or claim of which the Funding Corporation 
has been notified) which is pending or, to the best knowledge of the 
Funding Corporation, threatened against or affecting the Funding 
Corporation that would (i) materially and adversely affect the ability 
of the Funding Corporation to conduct its business as presently 
conducted, or (ii) prevent, hinder or delay the consummation of the 
transactions contemplated hereby.

Section 3.03 Covenants of the Parties

    (a) Further Assurances. Subject to the terms and conditions of this 
Agreement, each party hereto shall use all reasonable efforts to take, 
or cause to be taken, all action, and to do, or cause to be done, all 
things necessary, proper or advisable under applicable laws and 
regulations or otherwise to fulfill its obligations under this 
Agreement.
    (b) Organizational Documents. Each party hereto shall not (i) 
amend, modify or otherwise supplement its charter or bylaws, or (ii) 
amend, modify, supplement, terminate or withdraw its standing funding 
resolution referenced in Section 3.01(g) hereof, if such action under 
(i) or (ii) could, directly or indirectly, impede the issuance of 
Allocation Payment Debt. If any of the actions specified in (i) or (ii) 
of this Section 3.03(b) are taken by the Board of Directors of any 
party, and such action could, directly or indirectly, impede the 
issuance of Allocation Payment Debt, such action shall be deemed a 
breach of this Agreement.
    (c) No Challenge to this Agreement. Without implying that judicial 
action, arbitration, or other similar proceeding may be brought on any 
other matter, each Bank and the Funding Corporation specifically agree 
not to bring any judicial action, arbitration, or other similar 
proceeding to challenge the validity or enforceability of this 
Agreement.

Article IV. Effect of This Agreement

Section 4.01 Effect of This Agreement

    (a) Notwithstanding any other provision of this agreement and FCA's 
approval of the agreement, including through Federal Register notice 
and comment, it is expressly agreed by the parties hereto that neither 
this agreement, nor the execution or approval of this agreement, nor 
the insurance corporation's expression of no objection shall be 
interpreted to restrict or qualify, in any way, the authority of the 
FCA or the Insurance Corporation to exercise any of their respective 
powers, rights or duties, including the FCA's ability to invoke the 
joint and several liability provisions set forth in Section 4.4 of the 
Act, or to appoint a receiver or conservator.
    (b) Notwithstanding any other provision of this agreement, it is 
expressly agreed that this agreement, FCA's approval thereof, and the 
Insurance Corporation's expression of no objection do not provide any 
grounds for challenging FCA or Insurance Corporation actions with 
respect to the creation of or the conduct of receiverships or 
conservatorships. Without limiting the preceding statement, each bank 
specifically and expressly agrees and acknowledges that it cannot, and 
agrees that it shall not, attempt to challenge FCA's appointment of a 
receiver or conservator for itself or any other System institution or 
FCA's or the Insurance Corporation's actions in the conduct of any 
receivership or conservatorship on the basis of this agreement or FCA's 
approval thereof or the Insurance Corporation's expression of no 
objection. The banks jointly and severally agree that they shall 
indemnify and hold harmless FCA and the Insurance Corporation against 
all costs, expenses and damages, including without limitation, 
attorneys' fees and litigation costs, resulting from any such challenge 
by any party.

Article V. Arbitration

Section 5.01 Agreement to Arbitrate

    All disputes between or among the parties hereto relating to this 
Agreement or arising hereunder shall be submitted to final and binding 
arbitration pursuant to the U.S. Arbitration Act. Arbitrations shall be 
conducted under the Commercial Arbitration Rules of the American 
Arbitration Association before a single arbitrator. Neither the fact of 
the existence of an arbitration or any part of the records of such 
arbitration shall be divulged without the consent of the parties 
hereto, provided, however, that any party bringing an arbitration 
action against another party to this Agreement shall provide notice to 
the FCA and the Insurance Corporation that arbitration among the 
parties is pending.

Section 5.02 Procedure; Location

    The location of any arbitration proceedings under this Agreement 
shall be New York City, but such location may be changed by mutual 
agreement of the parties to such arbitration. An arbitrator shall be 
selected within fourteen (14) days of the initiation of arbitration by 
any party hereto, and the arbitrator shall render a decision within 
thirty (30) days of his or her selection, or as otherwise agreed to by 
the parties hereto. It is expressly agreed by the parties hereto that 
the arbitrator may order specific performance.

Section 5.03 Consistent Treatment of Each Bank

    This Agreement will be interpreted and applied in arbitration in a 
fashion that ensures that each Bank is treated consistently.

Section 5.04 Arbitration Principles

    If any party to this Agreement has taken any action or failed to 
take any action that results in the payment, in part or in full, of a 
Defaulted Maturing Obligation Allocation Amount by means of a statutory 
call by the FCA rather than pursuant to this Agreement, and such 
statutory call would not have been made but for the action or inaction 
of such a party to this Agreement, such action or inaction shall be 
deemed a breach of this Agreement. The arbitrator in any subsequent 
arbitration arising out of such action or inaction shall take the 
following principles into account in fashioning any remedies awarded in 
arbitration:
    (a) The parties intend that the arbitrator give economic effect to 
this Agreement in the event a Defaulted Maturing Obligation Allocation 
Amount is funded, in part or in full, through a statutory call that 
would not have been made but for the action or inaction of a party to 
this Agreement.
    (b) In the event of such action or inaction, the parties intend 
that each party to this Agreement will be put in the same economic 
position as each party would have occupied had the Defaulted Maturing 
Obligation Allocation Amount been allocated under this Agreement.
    (c) Notwithstanding any failure of the payment condition specified 
in Section

[[Page 51069]]

2.02(c)(iv) to be met, the arbitrator shall be permitted to afford 
relief to the parties as indicated pursuant to the principles set forth 
in this Section 5.04.
    (d) The arbitration principles set forth in this section shall not 
be construed to limit or affect the availability of any other relief 
that an arbitrator may choose to award in any arbitration pursuant to 
this Article V, including but not limited to an award of interest or 
consequential damages arising out of the actions or inactions of a 
party to this Agreement.
    (e) The principles set forth in this Section 5.04 shall not apply 
to any Bank for which this Agreement has been repudiated by the 
conservator or receiver on behalf of such a Bank in conservatorship or 
receivership.

Article VI. Indemnification

Section 6.01 Definitions

    As used in this Article VI:
    (a) ``Damages'' shall mean any and all losses, costs, liabilities, 
damages and expenses, including, without limitation, court costs and 
reasonable fees and expenses of attorneys expended in investigation, 
settlement and defense (at the trial and appellate levels and 
otherwise), which are incurred by an Indemnified Party as a result of 
or in connection with any third-party claim alleging liability for 
actions taken pursuant to or in connection with this Agreement, 
excepting any of the aforesaid to the extent such amounts are incurred 
by an Indemnified Party as a result of breaching any of such 
Indemnified Party's duties or obligations under this Agreement or for 
the violation of any provision under Article III herein. Except to the 
extent otherwise provided in this Article VI, Damages shall be deemed 
to have been incurred by reason of a final settlement or the dismissal 
with prejudice of any such claim, or the issuance of a final 
nonappealable order by a court of competent jurisdiction which 
ultimately disposes of such a claim, whether favorable or unfavorable.
    (b) ``Indemnified Party'' shall mean any Bank or the Funding 
Corporation, or any of the past, present or future directors, officers, 
stockholders, employees or agents of the foregoing.
    (c) ``Indemnity Payment'' shall have the meaning set forth in 
Section 6.07(a) hereof.

Section 6.02 Indemnity

    To the extent consistent with applicable law, the Banks (including 
any Bank seeking indemnification under the Agreement) shall indemnify 
and hold harmless each Indemnified Party against and in respect of 
Damages to the extent provided in Section 6.07, provided, however, that 
an Indemnified Party shall not be entitled to indemnification under 
this Article VI in connection with conduct of such Indemnified Party 
constituting gross negligence, willful misconduct, intentional tort or 
criminal act, or in connection with civil money penalties imposed by 
FCA; and provided further that no past, present or future directors, 
officers, stockholders, employees or agents of a Bank shall be entitled 
to indemnification under this Article VI in respect of Damages for 
which they could not be indemnified by such Bank pursuant to its 
bylaws, charter, or other agreements or instruments in effect as of the 
date of the act for which indemnification is being sought. Damages for 
which an Indemnified Party is entitled to indemnification shall be 
allocated to and payable by each Bank in proportion to such Bank's 
Average Insured Debt Obligations divided by the aggregate Average 
Insured Debt Obligations for all Banks, all of which shall be 
calculated in accordance with generally accepted accounting principles 
(``GAAP''), on the basis of the 12-month period ending on the last day 
of the last month prior to the date of the Assertion (as defined 
below).

Section 6.03 Advancement of Expenses

    The Banks shall advance to an Indemnified Party, as and when 
incurred by the Indemnified Party, all reasonable expenses, court costs 
and attorneys' fees incurred by such Indemnified Party in defending any 
proceeding involving a claim against such Indemnified Party based upon 
or alleging any matter that constitutes, or if sustained would 
constitute a matter in respect of which indemnification is provided for 
in Section 6.02, so long as the Indemnified Party provides the Banks 
with a written undertaking to repay all amounts so advanced if it is 
ultimately determined by a court in a final nonappealable order or by 
agreement of the Banks and the Indemnified Party that the Indemnified 
Party is not entitled to be indemnified under Section 6.02. Expenses 
advanced to an Indemnified Party pursuant to this Section 6.03 shall be 
allocated to and payable by each Bank in proportion to such Bank's 
Average Insured Debt Obligations divided by the aggregate Average 
Insured Debt Obligations for all Banks, all of which shall be 
calculated in accordance with generally accepted accounting principles 
(``GAAP''), on the basis of the 12-month period ending on the last day 
of the last month prior to the date of the Assertion (as defined 
below).

Section 6.04 Assertion of Claim

    (a) Promptly after the receipt by an Indemnified Party of notice of 
the assertion of any claim or the commencement of any action against 
him, her or it in respect of which indemnification may be sought 
against the Banks hereunder (each, an ``Assertion''), such Indemnified 
Party shall provide written notice of such Assertion to the Banks. The 
failure to so notify the Banks shall not relieve the Banks of liability 
they may have to such Indemnified Party hereunder, except to the extent 
that failure to give such notice results in material prejudice to the 
Banks.
    (b) The Banks shall be entitled to participate in, and to the 
extent the Banks elect in writing on thirty (30) days' notice, to 
assume, the defense of an Assertion, at their own expense, with counsel 
chosen by them and satisfactory to the Indemnified Party. 
Notwithstanding that the Banks shall have elected by such written 
notice to assume the defense of any Assertion, such Indemnified Party 
shall have the right to participate in the investigation and defense 
thereof, with separate counsel chosen by such Indemnified Party, but in 
such event the fees and expenses of such separate counsel shall be paid 
by such Indemnified Party and shall not be subject to indemnification 
by the Banks unless, in the absence of reasonable objections to the 
selection of such counsel by the Banks, (i) the Banks shall have agreed 
to pay such fees and expenses, (ii) the Banks shall have failed to 
assume the defense of such Assertion, or (iii) in the reasonable 
judgment of such Indemnified Party, based upon advice of his, her or 
its counsel, a conflict of interest may exist between the Banks and 
such Indemnified Party with respect to such Assertion, in which case, 
if such Indemnified Party timely notifies the Banks that such 
Indemnified Party elects to employ separate counsel at the Banks' 
expense, the Banks shall not have the right to assume the defense of 
such Assertion on behalf of such Indemnified Party. Notwithstanding 
anything to the contrary in this Article VI, neither the Banks, nor the 
Indemnified Party shall settle or compromise any action or consent to 
the entering of any judgment (a) without the prior written consent of 
the other, which consent shall not be unreasonably withheld, and (b) 
without obtaining, as an unconditional term of such settlement, 
compromise or consent, the delivery by the claimant or

[[Page 51070]]

plaintiff to such Indemnified Party of a duly executed written r