Emergency Economic Stabilization Act of 2008

The following information provided by Jeff Rodvien, Oppenheimer & Co.(NY) 98000/200/BAILOUT/Troubled.Asset.Relief.Program.summary.as.of.9.28.08.revised.doc 09/28/08 11:17 PM
September 28, 2008
Summary of Troubled Asset Relief Program
The Emergency Economic Stabilization Act of 2008 (the “Act”) provides the Treasury
Secretary with the authority to restore liquidity and stability to the U.S. financial system
and to ensure the economic well-being of Americans. As part of this authority, the
Treasury Secretary is authorized to establish a troubled asset relief program (“TARP”) to
purchase troubled assets from financial institutions under the terms of the Act.
I. Taxpayer Protection Provisions
• Funds Released in Tranches – TARP’s initial $250 billion will be immediately
available. Presidential certification to Congress will be required for the next $100
billion. The remaining $350 billion may be made available after the President
transmits a written report to Congress detailing the Treasury Secretary’s plan to
exercise the remaining authority. Congress must vote to disapprove.
• Insurance of Troubled Assets – The Secretary must establish a program to
guarantee troubled assets in amounts not greater than 100% of the amount of the
payment of principal and interest on the troubled assets. Premiums to be paid by
the financial industry. The details of the program are left to the Secretary’s
discretion.
• Warrants – The Secretary may not purchase troubled assets unless it receives from
the financial institution:
• For listed public companies – a warrant for voting, nonvoting stock or
preferred stock. The secretary must agree not to exercise voting power if it
takes voting stock but such voting power could be exercised by someone
who purchases from Treasury. The warrant must provide the government
with reasonable participation in equity appreciation and provide additional
protection against loss in the sale of the assets. Exercise and type of upside
is set by the Secretary “in the interests of the taxpayers.”
• Anti-dilution provisions must be included.
• For non-listed companies A warrant for common or preferred stock or a
senior debt instrument with a “reasonable interest rate premium.”
• No warrants required for purchases of less than $100M for the duration of
the program.
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• The final provisions give significantly more discretion to the Treasury.
• The substantial majority of the technical changes suggested by SIFMA and
Davis Polk & Wardwell late this afternoon were accepted in the proposed
legislation improving the effectiveness of the warrant provisions.
• Pricing and Auction Mechanisms. The Secretary is required to use market
mechanisms for purchases wherever possible and to maximize the efficiency of
taxpayer resources with auctions or reverse auctions. The mechanics of pricing are
left to the discretion of the Secretary although the Treasury is required to publish
program guidelines on this and other areas on an expedited basis. The guidelines
must be out within 2 business days of the first purchase or, at the latest, 45 days
after enactment.
• Recoupment of Taxpayer Losses – Five years after the date of enactment, OMB
will report to Congress on the TARP’s net gain or loss. If the program is running a
shortfall, the President will be required to submit a legislative proposal to Congress
that recoups for taxpayers the amount of the shortfall from the financial industry.
• Exchange Stabilization Fund Reimbursements – Treasury must reimburse the
Exchange Stabilization Fund for any funds used for the temporary guaranty
program for money market funds. Treasury cannot use the Fund for future
guaranty programs for money market funds.
II. Limits on Executive Compensation
• Direct Purchases – For financial institutions that participate in direct purchases,
the executive compensation limits include: prohibitions on senior executive officer
compensation that encourages unnecessary risk-taking; claw-back of bonuses paid
to senior executive officers based on statements of earnings that prove to be
materially inaccurate; and a ban on golden parachutes paid while Treasury holds an
equity or debt position in the financial institution.
• For direct purchases, the Secretary also retains significant discretion to
impose heightened corporate governance requirements – though the
standards are undefined.
• Auction Participants - The executive compensation limits are triggered by
purchased assets in an aggregate amount exceeding $300 million. When Treasury
buys assets at auction, an institution that has sold more than $300 million in assets
is subject to tax deduction limits for compensation limits above $500,000 paid to
“covered” employees as well as disallowance for certain severance payments on
which certain senior executives are subject to a non-deductible 20% excise tax. In
addition the institution is also prohibited from providing, in any new employment
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contract, for a golden parachute in the event of involuntary termination, bankruptcy,
insolvency, or receivership. Further guidance will be issued by Treasury.
III. Independent Oversight and Transparency
• Oversight Board – Composed of (1) chairman of the Federal Reserve Board, (2)
chairman of the SEC, (3) director of the Federal Home Finance Agency, (4)
secretary of HUD, and (5) Treasury Secretary. The private sector appointees by
Congress from prior drafts have been dropped. The Board has authority to review
the exercise of authority under the program; make recommendations; report any
suspected fraud or malfeasance to the Inspector General; and ensure the policies
implemented are consistent with protecting taxpayers and the economic interests of
the U.S. The possibility of the Board intervening directly to prohibit or limit the
Secretary’s actions has been dropped and the oversight is more on a policy level.
• Special Inspector General – New independent Inspector General to monitor the
Treasury Secretary’s decisions. Inspector Generals exist in most administrative
agencies and usually perform an audit like function.
• Reports – The Secretary must make various reports to Congress, including tranche
reports and a regulatory modernization report.
• GAO Oversight and Audits – The legislation mandates a GAO presence at
Treasury to oversee the program and conduct audits to ensure strong internal
controls and prevent fraud, waste and abuse. It will also include a study to
determine the extent to which leverage was a factor behind the current financial
crisis.
• Transparency – The legislation also requires the online posting of a description,
amounts, and pricing of assets acquired under the Act within 2 business days of
purchase, trade, or other disposition.
• Judicial Review – The standard for judicial review is limited to arbitrary,
capricious, abuse of discretion or not in accordance with law. No injunctions
permitted related to purchases of assets, insurance program, management and sale
of foreclosure mitigation efforts. Any other injunctions must be considered on an
expedited basis. No suits by any financial institution seller unless permitted in the
contract with Treasury.
• Regulatory. Requires that the Treasury Secretary implement guidelines and
regulations in multiple areas including reports, pricing mechanisms and conflicts of
interest.
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IV. Home Foreclosure Mitigation
• Tax Relief for Certain Homeowners – Under current law, forgiven mortgage debt
is not subject to tax through December 31, 2009. The bill extends this tax relief for
three years through December 31, 2012.
• Assistance to Homeowners – Requires the FHA, Federal Reserve, and FDIC to
adopt a systematic approach to preventing foreclosure and encourage loan servicers
to engage in loan modifications.
V. Miscellaneous
• Definition of Troubled Assets –Includes all mortgage related assets originated
before March 14, 2008 and, after consultation with the Chairman of the Federal
Reserve Board, any other financial asset that the Secretary determines is necessary
for financial stability. For the broader financial assets to apply, Congress must be
notified in writing.
• Definition of Financial Institution – It currently covers any institution, including,
but not limited to, any bank, savings association, credit union, security broker or
dealer, or insurance company established and regulated under the laws of the U.S.
or any state and having significant operations in the U.S. This covers branches
and agencies of foreign banks. It does not on its face cover affiliates of covered
institutions, the “including but not limited” will give the Secretary the power to
define covered institutions in rules and guideline.
• Suspension of Mark-to-Market Accounting – Reaffirms SEC authority to
suspend the application of mark-to-market accounting rules with respect to any
company.
• Public Disclosure – For any financial institution that sells troubled assets, the
Treasury Secretary determines whether the public disclosure with respect to
derivatives, contingent liabilities and off-balance sheet transaction is adequate to
inform the public of the true financial condition of the financial institution. If not,
the Secretary will make additional disclosure requirements to the relevant
regulators which includes the SEC, the OCC and the OTS.
• Community Bank Relief – Community banks that sell Fannie and Freddie
preferred stock could treat the gains and losses as ordinary income instead of
capital gains. As a result, any losses could be used to offset ordinary income for tax
purposes.
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Prior Draft Provisions That Were Dropped:
• Bankruptcy cram-down
• Program will not divert revenues to any of the housing funds
• Program will not make foreclosed properties available at a discount to state and
local governments receiving emergency assistance
• The “say on pay” requirement is dropped
If you would like further information or wish to discuss any of the points raised
above, please contact Richard Hunt (rhunt@sifma.org), Scott DeFife
(sdefife@sifma.org) or any other member of SIFMA’s staff (202-962-7300).
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