The Emergency Economic Stabilization Act of 2008
October 15, 2008
On Friday, October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “Act”)1 was signed into law. Among other things, the Act vests authority in the U.S. Treasury Secretary (the “Secretary”) to establish the Troubled Asset Relief Program (the “TARP”) for purposes of buying mortgage-related and other troubled assets from certain financial institutions to restore the capital bases of institutions holding such assets. The Secretary’s mandate regarding TARP is very broad and authorizes the Secretary to set guidelines for the identification, pricing, purchase and sale of certain assets from qualifying financial institutions.
The Secretary and others have interpreted the Act as to permit the Federal government to inject capital into the financial system by purchasing equity in financial institutions. It seems likely that the Federal government will pursue a two-pronged strategy – both purchasing troubled assets and investing in equity.
TARP ESTABLISHMENT
The central feature of the Act is the establishment of the TARP. The TARP shall be run by a newly-created Office of Financial Stability within the Office of Domestic Finance of the Department of the Treasury and under the leadership of an Assistant Treasury Secretary.2
TARP ELIGIBLE FINANCIAL INSTITUTIONS
Defined “financial institutions” are permitted to participate in the TARP and include, but are not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.3 The Act further provides that to the extent foreign financial authorities or banks hold troubled assets as a result of extending financing to “financial institutions” that have failed or defaulted on such financing, such troubled assets held by them also qualify for participation in the TARP.4
TARP ELIGIBLE ASSETS
Only defined “troubled assets” are considered for inclusion in the TARP. These include:
The Act requires the Secretary to publish operating guidelines for the TARP before the earlier of the 2nd business day following the first purchase of troubled assets and the 45th day after the Act’s enactment.6 The Secretary has the authority to purchase troubled assets and/or to insure troubled assets until December 31, 2009, subject to extension until October 3, 2010 if the Secretary certifies to Congress justification for, and costs of, such extension.7 While the TARP is in effect, the Secretary is required to make reports to the appropriate committees of Congress every 30 days, beginning no later than 60 days after the first purchase of troubled assets or the guarantee of troubled assets (described below).8
TARP TROUBLED ASSET DETERMINATIONS AND PURCHASES
When deciding which troubled assets to acquire, the Secretary must take into consideration, among other things, (1) taxpayers’ interests, (2) financial market stability, (3) homeowners’ retention of their homes and community stabilization (i.e., foreclosure mitigation), (4) financial institution viability, (5) support of smaller financial institutions holding Fannie Mae and Freddie Mac preferred stock, (6) stability of state governmental bodies and instrumentalities, and (7) Americans’ retirement security.9 While the Act lacks precise pricing mechanisms for troubled assets, the Secretary is required to make purchases at the lowest price consistent with the purposes of the Act and to maximize the efficiency of the use of taxpayer resources by employing available market mechanisms where appropriate.10 In turn, the Secretary is required to hold troubled assets to maturity or for resale at such time the Secretary determines will maximize value for taxpayers and return on investment for the federal government.11 In any case, the Secretary may not purchase a troubled asset at a higher price than what the prospective seller paid to purchase the trouble asset12 and must publicly disclose the terms of troubled asset purchases, trades or other dispositions within 2 days of such transactions.13 The Secretary has the initial authority to purchase and hold up to $250 billion of troubled assets at any one time. Thereafter, if the President submits certification to Congress regarding the Secretary’s need for additional purchasing authority, such limit shall be increased to $350 billion in troubled assets outstanding at any time. If, after this initial Presidential certification is delivered to Congress, a further Presidential certification is submitted to Congress that details a plan for the Secretary’s exercise of additional authority, such limit may be increased further to $700 billion in troubled assets outstanding at any time, unless a joint resolution of Congress denying additional purchasing authority to the Secretary is enacted within 15 days of transmission of such Presidential certification.14
TARP OVERSIGHT, MANAGEMENT AND REVIEW
The Act establishes the Financial Stability Oversight Board (“FSOB”), which is charged with reviewing the exercise of authority under the Act. The FSOB is comprised of the Fed Chairman, the Secretary, the Director of the Federal Housing Finance Agency, the Chairman of the Securities Exchange Commission, and the Secretary of Housing and Urban Development.15 The Act provides the Secretary with broad authority to manage purchased troubled assets, including the revenues and portfolio risks associated with them.16 The Secretary has the authority to contract with private parties to provide asset management services in connection with the TARP, but is required to consider the FDIC for management services where appropriate.17 The actions of the Secretary taken under the Act are subject to limited judicial review and relief.18 The TARP is also subject to the audit oversight of the U.S. Comptroller General.19
TARP FINANCIAL INSTITUTION PARTICIPATION
Financial institutions participating in the TARP will be subject to certain conditions and restrictions imposed by the Act. Subject to certain de minimis exceptions, any financial institution participating in the TARP will be required to issue to the Federal government (1) in the case of a publicly trade financial institution, warrants for such financial institution’s non-voting common stock or preferred stock and (2) in the case of any other financial institution, warrants for common or preferred stock or senior debt instrument.20 For direct purchases of troubled assets from financial institutions in transactions in which the Secretary receives meaningful equity or debt instruments, such financial institutions shall be required to observe certain executive compensation and corporate governance standards regarding senior executive officers for the duration the Secretary holds such instruments, recoupment of contingent or bonus compensation based on financial results later determined to be materially inaccurate, and golden parachute prohibitions.21 For auction purchases of troubled assets from financial institutions in blocks of $300 million or more per financial institution, such financial institutions shall be prohibited from entering into any employment agreement with a senior executive officer including a golden parachute triggered upon involuntary termination or insolvency events.22 Finally, any financial institution selling more than $300 million in troubled assets will be subject to restrictions regarding executive compensation tax deductions.23
TARP RELATIONSHIP TO GUARANTEES OF TROUBLED ASSETS
To the extent the Secretary establishes the TARP, the Secretary must also establish a program that provides for the guarantee of up to 100% of principal and interest payments for troubled assets issued prior to March 14, 2008.24 Such program would be funded by insurance premiums paid by participating financial institutions, which premiums would be held by a Troubled Asset Insurance Financing Fund (“TAIFF”). The Secretary is authorized to determine such premiums in accordance with the risk associated with particular classes of troubled assets, but in any case the levels of premiums set by the Secretary must be at levels to create sufficient reserves to meet anticipated claims. Guarantee obligations established under the program would be paid out of the TAIFF. Most importantly, the Secretary’s TARP purchasing authority limits referenced above shall be reduced at any given time by an amount equal to the positive difference between the aggregate amount of outstanding guarantee obligations established under such insurance program and the balance of the TAIFF.25
INCREASE IN DEPOSIT AND SHARE INSURANCE COVERAGE
The Act temporarily raised the maximum insured deposit amount for FDIC and credit union deposit insurance from $100,000 to $250,000 until December 31, 2009.26
AUTHORITY TO SUSPEND MARK-TO-MARKET ACCOUNTING
The Act authorizes the Securities Exchange Commission (“SEC”) under the Securities Exchange Act to suspend the application of Financial Accounting Standards Board’s Statement No. 157 regarding mark-to-market accounting standards to any issuer or with respect to any class or category of transaction if the SEC determines such suspension is necessary or appropriate in the public interest and is consistent with investor protection.27
Pub L. No. 110-343.
Act § 101(3)(A).
Act § 3(5).
Act § 112.
Act §3(9). The defined “appropriate committees of Congress” include the (1) the Committees on Banking, Housing and Urban Affairs, the Committee on Finance, the Committee on the Budget, and the Committee on Appropriations of the Senate, and (2) the Committee on Financial Services, the Committee on Ways and Means, the Committee on the Budget, and the Committee on Appropriations of the House of Representatives. Act § 3(1)(A)-(B).
Act § 101(d).
Act § 120(a)-(b).
Act § 105.
Act § 103.
Act § 113.
Act § 113.
Act §101(e).
Act § 114.
Act § 115.
Act § 104.
Act § 106.
Act § 107.
Act § 119
Act § 116.
Act § 113(d).
Act § 111(b).
Act § 111(c).
Act § 302.
Act § 102.
Act § 102(c)(4).
Act § 136(a)-(b).
Act § 132.
The Secretary and others have interpreted the Act as to permit the Federal government to inject capital into the financial system by purchasing equity in financial institutions. It seems likely that the Federal government will pursue a two-pronged strategy – both purchasing troubled assets and investing in equity.
TARP ESTABLISHMENT
The central feature of the Act is the establishment of the TARP. The TARP shall be run by a newly-created Office of Financial Stability within the Office of Domestic Finance of the Department of the Treasury and under the leadership of an Assistant Treasury Secretary.2
TARP ELIGIBLE FINANCIAL INSTITUTIONS
Defined “financial institutions” are permitted to participate in the TARP and include, but are not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.3 The Act further provides that to the extent foreign financial authorities or banks hold troubled assets as a result of extending financing to “financial institutions” that have failed or defaulted on such financing, such troubled assets held by them also qualify for participation in the TARP.4
TARP ELIGIBLE ASSETS
Only defined “troubled assets” are considered for inclusion in the TARP. These include:
- Residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages that in each case were originated or issued on or before March 14, 2008, as selected by the Secretary for purchase to promoted financial market stability.
- Any other financial instrument that the Secretary, upon consultation with the Chairman of the Board of Governors of the Federal Reserve System (the “Fed Chairman”), determines must be purchased to promote financial market stability, after notifying certain defined “appropriate committees of Congress” such determination.5
The Act requires the Secretary to publish operating guidelines for the TARP before the earlier of the 2nd business day following the first purchase of troubled assets and the 45th day after the Act’s enactment.6 The Secretary has the authority to purchase troubled assets and/or to insure troubled assets until December 31, 2009, subject to extension until October 3, 2010 if the Secretary certifies to Congress justification for, and costs of, such extension.7 While the TARP is in effect, the Secretary is required to make reports to the appropriate committees of Congress every 30 days, beginning no later than 60 days after the first purchase of troubled assets or the guarantee of troubled assets (described below).8
TARP TROUBLED ASSET DETERMINATIONS AND PURCHASES
When deciding which troubled assets to acquire, the Secretary must take into consideration, among other things, (1) taxpayers’ interests, (2) financial market stability, (3) homeowners’ retention of their homes and community stabilization (i.e., foreclosure mitigation), (4) financial institution viability, (5) support of smaller financial institutions holding Fannie Mae and Freddie Mac preferred stock, (6) stability of state governmental bodies and instrumentalities, and (7) Americans’ retirement security.9 While the Act lacks precise pricing mechanisms for troubled assets, the Secretary is required to make purchases at the lowest price consistent with the purposes of the Act and to maximize the efficiency of the use of taxpayer resources by employing available market mechanisms where appropriate.10 In turn, the Secretary is required to hold troubled assets to maturity or for resale at such time the Secretary determines will maximize value for taxpayers and return on investment for the federal government.11 In any case, the Secretary may not purchase a troubled asset at a higher price than what the prospective seller paid to purchase the trouble asset12 and must publicly disclose the terms of troubled asset purchases, trades or other dispositions within 2 days of such transactions.13 The Secretary has the initial authority to purchase and hold up to $250 billion of troubled assets at any one time. Thereafter, if the President submits certification to Congress regarding the Secretary’s need for additional purchasing authority, such limit shall be increased to $350 billion in troubled assets outstanding at any time. If, after this initial Presidential certification is delivered to Congress, a further Presidential certification is submitted to Congress that details a plan for the Secretary’s exercise of additional authority, such limit may be increased further to $700 billion in troubled assets outstanding at any time, unless a joint resolution of Congress denying additional purchasing authority to the Secretary is enacted within 15 days of transmission of such Presidential certification.14
TARP OVERSIGHT, MANAGEMENT AND REVIEW
The Act establishes the Financial Stability Oversight Board (“FSOB”), which is charged with reviewing the exercise of authority under the Act. The FSOB is comprised of the Fed Chairman, the Secretary, the Director of the Federal Housing Finance Agency, the Chairman of the Securities Exchange Commission, and the Secretary of Housing and Urban Development.15 The Act provides the Secretary with broad authority to manage purchased troubled assets, including the revenues and portfolio risks associated with them.16 The Secretary has the authority to contract with private parties to provide asset management services in connection with the TARP, but is required to consider the FDIC for management services where appropriate.17 The actions of the Secretary taken under the Act are subject to limited judicial review and relief.18 The TARP is also subject to the audit oversight of the U.S. Comptroller General.19
TARP FINANCIAL INSTITUTION PARTICIPATION
Financial institutions participating in the TARP will be subject to certain conditions and restrictions imposed by the Act. Subject to certain de minimis exceptions, any financial institution participating in the TARP will be required to issue to the Federal government (1) in the case of a publicly trade financial institution, warrants for such financial institution’s non-voting common stock or preferred stock and (2) in the case of any other financial institution, warrants for common or preferred stock or senior debt instrument.20 For direct purchases of troubled assets from financial institutions in transactions in which the Secretary receives meaningful equity or debt instruments, such financial institutions shall be required to observe certain executive compensation and corporate governance standards regarding senior executive officers for the duration the Secretary holds such instruments, recoupment of contingent or bonus compensation based on financial results later determined to be materially inaccurate, and golden parachute prohibitions.21 For auction purchases of troubled assets from financial institutions in blocks of $300 million or more per financial institution, such financial institutions shall be prohibited from entering into any employment agreement with a senior executive officer including a golden parachute triggered upon involuntary termination or insolvency events.22 Finally, any financial institution selling more than $300 million in troubled assets will be subject to restrictions regarding executive compensation tax deductions.23
TARP RELATIONSHIP TO GUARANTEES OF TROUBLED ASSETS
To the extent the Secretary establishes the TARP, the Secretary must also establish a program that provides for the guarantee of up to 100% of principal and interest payments for troubled assets issued prior to March 14, 2008.24 Such program would be funded by insurance premiums paid by participating financial institutions, which premiums would be held by a Troubled Asset Insurance Financing Fund (“TAIFF”). The Secretary is authorized to determine such premiums in accordance with the risk associated with particular classes of troubled assets, but in any case the levels of premiums set by the Secretary must be at levels to create sufficient reserves to meet anticipated claims. Guarantee obligations established under the program would be paid out of the TAIFF. Most importantly, the Secretary’s TARP purchasing authority limits referenced above shall be reduced at any given time by an amount equal to the positive difference between the aggregate amount of outstanding guarantee obligations established under such insurance program and the balance of the TAIFF.25
INCREASE IN DEPOSIT AND SHARE INSURANCE COVERAGE
The Act temporarily raised the maximum insured deposit amount for FDIC and credit union deposit insurance from $100,000 to $250,000 until December 31, 2009.26
AUTHORITY TO SUSPEND MARK-TO-MARKET ACCOUNTING
The Act authorizes the Securities Exchange Commission (“SEC”) under the Securities Exchange Act to suspend the application of Financial Accounting Standards Board’s Statement No. 157 regarding mark-to-market accounting standards to any issuer or with respect to any class or category of transaction if the SEC determines such suspension is necessary or appropriate in the public interest and is consistent with investor protection.27
Pub L. No. 110-343.
Act § 101(3)(A).
Act § 3(5).
Act § 112.
Act §3(9). The defined “appropriate committees of Congress” include the (1) the Committees on Banking, Housing and Urban Affairs, the Committee on Finance, the Committee on the Budget, and the Committee on Appropriations of the Senate, and (2) the Committee on Financial Services, the Committee on Ways and Means, the Committee on the Budget, and the Committee on Appropriations of the House of Representatives. Act § 3(1)(A)-(B).
Act § 101(d).
Act § 120(a)-(b).
Act § 105.
Act § 103.
Act § 113.
Act § 113.
Act §101(e).
Act § 114.
Act § 115.
Act § 104.
Act § 106.
Act § 107.
Act § 119
Act § 116.
Act § 113(d).
Act § 111(b).
Act § 111(c).
Act § 302.
Act § 102.
Act § 102(c)(4).
Act § 136(a)-(b).
Act § 132.
