Archive for October, 2008
Overview. The U.S. Department of the Treasury (Treasury) has issued an interim final rule (New Compensation Restriction Rules) implementing the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 (EESA). The New Compensation Restriction Rules apply to the senior executive officers of any financial institution participating in any part of the Treasury’s Troubled Assets Relief Program (TARP), including, the Capital Purchase Program (CPP), the Program for Systemically Significant Failing Institutions (PSSFI) and the Troubled Asset Auction Program (TAAP). Although the extent of the Compensation Rules’ impact will depend upon the program in which a particular financial institution chooses to participate, most institutions (even private ones) will be required to comply with one or more of the following rules:
- Ensure that incentive compensation for senior executives does not encourage unnecessary and excessive risks;
- Recover any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that prove to be materially inaccurate;
- Refuse to make any golden parachute payment to a senior executive officer during the period that the Secretary holds an equity or debt position in the institution;
- Forego federal income tax deductions on executive compensation exceeding $500,000 in a given tax year. Note: not a restriction on compensation levels, but on deductibility; and
- Senior executives covered by the New Compensation Restriction Rules include the chief executive officer, chief financial officer and the three other most highly compensated executive officers (SEOs).
When do these new rules apply? The applicability of the New Compensation Restriction Rules depends upon several factors, including the value of the assets sold by the institution to the Treasury and the method by which the Treasury acquires those assets (directly or via auction). Consider the following:
- The Compensation Restriction Rules apply to every financial institution along with its control group parent or subsidiaries (Subject Entity) that (a) participates in CPP, (b) sells more than $300 million of assets via the TAAP or (c) becomes part of the PSSFI.
- For participants in the CPP, the New Compensation Restriction Rules apply only during the time period that the Treasury holds an equity or debt position in the financial institution. For participants in the TAAP, the New Compensation Restriction Rules apply at least through December 31, 2009 and possibly through October 3, 2010, depending on whether Treasury extends the program.
- The New Compensation Restriction Rules apply only to SEOs. To implement this requirement, the New Compensation Restriction Rules look to Item 402 of Regulation S-K, applied under federal securities laws in connection with public offerings and public company periodic reporting. The Item 402-based determination of SEOs applies whether the institution is public or private.
Item 402 states that executive officers (other than the CEO or CFO) must make at least $100,000 and the determination as to which executive officers are the most highly compensated shall be made by reference to total compensation for the last completed fiscal year. However, the New Compensation Restriction Rules require Subject Entities to use “best efforts” to determine the three most highly compensated executive officers prior to having year-end compensation data for the current year. Also, Item 402 states that executive officers may include one or more executive officers or other employees of subsidiaries. Under limited circumstances, a Subject Entity may exclude an individual, other than its CEO or CFO, who is otherwise one of the most highly compensated executive officers, due to the payment of amounts of cash compensation relating to overseas assignments attributed predominantly to such assignments.
Restrictions By Specific TARP Program. As noted above, the effect that the New Compensation Restriction Rules will have on a given financial institution will depend upon which TARP program the institution chooses. The following paragraphs explain in greater detail the compensation restrictions associated with a given TARP program.
- Capital Purchase Program – This program allows the Secretary to purchase assets directly from financial institutions in exchange for a meaningful debt or equity position in the institution. The New Compensation Restriction Rules place several compliance requirements on financial institutions participating in the CPP.
First, the institution’s compensation committee, in conjunction with the institution’s senior risk officers, must ensure that SEO compensation packages do not prescribe incentive compensation that promotes unnecessary and excessive risks. The first such review must be completed within 90 days of the institution’s initial participation in the CPP, and a similar review must occur annually (but only while the Secretary holds a debt or equity interest in the institution pursuant to CPP). After these reviews, the compensation committee must certify that the reviews have been completed. Note the rules provide no guidance, other than consultation with risk management officers, as to what constitutes risk-promoting compensation. And, although the rules require the compensation committee to certify that SEO contracts comply with the prohibition on risky compensation pay, the certification will not be provided until after the Treasury has purchased troubled assets from the Subject Entity. The New Compensation Restriction Rules are not clear on what would happen if an existing contract did not comply with the Secretary’s guidelines.
Second, any financial institution participating in the CPP must require SEOs to repay any bonus or incentive compensation previously received if such compensation was based on statements of earnings, gains or other criteria that prove to be materially inaccurate. Note, although similar in many respects to Section 304 of Sarbanes-Oxley, this provision is in reality much broader. This provision applies to both public and private institutions, is not triggered exclusively by an accounting restatement, has an unlimited recovery period and covers not only material inaccuracies in financial reporting, but also material inaccuracies relating to other performance metrics used to award bonuses and incentive compensation.
Third, a financial institution cannot make any golden parachute payments to any SEOs while the Secretary holds an equity or debt position acquired under the CPP. For purposes of this rule, the term “golden parachute” payment refers to any compensation, other than a payment under a qualified retirement plan, with an aggregate present value that equals or exceeds 300% of the employee’s base salary. While that definition is similar to the term “excess parachute” payment set forth in § 280G of the Internal Revenue Code, “golden parachute” payments subject to EESA include all payments triggered by an applicable severance from employment, regardless of whether there has been a change in control of the financial institution, and encompass most any compensation paid on account of an SEO’s involuntary termination from employment, including terminations associated with the institution’s bankruptcy, insolvency or receivership.
Fourth, the financial institution must agree to forego any federal income tax deduction on the compensation in excess of $500,000 paid to any SEO.
- Programs for Systemically Significant Failing Institutions – Under this program, the Treasury provides direct assistance to certain failing financial institutions on terms negotiated on a case-by-case basis. These standards are similar in all respects to the New Compensation Restriction Rules applicable to the CPP, except that the definition of “golden parachute payment” is defined even more broadly. Like the CPP program discussed above, a financial institution participating in the PSSFI must prohibit any golden parachute payment to a SEO while the Treasury holds a meaningful equity or debt position in the institution. But unlike the CPP, for purposes of PSSFI, a “golden parachute payment” is defined as any compensatory payment to an SEO on account of severance from employment (i.e., not just payments in excess of 300% of the SEO’s base amount).
- Troubled Asset Auction Program – Under this program, the Treasury purchases troubled assets from a financial institution through an auction format. As prescribed by EESA, any financial institution that sells more than $300 million of troubled assets to the Treasury via auction would be prohibited from entering into new executive employment contracts that would provide a golden parachute payment to an SEO in the event of the SEO’s involuntary termination, or in connection with the financial institution’s bankruptcy filing, insolvency or receivership. The employment agreements subject to this rule will be considered “new” agreements if entered into on or after the date the financial institution has sold at least $300 million in troubled assets under TARP, provided that some of the asset sales were conducted through TAAP. An employment agreement that is renewed or materially modified after such date is also considered a “new” arrangement for this purpose. In addition, EESA precludes any financial institution from receiving any federal income tax deduction for any compensation in excess of $500,000 paid to an SEO.
You Must Act Now!
The deadline for filing applications to participate in the Treasury’s Capital Purchase Program (“TCPP”) is 5:00 p.m., on November 14, 2008. Financial Institutions need to take the following steps as soon as possible so they can determine if they are eligible to participate in TCPP and begin the process:
- Obtain and fill out the short TCPP application, which can be found by clicking here.
- Contact your primary federal bank regulator to determine whether you are eligible to participate in TCPP. It is our understanding that CAMELS 3 and 4 rated banks may be eligible to participate in TCPP.
- Convene a board meeting to discuss participation in TCPP in detail, paying specific attention to the restrictions the Bank would live with if it participates in TCPP. These restrictions involve dividends, redemptions and repurchases, transferability, voting rights, executive compensation and issuance of warrants. A detailed description of these restrictions in the Treasury’s term sheet for the senior preferred securities can be found by clicking here.
- In conjunction with counsel, (i) prepare to call a special shareholders meeting, (ii) prepare resolutions to be adopted at the shareholders meeting and (iii) prepare amendments to articles of incorporation, bylaws and other corporate documents authorizing the issuance of senior preferred securities to Treasury.
- Review the Treasury’s Standard Purchase Agreement when it is released (particularly the representations and warranties).
The major unanswered/unclear questions for community banks and their respective holding companies at this time are:
- Can S Corporations participate in the TCPP?
S Corporations can only have one class of stock. This issue was apparently overlooked in the rush of passing the new economic recovery laws. Our firm has been in contact with the IRS suggesting a regulatory change that would permit S Corporation banks and holding companies to participate in the TCPP. We have spoken with a branch manager of the IRS’ national office. Based on that conversation, we believe that S Corporations will be able to participate and guidance will be forthcoming that will disregard the TCPP senior-preferred for purposes of the single class of stock requirement for S Corporation status.
- How can private non-public institutions participate in TCPP due to requirements for pricing of warrants?
Notwithstanding the questions above, we believe that you should start the application process, and other actions set out above, NOW to take advantage of this low cost capital!
The contraction of credit has extended in dramatic fashion to the commercial paper market. Issuers are having to refinance their commercial paper daily unless they are willing to offer significantly higher interest rates, and the volume of outstanding paper continues to shrink. To reinvigorate this market, pursuant to its authority under Section 13(3) of the Federal Reserve Act, the Federal Reserve Board has created the Commercial Paper Funding Facility (CPFF) as a credit facility to a special purpose vehicle formed to purchase three-month U.S. dollar-denominated commercial paper from eligible issuers. An eligible issuer must be an U.S. issuer (including an U.S. subsidiary of a foreign parent) and register with the CPFF. Commercial paper must be non-interest bearing and rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization. No issuer may sell commercial paper through the program if such amount, together with outstanding commercial paper, would exceed the greatest amount of its U.S. dollar-denominated commercial paper outstanding on any day between January 1 and August 31, 2008. The commercial paper will be purchased at a discount based upon the three-month overnight index swap rate plus a spread which depends upon whether the paper is asset-backed or unsecured. Issuer registration begins on Monday, October 20, 2008, and purchases under the CPFF will begin on October 27, 2008. Further details about this program are outlined below. For more information from the Federal Reserve Bank of New York website, click here.
Commercial Paper Funding Facility
Recently, the commercial paper market has buckled as money market mutual funds and other investors have hesitated to buy commercial paper, especially commercial paper carrying a longer-dated maturity. As a result, an increasingly high percentage of outstanding commercial paper must be refinanced daily, interest rates on longer-term commercial paper have increased significantly, and the volume of outstanding commercial paper has dramatically declined. To counteract this decline and thaw the market for short-term commercial paper, the Federal Reserve Board (FRB) has authorized a Commercial Paper Funding Facility (CPFF) pursuant to its authority under Section 13(3) of the Federal Reserve Act.
The CPFF will be structured as a credit facility to a special purpose vehicle (SPV) that will purchase term commercial paper from eligible issuers. Under this program, the Federal Reserve Bank of New York will lend to the SPV on a recourse basis secured by all the SPV’s assets. The SPV will use the facility to purchase commercial paper from eligible issuers through the New York Fed’s primary dealers. An eligible issuer is an entity organized under the laws of the U.S. or a political subdivision or territory thereof (including a U.S. issuer having a foreign parent) which is registered with the CPFF. If a parent and a subsidiary have separate commercial paper programs, they are considered separate issuers. Currently, municipal commercial paper issuers may not participate, and the New York Fed reserves the right to limit or prohibit participation in the CPFF based upon other factors.
Commercial Paper Being Purchased
The SPV will purchase only U.S. dollar-denominated commercial paper which is non-interest bearing, has a three-month maturity (not extendable) and is rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization (NRSRO). If rated by multiple major NRSROs, the paper must be rated at least A-1/P-1/F1 by two or more of them. The pricing is different for asset-backed commercial paper (ABCP) and other commercial paper.
Limits per Issuer
The maximum amount of commercial paper that any single issuer may sell to the SPV will be limited to the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding (regardless of the maturity or other terms of the paper) on any day between January 1 and August 31, 2008. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit. In connection with registration, the issuer must certify the maximum amount of commercial paper that it could sell to the SPV (and may not certify a lesser amount) and pay a facility fee equal to 10 basis points of such maximum amount. The minimum transaction size accepted over the BLOOMBERG PROFESSIONAL BOOM® platform is $250,000.
Pricing of Commercial Paper Purchased by the SPV
The commercial paper purchased by the SPV will be discounted based on a rate equal to an applicable spread over the three-month overnight index swap (OIS) rate on the day of purchase. The spread for unsecured commercial paper will be 100 basis points per annum, and the spread for ABCP will be 300 basis points per annum. For unsecured commercial paper, the issuer must also pay a 100 basis points per annum unsecured credit surcharge which will be deducted by the SPV from the proceeds of the issuance on the trade execution date. An issuer may avoid the unsecured credit surcharge if the issuer provides a collateral arrangement for the commercial paper that is acceptable to the New York Fed or obtains an endorsement or guarantee of its obligations on the commercial paper that is acceptable to the New York Fed. The daily CPFF rates will be posted by 8:00 ET on the New York Fed’s website and published on the CPFF page of BLOOMBERG PROFESSIONAL® service.
An issuer whose commercial paper is protected by the FDIC’s Temporary Liquidity Guarantee Program will be considered guaranteed to the satisfaction of the New York Fed under the terms and conditions of the CPFF. However, during the FDIC program’s first 30 days, any such issuer that sells commercial paper to the SPV will still be required to pay the 100 basis point unsecured credit surcharge. If the issuer does not opt out of the FDIC’s Temporary Liquidity Guarantee Program at the end of the FDIC program’s first 30 days, the issuer (1) will be entitled to a reimbursement of the unsecured credit surcharge previously paid and (2) will not be subject to the unsecured credit surcharge for commercial paper subsequently sold to the SPV.
The CPFF will begin operating on October 27, 2008. Issuer registration begins on Monday, October 20, 2008; registration materials, including wire instructions and a registration form, will be available on this date at http://www.newyorkfed.org/markets/cpff.html. To access the facility on October 27, 2008, an issuer must register no later than Thursday, October 23, 2008. Thereafter, an issuer that has not previously registered with the CPFF must register at least two business days in advance of its intended use of the CPFF. The SPV will stop purchasing commercial paper on April 30, 2009, unless the FRB elects to extend it. The CPFF facility will terminate when the last of the SPV’s assets mature.
Earlier this week, Treasury Secretary Paulson triggered the systemic risk exception to the “least cost resolution” requirements of Section 13 of the FDIC Act. Based upon this authority, the FDIC Board of Directors approved the Temporary Liquidity Guarantee Program. Under the program, FDIC will guarantee newly issued senior unsecured debt of eligible institutions and provide full deposit insurance coverage for non-interest bearing deposit transaction accounts (i.e., non-interest bearing demand deposit accounts) at FDIC-insured institutions, regardless of dollar amount.
- Institutions eligible to participate consist of FDIC-insured institutions and bank holding companies, financial holding companies, and savings and loan holding companies that engage only in activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act. FDIC, in consultation with an institution’s primary regulator, will determine eligibility.
- Coverage for all eligible institutions is automatic for the first 30 days of the program at no cost.
- Institutions may opt out of either or both components of the program, but must do so before the end of the initial 30-day period.
- Participating institutions will be subject to enhanced supervisory oversight to prevent rapid growth or excessive risk-taking.
- A special assessment will be collected to cover any losses not covered by fees imposed in connection with the program. This assessment will apply to all insured institutions, whether or not they choose to remain in the program. The assessment will be computed based upon the amount of an institution’s average total assets during the period, minus the sum of (A) the amount of the institution’s average total tangible equity, plus (B) the amount of the institution’s average total subordinated debt.
- FDIC and the primary regulators will issue additional guidance regarding the program.
Senior Unsecured Debt Guarantee
- Applies to senior unsecured debt newly issued between October 14, 2008 and June 30, 2009. Applicable debt will include promissory notes, commercial paper, inter-bank funding and any unsecured portion of secured debt. Deposits and non-contractual obligations are not included.
- Guarantee generally will be limited to 125% of an institution’s eligible debt outstanding as of September 30, 2008, determined on an aggregated basis (as opposed to type). For institutions with no eligible debt outstanding as of September 30, 2008, FDIC and the institution’s primary regulator will consider eligibility and limits on a case-by-case basis. Interested institutions should contact their primary regulator to begin discussions. Because most community bank holding companies will not have outstanding eligible debt, it will be necessary for these institutions to negotiate the availability and extent of the guarantee with FDIC and their primary regulator.
- Prepayment of term debt instruments expiring between October 14, 2008 and June 30, 2009 will not be permitted in connection with this program.
- Coverage under this program will be provided only until June 30, 2012, even if the underlying obligation matures at a later date.
- As noted above, there are no fees in connection with the program for the first 30 days. After this time, FDIC will collect an annualized guarantee fee in an amount equal to 75 basis points (0.75%) multiplied by the amount of debt guaranteed under the program.
- FDIC recommends that instruments guaranteed under this program are eligible to be delivered as collateral for other borrowings and will coordinate with primary regulators on this point.
Deposit Account Insurance
- Applies to all funds held by FDIC-insured institutions in all non-interest bearing transaction deposit (i.e., demand deposit) accounts until December 31, 2009.
- As noted above, there are no fees in connection with the program for the first 30 days. After this time, FDIC will impose a 10 basis point (0.10%) surcharge on an institution’s current assessment rate. The surcharge will apply to all deposits not otherwise covered by the existing deposit insurance limit of $250,000. Resulting fees will be collected during the normal assessment cycle.
What Does This Mean To You?
If you are an eligible institution, you need to decide whether to remain in either or both components of the program. If you wish to opt out, you must do so before the end of the initial 30-day period of the program. At this point, the only apparent downsides to continued participation are marginally enhanced supervision and payment of the additional guarantee fees. In most cases, these would be outweighed by the direct program benefits as well as the indirect public relations benefits.
If you are, or intend to become, a depositor or unsecured lender to an eligible institution, you need to determine whether the institution will continue to participate in the program.
FDIC Interim Rule on Temporary Increase in Standard Coverage Amount and on Mortgage Servicing Accounts
Maximum Deposit Insurance Raised to $250,000
In a meeting held last Friday, October 10, 2008, the Federal Deposit Insurance Corporation (FDIC) Board of Directors adopted an interim rule with respect to deposit insurance coverage amounts and treatment of funds held in mortgage servicing accounts. The rule, effective October 10, 2008, raises the “standard maximum deposit insurance amount” (SMDIA), 12 C.F.R. 300.1(n), from $100,000 to $250,000 for the period October 3, 2008 until December 31, 2009. This is a conforming change to the temporary adjustment specified in the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 (October 3, 2008).
Deposit Insurance For Mortgage Servicing Accounts
The same interim rule also adjusts the method of insuring certain funds held in mortgage servicing accounts maintained in a custodial or other fiduciary capacity. Before the amendment, 12 C.F.R. 300.7(d) provided that principal and interest payments held in such accounts would be allocated on a pass-through basis for the interest of each owner (mortgagee, investor or security holder) of such accounts for purposes of computing SMDIA. Given the growth of securitization vehicles involving mortgage loans (including multi-layered structures), the FDIC is concerned about the impact on investors in the event of the failure of an FDIC-insured depository institution. Going forward, 12 C.F.R. 300.7(d) provides that accounts containing such principal and interest payments will be insured “for the cumulative balance paid into the account by the mortgagors, up to a limit of the SMDIA per mortgagor.” Thus, such funds will not be allocated to and aggregated with other deposits of investors OR mortgagors for purposes of SMDIA. Tax and insurance escrow deposits held in mortgage servicing accounts will continue to be allocated on a pass-through basis to individual mortgagors and aggregated with their other deposits for purposes of computing SMDIA.
Click here for a link to the interim rule.
Feds and Others Cut Rates
The Federal Reserve and other central banks cut rates by 50 basis points in a concerted move to reduce the cost of buying and building homes and the costs associated with borrowing funds to run businesses. These cuts also reduce the rates at which banks borrow. This should induce banks to start lending again to bring liquidity back into the economy. While not the primary goal of the rate cuts, the markets responded quickly and positively to this news.
Treasury Publishes Conflict of Interest Provisions and Requests Submissions of Application for Asset Managers and Custodians
The United States Treasury is moving quickly to implement the Emergency Economic Stabilization Act of 2008 (“EESA”) that was signed into law on Friday, October 3, 2008. On October 6, 2008, the Treasury published notices under EESA requesting proposals for items outlined below and interim guidelines for conflicts of interest. Included in the items published by the Treasury are the following:
- Interim Guidelines for Conflicts of Interest;
- Procurement Authorities and Procedures; and
- Three Notices to Financial Institutions interested in providing the following services:
- Custodian, Accounting, Auction Management, and Other Infrastructure Services for a portfolio of troubled mortgage-related assets. Minimum Qualification-$500 billion in domestic assets currently under custody.
- Asset management services for a portfolio of mortgage whole loans. Minimum Qualification-$25 billion in mortgage loans currently under management or proof of ability to handle a portfolio of such size.
- Asset management services for a portfolio of troubled mortgage-related securities. Minimum Qualification-$100 billion in dollar-denominated fixed-income assets currently under management.
Responsive RFPs are due by the end of today, October 8, 2008 at 5:00 p.m. Eastern Time.
Selection of Custodians, etc.
The Treasury plans to select the custodians, accountants, auction management and other infrastructure service providers first. The current schedule is to select them by October 10th and enter into financial agency agreements on October 11, 2008. Further, the service providers are to be prepared to begin working on October 11, 2008.
Selection of Asset Managers; Smaller/Minority/Female-Owned Institutions. The time table for selecting the asset management service providers is not described in the referenced notices, but the Treasury plans to conduct interviews and warns that it will be acting quickly. Treasury will also expect immediate responses from selected candidates. In addition, at a later date to ensure diversity of participation, the Treasury will provide a separate notice requesting applications from smaller and minority- and female-owned financial institutions to act as sub-asset managers within specific portfolios.
The Treasury regulations and applications to provide services are available at the new Treasury site regarding EESA.
On October 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”). EESA is an attempt by Congress to restore liquidity and stability to the United States financial system by, among other things, authorizing the Secretary of the Treasury to purchase or guarantee payment of troubled assets currently held by financial institutions.
Yesterday, the Office of the Chief Accountant of the Securities and Exchange Commission (SEC) provided further interpretation and clarification regarding the mark-to-market rules, otherwise referred to by the SEC as the determination of “fair value” rules or Statement 157. A copy of the SEC’s press release can be found at
. FASB is also preparing additional guidance regarding FASB Statement No. 157, Fair Value Measurements (Statement 157), which the SEC anticipates will be available later this week.
But, because of the current environment, the SEC provided the following clarification now:
- When an “active market” does not exist, management may use internal assumptions when measuring fair value.
- The SEC did not define “active market,” but noted that its determination requires judgment. Accordingly, the SEC warns that clear and transparent disclosures are critical to providing understanding of the judgments used by management. The SEC also stated that a significant increase in the spread between the amount sellers are “asking” and the price that buyers are “bidding,” or the presence of a relatively small number of bidders, are factors suggesting an inactive market.
- Broker quotes carry less weight in the determination of fair value if an active market does not exist.
- The results of distressed or forced liquidation sales are not determinative when measuring fair value. A transaction value has more weight when the buy-sale is conducted in an “orderly” manner with willing market participants and adequate exposure to the market.
- In an “active market”, a quoted market price is most representative of fair value and thus is required to be used (generally without adjustment). While transactions in inactive markets may be inputs when measuring fair value, they are likely not to be determinative.
- If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.
The SEC also provided guidance in determining whether an investment is “other-than-temporarily” impaired. As this determination also requires significant judgment, the SEC directs companies to consider (among other items) the following: (i) the length of the time and the extent to which the market value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; or (iii) the intent and ability of the holder to retain its investment in the issuer long enough to allow for any anticipated recovery in value.
On October 1, 2008, in a stated attempt to restore liquidity and stability to the United States’ financial system and in light of the United States House’s failure to pass a similar bill on Monday, the United States Senate proposed the latest version of the bailout bill (“Stabilization Bill”). The Senate version is very similar to the House version, but two major changes include:
- Raising the FDIC insurance amount on FDIC insured deposits to $250,000 from $100,000.
- Removing any cap on the FDIC borrowings from the Treasury until the end of 2009. Prior limit was $30 billion, which will reinstate in 2010 unless other action is taken.
If enacted into law, the Stabilization Bill would be called the Emergency Economic Stabilization Act (the “Act”). This version of the Stabilization Bill is otherwise very similar to the House version but yet significantly more detailed than the version proposed last week. This version of the bill attempts to address some of the earlier concerns expressed by commentators and citizens by limiting the discretion granted to the Secretary of the Treasury (the “Secretary”) and providing more oversight, as well as an insurance component. However, the bill still does not suspend mark-to-market rules or provide a lending v. purchase program.
If you would like more information about this, we will be following this matter closely.
Below is a summary of the other material provisions of the Stabilization Bill:
- Amount – Cap of $700 billion for buying troubled assets. Breakdown:
- $250 billion available to Secretary on Day 1.
- An additional $100 billion if the President submits a written certification to Congress that the Secretary needs additional funds.
- The remaining $350 billion is available if the President submits to Congress a written certification that the Secretary needs additional funds and a written report detailing the Secretary’s plan to exercise the Secretary’s authority under the Act and Congress does not pass a joint resolution within 15 days of the report’s submission disapproving the increase.
- New Guarantee/Insurance Piece - Complementing this new purchase program, the Stabilization Bill will require the Secretary to establish a guarantee program available to all troubled assets originated or issued prior to 3/14/2008. Under this program:
- The United States government will guarantee timely payment of principal and interest due on the troubled assets rather than purchasing them outright.
- The Secretary must determine the long-term viability of the affected financial institution and direct purchases and guarantees toward the most efficient use of funds.
- All financial institutions may participate in the guarantee program – no discrimination based on size, location, or type, size or number of troubled assets.
- Financial institutions must pay a premium to participate. These premiums may vary based on the credit risk of the particular troubled asset being guaranteed.
- The insurance program does not have separate funding; it is funded by (a) premiums and (b) a reserve from the funds that would otherwise be available to purchase troubled assets under the purchase program.
- Financial assistance is available, but only if (a) the financial institution was adequately capitalized on June 30, 2008, (b) the financial institution has assets less than $1 billion, (c) the financial institution’s capitalization level dropped one or more levels because devaluation of preferred government sponsored enterprises stock, and (d) assistance can be provided in manner sufficient to at least restore adequate capitalization levels.
- Troubled Assets – The Stabilization Bill defines troubled assets as those the Secretary determines that the purchase of provides stability and which fall into one of the two following categories:
- Residential and commercial mortgages originated or issued on or before 3/14/08 and any securities, obligations and other instruments based on or related to such mortgages; and
- Other instruments identified by the Secretary after consultation with Chairman of the Board of Governors of the Federal Reserve, if such determination is reported, in writing, to the appropriate Congressional committees.
- No Unjust Enrichment - Under the Stabilization Bill, the Secretary may not act in such a way as to promote unjust enrichment. This includes purchasing troubled assets at a higher price than what the seller paid. This limitation does not apply to troubled assets acquired in a merger or acquisition or from a financial institution that has initiated bankruptcy proceedings under title 11 of the United States Code or is in conservatorship or receivership. Moreover, any guarantee issued by the Secretary cannot be higher than 100% of the principal and interest payments due.
- Oversight -
- Office of Financial Stability formed under Office of Domestic Finance of the Department of Treasury.
- Financial Stability Oversight Board will be formed and consist of the Chairman of the Board of Governors of the Federal Reserve System, the Secretary, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission, and the Secretary of Housing and Urban Development.
- The bill calls for the Secretary to “take into consideration” nine factors, including serving the underserved, protecting families, saving money, ensuring stability, and protecting taxpayers.
- Contractors – The Secretary will have the power to hire, fire, and contract with servicers, liquidators, attorneys, etc.
- General Authority -
- As in the original bill, the Secretary is authorized to purchase, work out and liquidate troubled assets on terms and conditions determined by the Secretary subject to the Act and policies and procedures developed by the Secretary.
- New to this draft of the bill, the Secretary must issue regulations to “establish vehicles” to hold troubled assets.
- In many cases, the Secretary has discretion as to how to proceed as long as he consults with various agencies.
- Conflicts of Interest – The Secretary must set conflict of interest regulations.
- Executive Compensation – The Secretary must establish regulations to prevent clawbacks and golden parachutes for executives.
- Judicial Review – Judicial review is based on judicial review under the Administrative Procedure Act (“APA”), though the statute doesn’t direct the review to the courts of appeals as it does for APA rulemakings. The powers given the Secretary under section 101 are not subject to injunctive or equitable relief, and yet the statute carefully limits injunctive relief in some cases. Currently:
- “Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code, including that such actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.”
- But “No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101 . . . other than to remedy a violation of the Constitution.”