Senate Proposed Bailout/Stabilization Legislation “Emergency Economic Stabilization Act of 2008”

October 1, 2008 at 6:00 pm Leave a comment

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.”

Entry filed under: Client Alerts, EESA.

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