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Bailout 2.0 - The Coming Changes

January 14, 2009

As the 111th Congress begins its work, one of the first items to receive attention will be the Troubled Assets Relief Program, better known as TARP.  This Monday, at the request of President-elect Obama, President Bush asked Congress to approve the second $350 billion tranche of TARP funds.  Under TARP, the funds will be released unless the House and Senate pass resolutions of disapproval.  Resolutions have been introduced in both the House and the Senate, and votes could occur as early as the end of this week.  If either house fails to pass the disapproval resolution, or if Congress cannot override a Presidential veto of the joint resolution, then the funds will be available to the Executive branch.  Notwithstanding the disapproval resolutions, Congress appears poised to make statutory changes to TARP that could impact past and future recipients of TARP funds.

The Frank Legislation, H.R. 384

TARP has been widely criticized for being too costly, too opaque, and failing to ameliorate economic problems, and legislators on Capitol Hill are pushing forward with plans to revise TARP legislation and redirect any additional funds to other economic problems such as home foreclosures.   Leading the legislative effort, Representative Barney Frank (D-MA) has introduced new legislation, H.R. 384, entitled "TARP Reform and Accountability Act of 2009."   This legislation would make a range of significant changes to TARP, as summarized below, and has already drawn criticism from some in the financial services sector who believe that its retroactive components are unfair and unworkable. 

Debate on H.R. 384 began today, January 14th, and legislators have proposed a wide range of changes to the language that would make the use of TARP funds subject to an even more complex range of reporting mandates, executive compensation limits, and taxpayer protection requirements.  A vote on H.R. 384 is likely to occur on Thursday, January 15th.  The Frank legislation will only be the starting point for Congressional discussions regarding TARP reforms, and a number of legislators have indicated that more significant changes to TARP will be necessary to secure Congressional authorization for the second $350 billion tranche of TARP funds. 

Likely Outcome

It is likely that public pressure resulting from the criticism about the use of previous TARP funds will result in the enactment of changes to TARP that are similar to those proposed in the Frank legislation.  Further, there is a growing belief that many of the proposals included in the Frank bill will be adopted through executive action.  President-elect Obama's designated director of the National Economic Council, Lawrence Summers, has already promised such changes in a letter to Congressional leaders sent this week. 

Critics of TARP have pointed to the continuing problems in the lending sector, insufficient accountability and transparency in TARP, and public polling numbers that show little support for TARP.  If these concerns are not allayed, then it is likely that even if additional TARP funds are made available to Treasury, they will come with new conditions regarding how they can be used that will have significant impacts on companies that receive TARP funding. 

Taken together, these developments make it essential that institutions that have received TARP funds in the past or desire to receive them in the future carefully track changes to TARP, identify opportunities to participate in the debate, and be prepared to pursue new opportunities and comply with new mandates.

Summary of H.R. 384

Monitoring, accountability and eligibility changes:

  • Requires quarterly public reporting for any institution using TARP funds. FDIC-insured depository institutions must report on any change in lending levels and any activity related to TARP funding.
  • Requires that FDIC-insured depository institutions that receive TARP funds obtain Treasury approval for mergers or acquisitions involving other depository institutions.
  • Requires that agreements be reached between the Department of Treasury, TARP participants and the institutions’ regulators controlling how the funds are to be used and requiring specific benchmarks.
  • Names the Treasury as monitor of institutions that are not FDIC-insured or do not have a federal regulator.
  • Directs Treasury to immediately make TARP funds available to smaller local institutions.

Withdrawal from TARP:

  • Treasury is required to permit a recipient of TARP funds to repay those funds, whether or not the recipient has replaced those funds with private capital, as currently required by Treasury.

Rules on executive compensation:

  • The most stringent non-tax compensation restrictions described in the failed auto bailout legislation are now applied to all TARP recipients.  These include prohibitions on incentives based on excessive risk and benefits to executives whose companies are acquired by another institution, prohibitions on bonuses to the 25 highest-paid employees, and required divestment of private aircraft.

Foreclosure relief:

  • Use of the second $350 billion of TARP funds is conditioned on the use of up to $100 billion, but no less than $40 billion, for foreclosure mitigation, with plan required by March 15, 2009. 
  • Creates a congressional oversight panel to report to Congress by July 1 on actions taken by the Treasury to mitigate foreclosures.
  • Treasury is required to develop a foreclosure mitigation plan, consistent with statutory requirements, by March 15, 2009. Treasury is required to implement the plan no later than April 1, 2009.  

Clarification of other TARP authority:

  • Clarifies Treasury’s authority to establish facilities to support the availability of consumer loans, such as student loans, and auto and other vehicle loans.  Confirms Treasury's authority to direct TARP funds to automobile manufacturers, and requires that Treasury adopt the restructuring requirements that were included in the failed automobile bailout legislation.