- International Practice
- Securities Regulation
- Climate Change
- Financial Institutions
- Labor and Employment
- Strategic Communications
- Corporate and Securities
- Financial Restructuring
- Educational Institutions
- Private Funds
- Intellectual Property
- Public Finance
- White Collar Defense
- Environmental Strategies
- Internal Investigations
- Real Estate and Projects
Congress Moves Closer to "Bailout" Package
September 28, 2008
Congress is moving closer to adopting a comprehensive legislative package designed to “bailout” financial institutions and stabilize the economy: the Emergency Economic Stabilization Act of 2008. We are closely monitoring negotiations between Congress and the White House, and we are analyzing the draft legislation. This email provides an overview of the newest draft bill, highlighting provisions that have been under discussion since Treasury unveiled its proposal last week.
On timing, we expect the bill to go to the House Rules Committee tonight, enabling the House to vote on the final package on Monday. Senate Majority Leader Harry Reid (D-NV) announced that the Senate would take action as soon as the House sends the bill to the Senate.
As always, when dealing with late-breaking legislative developments, there may be technical or conforming changes to language. We will let you know if there are as soon as possible.
Regarding Foreign Banks: “Financial Institution” is now defined to include “any bank…organized and regulated under the laws 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.”
Troubled Assets: In addition to commercial and residential mortgages, and any securities, obligations or other instruments related to such mortgages, the bill includes “any other financial instrument” that the Secretary, in consultation with others, decides is necessary for market stabilization. This section now conditions the exercise of this discretion by including, “but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.”
Troubled Assets Relief Program (TARP)
Requires Oversight: This section establishes the Office of Financial Stability within Treasury and the Financial Stability Oversight Board. The Comptroller General is required to commence ongoing oversight of the TARP immediately upon enactment. The Comptroller must evaluate whether the Secretary is meeting all of the standards set out in the legislation, and in particular the taxpayer protection elements. Treasury is required to give the GAO full access to all information and records and reimburse the GAO for related costs of oversight done on behalf of the Comptroller. The Comptroller must submit reports on the TARP to Congress every 60 days. The TARP is subject to annual and public audits.
Prohibits Unjust Enrichment: This section prohibits unjust enrichment for financial institutions participating in the program, including preventing the resale of a troubled asset to the Secretary at a higher price than what the seller paid. A new provision in this section would exempt troubled assets “acquired in a merger or acquisition or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under Title 11, United States Code."
Requires the Insurance of Troubled Assets: This new section requires the Secretary to establish a program to guarantee troubled assets. The premiums collected under this program will be used to offset the bill’s outlays. It also establishes the Troubled Asset Insurance Fund.
Curbs Executive Compensation: If Treasury purchases troubled assets from an institution where no bidding process or market prices are available, and the Secretary receives an equity position as a result of the transaction, Treasury must require compliance with standards for executive compensation and corporate governance. Such compliance is required for the time period that Treasury holds an equity position.
Establishes Standards for Executive Compensation: Institutions that participate in the TARP must exclude incentives for executive officers that encourage unnecessary and excessive risks. Institutions are empowered to recover bonuses paid in the past that were based on inaccurate statements or reports. Payments of “golden parachutes” are prohibited during the time that Treasury holds an equity position. Golden parachutes are also prohibited after an auction sale of assets from a single company exceeding $300,000,000. Tax deductions for executive compensation are limited if institutions participate in the TARP.
Protects Taxpayers: The Secretary is required to use authority to minimize impacts on taxpayers. The Secretary must: hold assets until optimal market conditions exist for resale; sell assets at a price that maximizes return to the government; encourage private sector participation and use appropriate market mechanisms to execute programs; and secure warrants/senior debt instruments with preferable terms and conditions in exchange for purchases of troubled assets.
Requires Transparency: Details of troubled assets purchased by Treasury must be made available to the public within two days of purchase, trade, or disposition of the assets. Greater public disclosure of the details of corporate accounting is also required.
Allocates Tranches of Money: The TARP gives immediate authority to purchase $250 billion of troubled assets. $100 billion more in authority if the President certifies the need to Congress; $350 billion more in purchase authority if the President certifies the need, and Congress does not pass a joint resolution of disapproval within 15 days.
Provides for Judicial Review: Actions by Treasury under the TARP can be set-aside and held unlawful if they are found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law. Equitable relief is limited. Institutions participating in the TARP may not bring claims against the Secretary of the Treasury.
Establishes a "Special Inspector General" for the TARP: As with other inspectors general, this Special Inspector General will be responsible for identifying fraud, waste and abuse in the TARP.
Establishes a Congressional Oversight Panel: This Congressional Oversight Panel "shall review the current state of the financial markets and the regulatory system....." This panel is the result of the desire of Congress to maintain its oversight authority in the face of sweeping powers conferred upon the Secretary of the Treasury.
Provides for Enhanced FDIC Enforcement: This section prohibits false advertising using the term "FDIC" or stating FDIC insured if an institution is not so insured.
Requires Cooperation with FBI: This section expressly requires that any "federal financial regulatory agency" cooperate with the FBI.
Enhances SEC Authority: The bill gives the SEC authority to "suspend" Statement Number 157 of the Financial Accounting Standards Board.
Requires a Mark-to-Market Study: The bill mandates a study of "mark-to-market" accounting, which study will be carried out by the SEC in consultation with the Board of Governors of the Federal Reserve System.
Provides for Recoupment: If after five years there are shortfalls in the TARP, then "the President shall submit to the Congress a legislative proposal that recoups from entities benefiting from the program an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the budget deficit or the national debt."