Governments Actions 9/28/08

I received this summary of the Government’s Actions to help the credit crisis from Jeff Rodvien. I wanted to share it with you. I hope this helps answer questions.
Jeff Cameron.

Summary of Trouble Asset Relief Program.

The Emergency Economic Stabilization Act of 2008 (the “Act”) provides the Treasury Secretary with the authority to restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans. As part of this authority, the Treasury Secretary is authorized to establish a trouble asset relief program (“TARP”) to purchase troubled assets from financial institutions under the terms of the Act.

I. Taxpayer Protection Provisions

• Funds Released in Tranches – TARP’s initial $250 billion will be immediately available. Presidential certification to Congress will be required for the next $100 billion. The remaining $350 billion may be made available after the President transmits a written report to Congress detailing the Treasury Secretary’s plan to exercise the remaining authority. Congress must vote to approve.

• Insurance of Trouble Assets – The Secretary must establish a program to guarantee troubled assets in amount not greater than 100% of the amount of the payment of principle and interest on the trouble assets. Premiums to be paid by the financial industry. The details of the program are left to the secretary’s discretion.

• Warrants – The Secretary may not purchase troubled assets unless it receives from the financial institution:

• For listed public companies – a warrant for voting, nonvoting stock or preferred stock. The secretary must agree not to exercise by someone who purchases from Treasury. The warrant must provide the government with reasonable participation in equity appreciation and provide additional protection against loss in sale of the assets. Exercise and type of upside in set by the secretary “in the interest of the taxpayers.”

• Anti-dilution provisions must be included.

• For non-listed companies A warrant for common or preferred stock or a senior debt instrument with a “reasonable interest rate premium.”

• No warrants required for purchases of less than $100M for the duration of the program.

• The final provisions give significantly more discretion to the Treasury.

• The substantial majority of the technical changes suggested by SIFMA and Davis Polk & Wardwell late this afternoon were accepted in the purposed legislation improving the effectiveness of the warrant provisions.

• Pricing and Auction Mechanisms. The Secretary is required to use market mechanisms for purchases wherever possible and to maximize the efficiency of taxpayer resource with auctions or reverse auctions. The mechanics of pricing are left to the discretion of the Secretary altogether the Treasury is required to publish program guidelines on this and other areas on an expenditure basis. The guidelines must be out within 2 business days of the first purchase or, at the latest, 45 days after enactment.

• Recoupment of Taxpayer Losses – Five years after the date of enactment, OMB will report to Congress on the TARP’s net gain loss. If the progress is running a shortfall, the President will be required to submit a legislative proposal to Congress that recoups for taxpayers the amount of the shortfall from the financial industry.

• Exchange Stabilization Fund Reimbursement – Treasury must reimburse the Exchange Stabilization Fund for any funds used for the temporary guaranty program for money market funds.

II. Limits on Executive Compensation

• Direst Purchases – For financial institutions that participate in direct purchases, the executive compensation limits include: prohibitions on senior executive officer compensation that encourages unnecessary risk-taking; claw-back of bonuses paid to senior executive officers based on statement of earnings that prove to be materially inaccurate; and a ban on golden parachutes paid while Treasury holds an equity or debt position in the financial institution.

• For direct purchases, the Secretary also retains significant discretion to impose heightened corporate governance requirements – though the standards are undefined.

• Auction Participants – The executive compensation limits are triggered by purchased assets in a aggregate amount exceeding $300 million in assets in subject to tax deduction limits for compensation limits above $500,000 paid to “covered” employees as well as disallowance for certain severance payments on which certain senior executives are subject to a non-deductible 20% excise tax. In addition the institution is also prohibited from providing, in any new employment contract, for a golden parachute in the event of involuntary termination, bankruptcy, insolvency, or receivership. Further guidance will be issued by Treasury.

III. Independent Oversight and Transparency

• Oversight Board – Composed of (1) chairman of the Federal Reserve Board. (2) Chairman of the SEC, (3) director of the Federal Home Finance Agency, (4) secretary of HUD, and (5) Treasury Secretary. The private sector appointees by Congress from prior draft have been dropped. The Board has authority to review the exercise of authority under the program; make recommendations; report any suspected fraud or malfeasance to the Inspector General; and ensure the politics implemented are consistent with protecting taxpayers and the economic interest of the U.S The possibility of the Board intervening directly to prohibit or limit the Secretary’s actions has been dropped and the oversight is more on policy level.

• Special Inspector General – New independent Inspector General to monitor the Treasury Secretary’s decisions. Inspectors Generals exist in most administrative agencies and usually perform an audit like function.

• Reports – The Secretary must make various reports to congress, including tranches reports and a regulatory modernization report.

• GAO Oversight and Audits – The legislation mandates a GAO presence at Treasury to overseas the program and conduct audits to ensure strong internal controls and prevent fraud, waste and abuse. It will also include a study to determine the extent to which leverage was a factor behind the current financial crisis.

• Transparency – The Legislative also require the online posting of a description, amount, and pricing of assets acquired under the Act within 2 business days of purchase, trade, or other disposition.

• Judicial Review – The standard for judicial review is limited to arbitrary, capricious, abuse of discretion or not in according with law. No injunctions permitted related to purchase of assets, insurance program, management and scale of foreclosure mitigation efforts. Any other injunctions must be considered on an expedited basis. No suits by any financial institution seller unless permitted in the contract with Treasury.

• Regulatory. Requires that the Treasury Secretary implement guidelines and regulations in multiple area including reports, pricing mechanisms and conflicts of interest.

IV. Home Foreclosure Mitigation

• Tax Relief for Certain Homeowners – Under current law, forgiven mortgage debt is not subject to tax through December 31, 2009, The bill extends this tax relief for three years through December 31, 2012.

• Assistance to Homeowners – Requires the FHA, Federal Reserve, and originated before March 14, 2008 and, after consultation with the Chairman of the Federal Reserve Board, any other financial assets that the Secretary determines is necessary for financial stability. For the broader financial assets top apply, Congress must be notified in writing.

V. Miscellaneous

• Definition of Troubled Assets – Includes all mortgage related assets originated before March 14, 2008 and, after constitution with the Chairman of the Federal Reserve Board, any other financial asset that the Secretary determines is for financial stability. For the broader financial assets to apply, Congress must be notified in writing.

• Definition of Financial Institution – It currently covers any institution, including, but not limited to, any bank, savings associations, credit union, security broker or dealer, or insurance company establish and regulate under the laws of the U.S. or any state and having significant operations in the U.S. This covers branches and agencies of foreign banks. It does not on its face cover affiliates of covered institutions, the “including but not limited” will give the Secretary the power to define covered institutions in rules and guidelines.

• Suspension of Mark-to-Market Accounting – Reaffirms SEC authority to suspend the application of mark-to-market accounting rules with respect to any company.

• Public Disclosure – For any financial institution that sells troubled assets, the Treasury Secretary determines whether the public disclosure with respect to derivatives, contingent liabilities and off-balance sheet transaction is adequate to the Secretary will make additional disclosure requirements to the relevant regulators which include the SEC, the OCC and the OTS.

• Community Bank Relief – Community banks that sell Fannie and Freddie preferred stock could treat the gains and losses as ordinary income instead of capital gains. As a result, any losses could be used to offset ordinary income for tax purposes.

Prior Draft Provisions That Were Dropped:

• Bankruptcy cram-down

• Program will not divert revenues to any of the housing funds

• Program will not make foreclosure properties available at a discount to state and local governments receiving emergency assistance

• The “say on pay” requirement is dropped