2008 In Review: Outline Of Significant Federal Actions

Below is an outline followed by a brief summary of some

significant regulatory and governmental actions taken to date to

attempt to mitigate the impact of the mortgage crisis and the

related ripple effects through the securities and credit

markets.

Bank of America announces acquisition of Countrywide Financial

(January 11, 2008)

Federal Reserve lowered federal funds rate 75 basis points to

3.5% (January 22, 2008); lowered by 50 basis points to 3% (January

30, 2008); lowered by 75 basis points to 2.25% (March 18, 2008);

lowered by 25 basis points to 2% (April 30, 2008); lowered by 50

basis points to 1.5% (October 8, 2008)

Federal Reserve increases temporary reciprocal currency

arrangements with other central banks (March 11, 2008, May 2, 2008,

July 30, 2008, September 18, 2008, September 26, 2008, September

29, 2008 and October 14, 2008) and extended the swap lines to

additional central banks (September 24, 2008)

Federal Reserve Bank of New York guarantees $29 billion of

Bear, Stearns debt as the government brokers its acquisition by

JPMorgan for $2 per share (March 14, 2008), later raised to $10 per

share (March 24, 2008)

Federal Reserve announces new Term Securities Lending Facility

(TSLF) (March 11, 2008); accepts a wider pool of collateral for

TSLF (May 2, 2008); TSLF extended through January 30, 2009 (July

30, 2008) and extended eligible collateral (September 14,

2008)

Federal Reserve authorizes Federal Reserve Bank of New York to

create Primary Dealer Credit Facility to provide liquidity to

dealers in the securitization markets for up to six months (March

16, 2008); extended the PDCF through January 30, 2009 (July 30,

2008) and extended the eligible collateral (September 14,

2008)

FDIC is appointed receiver for IndyMac (July 11, 2008), then

the largest bank failure since the 1980's; the parent holding

company subsequently filed for Chapter 7 bankruptcy protection

(July 31, 2008)

SEC proposes rules in two phases to remedy concerns with the

credit rating agencies (June ? July 2008)

Housing and Economic Recovery Act of 2008, establishing the

HOPE for Homeowners Program (July 30, 2008)

SEC takes emergency action against certain short selling

practices (July ? October 2008)

Federal Reserve introduces 84-day Term Auction Facility loans

(July 30, 2008); Change follows a series of increases in number and

size of auctions of 28-day credit throughout 2008 and was followed

by increases in the size of the auctions of 84-day credit

FHFA appointed as conservator for Fannie Mae and Freddie Mac

(September 7, 2008)

Lehman Brothers files for bankruptcy protection (September 15,

2008); Merrill Lynch sells itself to Bank of America (September 15,

2008)

Federal Reserve agrees to lend AIG $85 billion and the

government takes a 79.9% stake in the company and removes CEO in a

large scale bailout (September 16, 2008)

Federal Reserve announces loan program for depository

institutions and bank holding companies to finance their purchase

of high quality asset-backed commercial paper (ABCP) from money

market funds (September 19, 2008)

Federal regulators seize Washington Mutual in the now largest

bank failure in U.S. history and arrange a sale of assets to

JPMorgan (September 24, 2008)

Treasury announces Temporary Guarantee Program for Money Market

Funds (September 29, 2008) Citigroup announces acquisition of

Wachovia businesses in deal brokered by the FDIC and federal

regulators (September 29, 2008); followed by an offer from Wells

Fargo for the entire bank (October 3, 2008)

Federal Reserve announced the commencement of interest payments

on required and excess deposits at Reserve Banks (October 6,

2008)

Federal Reserve announces creation of a Commercial Paper

Funding Facility to provide back-stop liquidity to commercial paper

issuers (October 7, 2008) and releases updated terms and conditions

(October 14, 2008)

Treasury announces coordinated effort with G7 to address

liquidity and banking crisis (October 10, 2008)

FDIC announces Temporary Liquidity Guarantee Program to provide

guarantees for bank debt and insurance for all non-interest bearing

transaction accounts (October 14, 2008)

Federal Reserve Announces Two Lending Facilities

On March 11, 2008, the Federal Reserve announced an expansion of

its securities lending program. The new Term Securities Lending

Facility (TSLF) provides up to $200 billion of Treasury securities

to primary dealers secured for a term of 28 days (rather than

overnight, as in the previously existing program) by a pledge of

other securities, including federal agency debt, federal agency

mortgage-backed securities and non-agency triple-A rated

privatelabel residential MBS. On May 2, 2008, the Federal Reserve

announced an expansion in the collateral that can be pledged in the

Schedule 2 TSLF auctions, to include triple-A rated asset-backed

securities. On July 30, 2008, the TSLF was extended through January

30, 2009.

On March 16, 2008, the Federal Reserve announced the

authorization of a lending facility designed to improve the ability

of primary dealers to provide financing to participants in the

securitization markets. The facility as initially announced was

authorized for six months, though it was later extended through

January 30, 2009. The interest rate charged for use of the facility

is the discount rate at the Federal Reserve Bank of New York.

SEC Proposes Credit Rating Agency

Reform1

On June 16, 2008 and July 1, 2008, the SEC issued rule proposals

aimed at responding to ongoing concerns regarding the role and

importance of credit ratings issued by nationally recognized

statistical rating organizations (NRSROs). As a result of the

sub-prime crisis, the NRSROs fell under criticism based on

assertions that they made inaccurate judgments in their initial

ratings of mortgage-backed securities and in their ongoing

surveillance of these transactions. Concerns were raised regarding

the potential conflict of interest that arises when the issuer that

is requesting a rating also pays the NRSRO fee. The proposed rules

address conflict of interest concerns and impose restrictions and

disclosure requirements based on the interactions between rating

agencies and issuers. The disclosure requirements would mandate

that significant additional information be publicly provided.

Finally, many of the proposed rules were intended to address the

SEC's concern that the inclusion of credit ratings throughout

its own rules and regulations may have acted as a regulatory

"seal of approval" for the ratings such that market

participants may have placed "undue reliance" upon them.

The proposed amendments would eliminate references to these ratings

in numerous SEC rules and forms. As drafted, the proposals would

have a significant impact on how market participants use credit

ratings during the new issuance process, in determining investment

suitability, for computing net capital requirements, and in

complying with other SEC rules and regulations.

The comment periods have closed and the rule proposals are

pending final action by the SEC.

Federal Reserve Authorizes Lending to Fannie Mae and

Freddie Mac

On July 13, 2008, the Federal Reserve announced that it had

granted the Federal Reserve Bank of New York the authority to lend

to Fannie Mae and Freddie Mac should such lending prove necessary.

Any lending would be at the primary credit rate and collateralized

by U.S. government and federal agency securities. The authorization

was intended to supplement Treasury's existing lending

authority and to help ensure the ability of Fannie Mae and Freddie

Mac to promote the availability of home mortgage credit during a

period of stress in financial markets.

SEC Takes Actions against Short

Selling2

In an effort to address continuing market volatility, the SEC

issued a series of emergency orders to limit short sales and

require reporting of short positions. Given the speed with which

these emergency orders were issued and the questions raised

regarding their implementation, the SEC quickly followed with

additional interpretive guidance. As of October 8, 2008, the

emergency short sale orders have expired, and the emergency short

sale reporting order is currently scheduled to expire on October

17, 2008. The new temporary rule and two new permanent rules

described below remain in effect.

On July 15, 2008, the SEC issued its first emergency order

barring naked short sales of the stocks of Fannie Mae, Freddie Mac

and 17 financial firms, including several investment banks. The

order was issued in response to a perception that naked shorting

might trigger a market stampede away from the securities of the

subject institutions. The order was intended to promote investor

confidence and reassure investors that the SEC was protecting

companies and investors from manipulative short selling. Market

makers were excluded from the restriction in an amendment on July

18th. This initial order was extended through August 12th. At that

time the SEC indicated that it was considering permanent

rulemaking.

On September 17, 2008, following the government rescue of Fannie

Mae and Freddie Mac, the failure of Lehman Brothers, the sale of

Merrill Lynch and the bailout of AIG, the SEC took emergency action

and adopted three rules to prohibit naked short selling.

The first was the adoption of a temporary rule under Regulation

SHO, Rule 204T. The rule imposes a penalty on any participant of a

registered clearing agency, and any broker-dealer from which it

receives trades for clearance and settlement, for having a fail to

deliver position ? it requires that short sellers and

their broker-dealers deliver securities by the close of business on

the settlement date (three days after the sale transaction date, or

T+3) and imposes penalties for a failure to do so. Rule 204T has

also been proposed as a permanent rule and the SEC has a comment

period open.

The SEC's second action was to adopt amendments to Reg SHO

to eliminate the options market maker exception. As a result,

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