The Emergency Economic Stabilization Act Of 2008

Profession:Mayer Brown
 
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Article by

Scott A. Anenberg ,

Michael R. Butowsky ,

Thomas J. Delaney ,

Charles M. Horn ,

David M. McIntosh ,

Carolyn P. Osolinik ,

David Sahr and

Jeffrey P. Taft

Originally published October 3, 2008

Keywords: EESA, deposit insurance, treasury

bailout, troubled asset relief, TARP, Treasury, financial

institution, executive compensation, conflict of interest,

FDIC,

BACKGROUND

On October 3, 2008, President Bush signed the Emergency Economic

Stabilization Act of 2008 (the "EESA" or the

"Act") into law. After a failed vote in the US House of

Representatives on Monday, the US Senate passed the legislation on

Wednesday as amended to increase temporarily deposit insurance

coverage and to provide numerous tax benefits. The House then

passed the amended legislation today and the Act was sent to

President Bush late this afternoon. The Act is summarized below

with the exception of the tax provisions.

The Act provides the Secretary of the US Department of the

Treasury (the "Treasury") with the authority to establish

a troubled asset relief program (TARP) in which it can purchase or

insure up to US$700 billion in troubled assets for the purposes of

providing stability and preventing disruption in the economy and

financial system and protecting taxpayers. This authority

terminates December 31, 2009, unless extended by the Treasury.

The Act provides that the US$700 billion will be available in

three segments: US$250 billion is available immediately ?

but additional amounts, while authorized, would have to be

specifically requested; an additional US$100 billion will be

available upon certification by the President to Congress; and the

remaining US$350 billion will be available after the President

sends a written report to Congress detailing the Secretary's

intended use of the remaining funds. Congress can vote to

disapprove this additional amount.

While the Act is lengthy, it lacks significant detail in a

number of important areas. As a result, important aspects of

legislation, including the specific characteristics of assets that

will qualify for purchase, the manner in which the government

establishes prices for those assets and the criteria for

participation in the program, will have to be defined by rules and

guidance to be issued by the Treasury. To the extent that

institutions are interested in participating in the program, we

recommend that they closely follow the implementation of the Act

and participate to the greatest extent possible in any public

comment opportunities.

TROUBLED ASSET RELIEF PROGRAM

The Act authorizes the Treasury to create a purchase program and

an insurance program. The asset purchase program was included in

the Treasury's original proposal and is the primary focus of

this legislation. Nevertheless, the Treasury is obligated to

establish the insurance program to accompany the asset purchase

program.

As noted, the TARP enables the Treasury to purchase, and to make

and fund commitments to purchase, troubled assets from certain

financial institutions. These will be made on such terms and

conditions as are determined by the Treasury, and in accordance

with the policies and procedures developed and published by the

Treasury.

The Treasury is required to publish program guidelines for TARP

before the earlier of either the second business-day after the date

of the first purchase of troubled assets or 45 days after the

enactment date. Thus, if the Treasury seeks to immediately utilize

the purchasing authority on October 6, program guidelines must be

published on October 8. The Act does not specify that the

guidelines be subjected to a public notice and comment process

prior to implementation, although they could be adopted in interim

final form subject to change after public comment. The guidelines

must address the following points: (i) mechanisms for purchasing

troubled assets; (ii) methods for pricing and valuing troubled

assets; (iii) procedures for selecting asset managers; and (iv)

criteria for identifying troubled assets for purchase.

While the actual pricing mechanisms are left to the

Treasury's discretion, the Act requires the Treasury to use

market mechanisms for purchases whenever possible and to maximize

the efficiency of taxpayer resources with auctions and reverse

auctions. The program guidelines are expected to provide additional

information about pricing, on which the legislation is silent.

The Act's definitions of "financial institution"

and "troubled asset" are key to determining the ability

of an institution to participate in TARP. As discussed below, these

terms are defined broadly and provide the Treasury with significant

discretion in determining the institutions and assets covered.

Financial Institutions Eligible To Participate

Under the Act, "financial institution" means any

institution, including but not limited to any bank, savings

association, credit union, securities broker or dealer, or

insurance company, established and regulated under the laws of the

United States or any state, territory, or possession of the United

States, the District of Columbia, Commonwealth of Puerto Rico,

Commonwealth of Northern Mariana Islands, Guam, American Samoa, or

the United States Virgin Islands, and having significant operations

in the United States, but excluding any central bank of, or

institution owned by, a foreign government.

The Act includes institutions "established and

regulated" under the laws of the United States or any state.

An earlier draft more narrowly defined the term to include

institutions "organized and regulated" under the laws of

the United States or any state. The final language helped clarify

that US branches and agencies of foreign banks are financial

institutions under the Act. In addition to the financial

institutions specifically cited, the broad definition should also

cover bank holding companies and their US subsidiaries that are

subject to regulation and supervision by the Board of Governors of

the Federal Reserve System (the "Board") under the Bank

Holding Company Act of 1956, as amended. Other aspects of the

definition remain unclear and the Treasury will need to address

several points, including: (i) what constitutes "significant

operations" in the United States; (ii) whether ownership

stakes by sovereign wealth funds would constitute government

ownership; (iii) the level or nature of foreign ownership that

would preclude an institution from participating in TARP; and (iv)

the extent to which affiliates of financial institutions are

eligible to directly participate in TARP.

Troubled Assets Eligible For Purchase

Under the Act, "troubled assets" means? (i)

residential or commercial mortgages and any securities,

obligations, or other instruments that are based on or related to

such mortgages, that in each case was originated or issued on or

before March 14, 2008, the purchase of which the Treasury

determines promotes financial market stability; and (ii) any other

financial instrument that the Treasury, after consultation with the

Chairman of the Board, determines the purchase of which is

necessary to promote financial market stability, but only upon

transmittal of such determination, in writing, to the appropriate

Congressional committees.

This definition is very broad, and the first subsection appears

to include any security or derivative that is linked to an

underlying residential or commercial mortgage loan. The definition

does not expressly require that the troubled assets be located in

the United States to qualify for sale to TARP. Thus, depending upon

guidance to be issued by the Treasury, troubled assets booked in

the non-US branch of a US bank should be eligible. Moreover, the

Act does not expressly require that the mortgage loans or

securities have a nexus to US real estate. However, it would appear

that eligibility for troubled assets based on non-US mortgage loans

or instruments would be inconsistent with the intent of TARP. The

second subsection of the definition grants the Treasury broad

authority to purchase any...

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