The Emergency Economic Stabilization Act of 2008
The Treasury’s Recipe for Restoring Liquidity and Stability to the Financial System
The Emergency Economic Stabilization Act of 2008 (EESA) was signed by President Bush on October 3, 2008. Throughout October, as markets roiled at home and abroad, the United States Department of the Treasury moved swiftly to begin mixing the list of ingredients contained in EESA with hope that the blend will achieve the Act’s goals of restoring liquidity and stability to the financial system, protecting individual savings, preserving homeownership and promoting future economic growth. The recipe is complex and the Treasury must work nimbly to make this delicate economic soufflé rise. This article will highlight EESA’s major provisions and steps the Treasury has taken toward implementation as well as provide a brief overview of the Treasury’s related voluntary Capital Purchase Program.
Troubled Assets Relief Program. Under EESA, the Treasury is authorized to establish the Troubled Assets Relief Program (TARP) to purchase troubled assets from financial institutions. TARP is managed by the newly formed Office of Financial Stability, headed by Neel Kashkari. Under TARP, the Treasury is authorized to purchase both mortgage-backed securities and whole loans. In determining which assets will be purchased and at what price, the Treasury is charged with implementing a process that will prevent the unjust enrichment of financial institutions. Bank of New York-Mellon will be the master custodian of the mortgage-backed securities purchase program. The Treasury is working with the federal regulatory agencies to assemble the details of the whole loan purchase program. Asset managers will be hired in the near future.
Troubled Assets Insurance Fund. EESA requires the Treasury to establish a program to guarantee the troubled assets of financial institutions. A request for comment was published in the October 16, 2008 Federal Register seeking input on how the program should be structured. The program must be voluntary and self-funding. Comments, which were due October 28, 2008, were invited on the calculation method for risk-based premiums, events triggering payout, the form of payouts and eligible assets under the program.
Foreclosure Mitigation and Homeownership Preservation. EESA requires the Treasury to implement a plan to minimize foreclosures on the troubled assets it acquires under TARP. Mortgage servicers will be strongly encouraged to utilize programs such as HERA’s Hope for Homeowners (which was amended by EESA to allow for broader eligibility) to assist borrowers in avoiding foreclosure. EESA authorizes the Treasury to issue loan guarantees and credit enhancements to facilitate loan modifications. Donna Gambrell has been named Chief of Homeownership Preservation. EESA also requires the newly formed Federal Housing Finance Agency (FHFA) to provide foreclosure avoidance assistance to homeowners living in properties securing assets held, owned or controlled by Fannie Mae and Freddie Mac, and also to encourage servicers to utilize Hope for Homeowners and similar programs. FHFA must periodically report to Congress data related to foreclosures and loan modifications.
Executive Compensation. Financial institutions that sell troubled assets to the Treasury under TARP must agree to certain limits on executive compensation and will be subject to restrictions on certain tax benefits. For example, if the Treasury purchases assets in excess of $300 million from a financial institution, the institution is prohibited from entering into any new executive employment contracts that include golden parachutes for the term of the program. Furthermore, executive compensation in excess of $500,000 and certain golden parachute payments for senior executives are not tax deductible, and a 20% excise tax will be imposed on the recipient of such golden parachute payments. Stricter limitations apply to golden parachute payments to senior executives of failing institutions.
FDIC/ NCUA Insurance. In an attempt to boost public confidence, the EESA temporarily raised the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) coverage limits on non-retirement accounts for banks and credit unions from $100,000 to $250,000 per account holder, per institution. Coverage for retirement accounts remains at $250,000. The increased limits will be in effect until the end of 2009.
Capital Purchase Program. Less than two weeks after the passage of EESA, the Treasury announced another new program designed to restore capital flows and further boost public confidence. The voluntary Capital Purchase Program (CPP) is available to qualifying U.S. controlled banks, savings associations, and certain bank, savings and loan holding companies. Under the program, the Treasury will purchase up to $250 billion of preferred stock from institutions that meet the November 14, 2008 application deadline. Nine of the nation’s largest financial institutions had already accepted the Treasury’s standard terms at the time the program was announced on October 14, 2008 and capital purchases in these institutions began the last week in October. Notably, the Treasury has authorized, and some would even say encouraged, stronger institutions to use funds received through the CPP to acquire weaker institutions.
The application process has been established in cooperation with the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). Application may be made through an institution’s primary regulator, which will then make appropriate recommendations to the Treasury for acceptance or rejection of the application. Executive compensation limits similar to those under TARP will apply to participants in the program. CPP guidelines and the application can be found by clicking here. The Treasury’s stated goal is to make the program available to the estimated 5,000 non-publicly traded or privately held banks in the U.S., including Subchapter S corporations, mutual institutions and other ownership classes. On October 31, 2008, the Treasury announced that it would be issuing separate term sheets and extending the application deadline for those non-publicly traded entities that may be interested in participating in the program.
The $700 Billion Question. The Treasury is moving quickly to implement the $700 billion plan. Whether you call it a bailout, a rescue or a mere confidence booster, only time will tell whether EESA truly provides a recipe for success.
