On January 14, President Obama proposed a Financial Crisis Responsibility Fee to be imposed on financial firms in order to recoup the projected $117 billion cost of TARP. The fee will be in place for 10 years, or longer if necessary to fully repay TARP. Only firms with more than $50 billion in consolidated assets will be subject to the fee. Covered institutions include U.S. firms, and U.S. subsidiaries of foreign firms, that were insured depository institutions, bank holding companies, thrift holding companies, insurance or other companies that owned insured depository institutions, or securities broker-dealers as of January 14, or that become one of these types of firms after January 14. White House Release. Financial Crisis Responsibility Fee Fact Sheet.
TARP
Treasury Outlines Extension of and Exit Strategy for TARP
On December 9, Treasury Secretary Geithner outlined the Administration’s exit strategy for TARP. Geithner highlighted four elements of the strategy: (i) extending TARP until October 3, 2010 to maintain an adequate financial stability reserve, (ii) continuing to terminate and wind down government programs enacted to address the economic crisis, (iiii) managing equity investments acquired through the Emergency Economic Stabilization Act, and (iv) limiting new commitments in 2010 to: (a) foreclosure mitigation programs, (b) initiatives to provide capital to small and community banks, and (c) the expansion of TALF. Treasury Release.
Auto Industry Developments
On December 19, Treasury extended $13.4 billion in short term financing from TARP funds to General Motors Corporation and Chrysler LLC, with an additional $4 billion in loans to follow in February 2009 (contingent upon the release by Congress of the remaining TARP funds), in exchange for warrants for non-voting stock, executive compensation limits, dividend restrictions and other commitments. If the automobile manufacturers are not able to achieve financial viability,evidenced by positive net worth, by March 31, 2009, the loans will be called. Term Sheets. Treasury Press Release.
TARP Reports
On December 5, Treasury released its initial TARP progress report to Congress. On December 2, Treasury presented its third Tranche Report and the GAO published its first TARP report recommending that more steps be taken to ensure accountability and transparency with respect to TARP. First Report to Congress. Tranche Report. GAO Transparency Report.
On December 4, the GAO presented a separate report on TARP to a Senate subcommittee on financial services and general government which focused on TARP’s efforts to address home mortgage defaults and foreclosures. The GAO noted that default and foreclosure rates for home mortgages rose sharply from the second quarter of 2005 through the second quarter of 2008 and indicated that more extensive use of loan modification programs would be necessary to restore stability to the mortgage market and preserve home ownership. In related news, on
On December 8, at the Office of Thrift Supervision’s National Housing Forum Comptroller of the Currency John C. Dugan stated that more than half of the loans modified in the first quarter of 2008 fell delinquent within six months after modification. GAO Home Mortgage Report. OCC Press Release.
On December 10, the Congressional Oversight Panel for TARP issued its initial report, as mandated by the Emergency Economic Stabilization Act of 2008, urging Treasury to provide more information on its current progress and future plans, and questioning whether Treasury’s efforts are having a positive effect on stabilizing markets and reducing foreclosures. Congressional Oversight Panel Report.
Auto Industry and TARP
On December 10, the House of Representatives passed the Auto Industry Financing and Restructuring Act in an effort to restore liquidity and stability to the domestic automobile industry. Among other measures, the assistance package would include bridge loans (with terms of up to 7 years) to be dispersed by a Presidentially appointed “car czar” in return for warrants and concessions from the companies. The Senate failed to agree to pass the bill without modification. As we go to press, the White House is considering the use of TARP funds to help the automakers. Auto Industry Financing and Restructuring Act.
Treasury and Fed Developments
On November 12, Treasury Secretary Paulson announced that Treasury would not be purchasing troubled assets under TARP, as was originally contemplated with the passage of the Emergency Economic Stabilization Act. Secretary Paulson set forth three priorities for the deployment of remaining TARP funds: (1) strengthening the capital positions of financial institutions, including implementing measures to attract private capital, (2) encouraging investment in ABS, potentially by providing investors with access to federal financing, and (3) mitigating mortgage foreclosures. Secretary Paulson also remarked that Treasury’s preferred stock purchase agreement with the GSEs is “effectively, a guarantee on GSE debt and agency MBS.” Orrick Client Alert. Secretary Paulson’s Remarks.
On November 10, Treasury announced that it will purchase, under the Emergency Economic Stabilization Act, $40 billion of newly issued preferred shares of AIG, which it referred to as a “systemically important company.” In conjunction with this announcement, the New York Fed announced reductions on interest on AIG’s credit facility and extended its length from two to five years. The Fed also created two additional AIG lending facilities, one to fund CDO securities on which AIG has written CDS contracts and one to fund RMBS from AIG’s lending portfolio. Treasury Release. Fed Release.
On November 10, the Fed approved the application of American Express Company and American Express Travel Related Services Company, Inc. to become bank holding companies on conversion of American Express Centurion Bank from an industrial loan company to a bank. Fed Release.
On November 10, the New York Fed announced that purchases of eligible money market instruments through the Money Market Investor Funding Facility would begin on or about November 24. New York Fed Release.
Emergency Economic Stabilization Act Developments
Agreements were signed over the past weekend with the initial nine institutions electing to participate in Treasury’s Capital Purchase Program. Treasury began delivering $125 billion in capital to those institutions on October 28. A number of regional banks have also applied to receive approximately $35 billion in capital under the program. CPP Transaction Report. Treasury Press Release.
On October 28, SIFMA and ASF jointly issued a comment letter relating to the development of the asset guarantee program authorized under the Emergency Economic Stabilization Act and requested that Treasury consider limiting and targeting the circumstances in which the guarantee program might be effectively used. SIFMA/ASF Comment Letter.
Internal Revenue Code Sec. 597 provides for rules to prevent a double tax benefit on the receipt by a bank or S&L of “federal financial assistance” pursuant to section 406(f) of the National Housing Act, section 21A of the Federal Home Loan Bank Act or section 11(f) or 13(c) of the Federal Deposit Insurance Act. On October 14, the IRS announced that amounts furnished to financial institutions under TARP will not be treated as “federal financial assistance” within the meaning of Sec. 597. IRS Notice 2008-101.
TARP Capital Purchase Program
Qualified financial institutions can apply on or before November 14 to participate in the Treasury’s Capital Purchase Program to sell senior preferred shares to Treasury. All institutions that sell shares to the government will be required to accept restrictions on executive compensation. Treasury Summary of Senior Preferred Terms. Orrick Structured Finance Alert.