The U.S. House of Representatives today debated and voted on the Emergency Economic Stabilization Act of 2008, also referred to as the Troubled Asset Relief Program (“TARP”). Both Democrats and Republicans had their say on the positives and negatives of the bill, but in the end, the bill was defeated by a 228 - 205 vote; 218 Yea votes were required to pass the bill. The breakdown of the voting tallied 140 Democrats voting Yea while only 65 Republicans approved the measure. Conversely, 95 Democrats and 133 Republicans voted Nay. Those voting against felt that the bill represented too much government interference in the economy and too much of a bailout for Wall Street. Those in favor, meanwhile, stressed the need to jumpstart the economy and revive the flow of money into the credit markets.
A Senior Member of Locke Lord Strategies, speaking to a staffer of a key House Member, stated that the House would not try to bring the bill back for a vote until later in the week. Regardless, the bill will need to be reworked in order to be approved by the House. Indeed, some Members are saying that the entire process should be restarted from scratch. The Senate, which was scheduled to vote on the bill at midweek, will most likely wait until further House action.
Reaction on Wall Street was as expected with the Dow dropping 778 points. Many naysayers, however, are claiming that the state of affairs is not as bad as portrayed and that given time, the market will correct itself. It is doubtful however, if that attitude will continue to prevail if the stock market continues to crumble.
Most Recent House Proposal
The version of the bill voted on by the House today most resembled the bill put forth by Senator Christopher Dodd (D-CT), Chairman of the Senate Committee on Banking, Finance and Urban Affairs, with a few notable exceptions:
- adds a new “Insurance of Troubled Assets” section which would require the Secretary of the Treasury to establish a program to guaranty (rather than purchase) troubled assets. The program would guaranty up to 100 percent of the payment of principal and interest on the troubled asset and would be funded through premiums charged to participating firms. The section was deemed necessary by conservative Republicans as a method to reduce the cost of the bailout;
- requires the Secretary to take into consideration the protection of the interest of taxpayers by maximizing overall returns and minimizing the national debt;
- amends the authority of the Financial Stability Oversight Board to reviewing the policies implemented by the Secretary, as opposed to the Dodd Bill language which made the Board responsible for reviewing all “actions” of the Secretary;
- reconstitutes the composition of the Financial Stability Oversight Board to include the Secretary, the Director of the Federal Housing Finance Agency and the Secretary of HUD, while deleting from the Board the Chairman of the FDIC as well as two positions slated for non-federal government employees;
- eliminates the requirement that 20 percent of the profits generated from the sale of troubled assets must be deposited into the Housing Trust Fund and the Capital Magnet Fund;
- amends the requirement in the Dodd bill relating to corporate governance and executive compensation of firms that sell assets under the TARP. In the latest bill, firms will have to comply with corporate governance and executive compensation requirements only if: (i) the assets are purchased without any competitive bid or (ii) the assets are acquired through an auction purchase and the amount purchased in the aggregate from the institution exceeds $300 billion;
- deletes the provision in the Dodd Bill that would have allowed bankruptcy judges to amend first mortgage loans in a bankruptcy proceeding;
- grants the SEC the authority to suspend mark-to-market accounting rules and requires the SEC to study the effects of mark-to-market accounting on financial institutions’ balance sheets, the impact on bank failures in 2008 and the impact on the quality of financial information from mark-to-market accounting;
- increases the deductible amount of executive compensation under IRC Section 162(m) for firms selling assets under the TARP from $400,000 to $500,000;
- deletes the shareholder access to proxy solicitation materials and “say on pay” provisions found in the Dodd Bill;
- includes a provision which nullifies any provision in any contract which inhibits a person from acquiring a financial institution over which the FDIC is exercising its authority;
- limits the ability of any institution participating in the TARP to bring an action against the Secretary, other than as permitted by the Secretary; and
- requires the Secretary, where appropriate, to consider the reasonable requests by homeowners for loss mitigation measures, including term extensions, rate reductions, principal write downs, or other modifications.