As part of a Congressional compromise to ensure enactment of the Emergency Economic Stabilization Act of 2008 (the “Act”), Section 102 of the Act requires the Secretary of the Treasury (“Treasury” or the “Secretary”) to establish a program to guarantee troubled assets originated on or prior to March 14, 2008, including mortgage-backed securities. Not later than 90 days after enactment of the Act (or January 1, 2009), the Secretary is obligated to report to Congress on the program established.

Under the Act, the Secretary is authorized to set and collect premiums from participating financial institutions by category or class of asset, taking into consideration the credit risk characteristics of the asset being guaranteed. The premiums must be sufficient to cover anticipated claims, based on actuarial analysis, and ensure that taxpayers are fully protected. The structure of the guarantee program may take any number of forms and may vary by asset class. In the Act, Congress also established a Troubled Assets Insurance Financing Fund (the “Fund”) to hold and to fulfill Treasury’s financial guarantees. The Act provides that Treasury’s authorization under the Act is to be reduced by an amount equal to the difference between the total of the outstanding guaranteed obligations and the amounts held by the Fund.

On October 14, 2008, Treasury released a request for public input on the program. In particular, Treasury asked for comment on the following questions:

  • How should the program be structured to minimize adverse selection?
  • How should premiums be calculated?
  • What events should trigger insurance payout?
  • What form should payment take?
  • Which institutions should be eligible?

The request for comment also asks for input on appropriate structures for different asset classes and other more detailed aspects of a potential insurance program. Comments are due by Friday, October 28, 2008, and may be submitted at www.regulations.gov.