On Oct. 3, 2008, Congress passed H.R. 1424, the “Emergency Economic Stabilization Act of 2008” (“the Act”). This legislation is designed to stabilize the economy following the recent financial crisis, and the President has signed it into law. This bulletin is designed to provide Reed Smith clients with an overview of the changes in contracting requirements enacted by the Act.
Authorizing the Purchase of Troubled Assets. The Act authorizes the Secretary of the Treasury (“Secretary”) to establish a Troubled Asset Relief Program to purchase “troubled assets” from financial institutions, “on such terms and conditions as are determined by the Secretary.” Section 101(a). The Act provides the Secretary with broad leeway to determine what constitutes a “troubled asset” and to decide which “troubled assets” to purchase. For example, the Act provides that “troubled assets” shall include “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 Secretary determines promotes market stability.” Section 3, Subpart 9(A). The Act also allows the Secretary to designate as a “troubled asset,” “any other financial instrument” the Secretary determines is necessary to purchase “to promote financial market stability.” Section 3, Subpart 9(B). In the latter case, however, to designate such a financial instrument as a “troubled asset,” the Secretary is required to consult with the Chairman of the Federal Reserve and notify Congress, in writing, of the decision.
The Act’s Effect on Federal Contracting Procedures. The Act authorizes the Secretary of the Treasury to designate financial institutions as “financial agents” of the federal government in the purchase and sale of troubled financial assets. Section 101(c)(3). To do this in a timely manner, the Act authorizes the Secretary to award contracts to institutions to perform work as financial agents without using the Federal Acquisition Regulation’s (“FAR”) competitive procedures. Generally, the FAR requires agencies to award contracts pursuant to a competitive bidding process that involves the solicitation of offers and adherence to stated evaluation criteria. The Act, however, contains an exception to this general Rule that permits the Secretary to waive specific provisions of the FAR (which would, for example, allow the award of “solesource” contracts to specific contractors) if the Secretary determines that compliance with FAR requirements would be “contrary to the public interest.” Section 107(a). Within seven days of making this determination, the Secretary is required to provide notification, with justification, for the determination to congressional committees with oversight over banking issues. Id. Further, if in making this determination the Secretary waives FAR provisions related to the “inclusion and utilization of minorities and women, and minority- and women-owned businesses,” the Secretary is required to “develop and implement standards and procedures to ensure” their inclusion and utilization “to the maximum extent practicable.” Section 107(b). The Act also provides that the Federal Deposit Insurance Corporation (“FDIC”) “shall be eligible for, and shall be considered in, the selection of asset managers for residential mortgage loans and residential mortgage-backed securities and shall be reimbursed by the Secretary for any services provided.” Section 107(c).
Given the above provisions, the Act creates opportunities for financial service companies to win work as a financial agent of the federal government, either through direct contracting with the Secretary or as a subcontractor with the FDIC.
Program Guidelines. Under the Act, the Secretary shall publish program guidelines that include
- Mechanisms for purchasing troubled assets
- Methods for pricing and valuing troubled assets
- Procedures for selecting asset managers
- Criteria for identifying troubled assets for purchase. Section 101(d)(1-4)
The Act requires these guidelines to be produced “[b]efore the earlier of the end of the 2 business-day period beginning on the date of the first purchase of troubled assets…or the end of the 45-day period beginning on the date of enactment of this Act.” Id.