The Emergency Economic Stabilization Act of 2008 ("EESA") authorizes the Treasury Secretary (the "Secretary") to provide additional capital to various types of financial institutions in the hope of reviving credit markets frozen by, among other things, massive losses in debt securities and other instruments backed by nonperforming, under collateralized mortgages.

In recent days, much publicity has been given to the possibility that the Treasury Department will use its authority under EESA to make equity investments in institutions that need more capital. However, Treasury is also continuing its rush to establish a program to purchase troubled assets from institutions.

Purchase of Troubled Assets. EESA authorizes the Secretary to establish and implement a Troubled Asset Relief Program ("TARP") to purchase "troubled assets," defined by EESA as "residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, the purchase of which the Secretary determines promotes financial market stability." EESA also authorizes the Secretary to manage and resell assets purchased under the program, requiring sales proceeds to be paid into the general fund to reduce the public debt.

Implementation. EESA does not contain TARP details, but expressly requires the Secretary to publish guidelines for implementation of the program, including criteria for identifying, mechanisms for purchasing, and methods for pricing and valuing assets by the earlier of November 14, 2008 or within 2 days after the first purchase under the program.

In a speech this morning, Treasury's Neel Kashkari (Interim Assistant Secretary for Financial Stability) gave assurance that Treasury is moving rapidly and methodically to implement the program in a way that maximizes the program's effectiveness in strengthening the financial system while protecting the taxpayers' interests. In particular, Treasury has created seven policy teams to work on different aspects of implementing EESA.

Asset Managers. On October 6, Treasury announced that it will separately select asset managers for securities and whole mortgage loans, as "financial agents" of the United States, and not as independent contractors. Under EESA, "financial institution" means "any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company," established under federal, state or U.S. territorial law, having significant operations in the United States.

Treasury required firms applying as asset manager for mortgage-backed securities purchased under the program to already have at least $100 billion of fixed income assets under management. In this morning's speech, Kashkari stated that Treasury had received more than 100 mortgage-backed securities asset manager applications and that Treasury should make a selection "in the next few days." One of the seven teams established by Treasury is identifying which mortgage-backed securities to purchase, from whom to buy them, and which purchase mechanism will best meet policy objectives.

Also on October 6, Treasury published a notice to financial institutions interested in providing whole loan asset management services. Minimum requirements for the financial institutions seeking to perform whole loan asset management services include having been continuously engaged in managing whole loan assets for at least five years and currently managing a mortgage loan portfolio of at least $25 billion. Kashkari stated that more than 100 whole loan asset manager applications have been received and that Treasury should make a selection in the next few days. One of the seven Treasury teams is working to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet policy objectives.

Mandatory Considerations in Exercising EESA Authority. In exercising his authority, EESA directs the Secretary to consider, among other factors, "protecting the interest of taxpayers by maximizing returns and minimizing the impact on the national debt," and "providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings and retirement security." In determining troubled assets for purchase, the Secretary must also consider:

  • the long-term viability of institutions, in determining whether a purchase from them represents the most efficient use of funds;
  • providing financial assistance to financial institutions serving low and moderate income populations and having less than $1 billion in assets; and
  • protecting retirement security by purchasing troubled assets held by eligible retirement plans.

Foreclosure Mitigation; Assistance to Homeowners. EESA includes specific provisions to avoid foreclosures. To the extent that the Secretary, Fannie Mae, Freddie Mac, the FDIC, or the Federal Reserve hold, own or control mortgages, mortgage-backed securities and other assets secured by residential homeowners, each agency is required to use its authority to encourage mortgage servicers to take advantage of the HOPE for Homeowners Program (HHP) and other programs to minimize foreclosures. Home mortgage modifications, including rate and principal reductions, are expressly encouraged.

HHP, a voluntary program established under The Hope for Homeowners Act of 2008 ("HHA"), allows borrowers who cannot afford their mortgages to refinance with loans insured by the FHA. As first enacted in June, the amount of principal obligation eligible for refinance was limited to 90% of appraised value of the mortgaged property. EESA revises HHA to permit refinance of a higher percentage of value, at the discretion of HHP's Board of Directors.

One of the seven teams established by Treasury is responsible for seeing that as many homeowners as possible are helped, while also helping taxpayers.

Executive Compensation. EESA has important requirements regarding executive compensation for institutions that participate in TARP. One of the seven Treasury teams is working to define these requirements in various contexts, including where Treasury purchases troubled assets from an institution.

Oversight. EESA contains various oversight and compliance mandates, including theestablishment of a Financial Stability Oversight Board. This board, which is comprised of the Chairman of the Federal Reserve, the Secretary, the Director of the Federal Housing Finance Agency, the Chairman of the SEC, and the Secretary of HUD, is to make recommendations regarding, and review exercises of authority under, TARP and other programs developed under the legislation. One of the seven teams established by Treasury is focused on making sure that Treasury will "get it right" on such matters.