The events in the financial sector this past week have been historic.

To assist clients as efficiently as possible, Fried, Frank, Harris, Shriver & Jacobson LLP has today established a multi-practice task force consisting of senior attorneys in its banking, corporate, real estate, bankruptcy, litigation, securities and government contracts practices. This is the first in a series of Alerts that you will receive from us on the Treasury rescue plan. A presumed draft of Treasury’s proposed rescue legislation circulated yesterday, and a legislative fact sheet was released by Treasury that evening explaining the legislative proposal that Treasury had submitted to Congress. The draft legislative language suggests a minimalist approach with many of the details to be determined by implementing regulations drafted by the Treasury.

Under the proposed legislation, Treasury would be empowered to do the following: 

  1. Issue securities or obligations, and make and fund commitments to purchase mortgagerelated assets (i.e., residential or commercial mortgages, and any securities, obligations or other instruments that are based on mortgages originated before September 17, 2008) from participating financial institutions (which is currently undefined) with significant operations in the US unless Treasury, in consultation with the FRB, determines that broader institution or asset eligibility is necessary to stabilize financial markets. The price of assets purchased would be established through market mechanisms where possible, such as reverse auctions. 
  1. Manage, sell, and enter into financial transactions with regard to mortgage-related assets, on terms and for durations that it determines appropriate. 
  1. Hire private firms to manage the assets purchased (with an apparent exemption from normal government contracting rules). 
  1. Exercise all rights that come with the mortgage-related assets (e.g., sell them, foreclose on real estate, seek recourse, hold them to maturity, etc.).
  1. Engage financial institutions as financial agents of the government. 
  1. Establish separate vehicles to purchase mortgage-related assets and issue obligations. 
  1. Promulgate implementing regulations.

The federal budget would be amended to provide Treasury a purchase limit of $700 billion in outstanding mortgage-related assets.

If enacted, the law would sunset in two years.

In addition, Treasury has decided to use up to $50 billion from the Exchange Stabilization Fund, which it maintains for currency exchange purposes, to guarantee money market mutual funds. The mechanism and other details of this guarantee have not been worked out. The FRB also is assisting in stabilizing money market mutual funds by establishing a lending facility that member banks and bank holding companies may tap to purchase qualifying asset-backed commercial paper from those funds. Safety and soundness requirements for these transactions have been relaxed.

These and other actions by Treasury will likely form the predicate for broad new regulation of firms that are the beneficiaries of this government rescue.

There are many details that need to be fleshed out over the coming days. In particular, the price at which mortgage-related assets are purchased will impact the program, particularly where there is a significant difference between the price offered by Treasury and the current value of the assets as recorded on the books of the selling institution. In addition, it remains to be seen what types of financial interests that Treasury will take, if any, in the selling institutions.