On Monday, September 22, 2008, Senate Banking Committee Chairman Christopher Dodd introduced his view of a Treasury rescue of the nation’s financial institutions. In short, the Dodd proposal would embellish or deviate from the Treasury proposal in the following ways:
- Treasury can make and fund commitments to purchase “troubled assets” (broadly defined to include almost anything that Treasury and the Federal Reserve Board (“FRB”) determine) from any “financial institution” (i.e., financial services companies – banks, savings institutions, credit unions, securities firms and insurance companies) having significant operations in the US, or other institutions, including foreign institutions, if so determined by Treasury and the FRB.
- The Treasury is required to receive “contingent shares” (“CS”) in the financial institution or an affiliate equal in value to the purchase price of the assets purchased. The purchase price issue and how it relates to the seller’s book value has an enormous impact on the effect and attractiveness of this type of program.
- CS would be equity instruments, which are protected by anti-dilution provisions (unless the financial institution is not publicly traded, in which case the Treasury would receive senior contingent debt). If the amount that the Treasury receives in selling assets acquired from a financial institution is less than the amount paid for the assets, the CS will vest to the Treasury in an amount equal to 125% of the difference between the amount that the Treasury paid and the disposition price of such assets, divided by the average share price of the institution during the 14-day period prior to the purchase.
- An Emergency Oversight Board (“EOB”) consisting of the Chairmen of the FRB, the Federal Deposit Insurance Corporation (“FDIC”), and the Securities and Exchange Commission would oversee the exercise of authority by Treasury. The EOB would also include two members appointed by the (i) majority leadership of the Senate and House and the (ii) minority leadership of the Senate and House. The EOB would appoint a Credit Review Committee to evaluate the exercise of Treasury’s purchase authority. The EOB would not have any authority to override the actions of the Treasury.
- The proposal would allocate at least 20% of any profits realized from the sale of troubled assets by the Treasury to the Housing Trust Fund and the Capital Magnet Fund. The balance would go to the Treasury.
- The FDIC would manage the acquired assets for the Treasury.
- The proposal contains provisions intended to provide additional assistance to homeowners in danger of foreclosure.
- The Treasury would have to reimburse the Exchange Stabilization Fund (“ESF”) for any expenditures it caused the ESF to make to temporarily guaranty money market mutual funds (“MMMFs”) and is prohibited once the legislation passes from using the ESF for that purpose.
- The Treasury is permitted to guarantee MMMFs as a part of the program authorized by the overall rescue program for 120 days, or for up to a year from enactment, if the Treasury certifies the need in writing to the Congress.
- Any insurance provided to MMMFs may not exceed FDIC coverage amounts, and the Treasury must charge premiums at a rate equivalent to what the FDIC charges.
- The overall rescue program terminates December 31, 2009, unless the Secretary certifies to the Congress in writing the need to extend the program up to two years from the enactment of the legislation.
- Treasury must require that any entity seeking to sell assets meet appropriate standards for executive compensation, which, among other things, include limits that remove incentives to take risk and a claw-back for incentive compensation if earnings or other criteria are later proven to be inaccurate.
The Dodd version of the Treasury rescue raises critical issues regarding the price at which assets can be sold, the implications of the Treasury receiving large amounts of CS in American companies, and the government role in evaluating the appropriateness of executive compensation.
Representative Barney Frank today also released a response to the Treasury proposal that differs in certain respects from the Dodd proposal. Among the notable differences are:
- There would be no specific amount of equity that Treasury would be required to receive in connection with purchase transactions. However, any institution in which the Treasury held an equity interest would be prohibited from making any severance payments to senior executive officers while the equity was outstanding.
- The Treasury would be authorized to use private contractors to manage acquired assets, but could utilize the FDIC