Last night, by a bipartisan 74-25 vote, with 78 percent of Democrats and 69 percent of Republicans voting in favor, the U.S. Senate approved landmark rescue legislation that will provide up to $700 billion of relief for financial institutions holding troubled residential and commercial mortgage loans and other assets. House action is scheduled for Friday, although, in light of the failure of similar legislation in the House on Monday,1 approval is not certain. If the House does approve the bill, the President will sign it shortly thereafter.
The legislation, re-designated as H.R. 1424 (the “Bill”),2 retains the substance of the original Treasury Department proposal from September 20 — a $700 billion program that allows Treasury to purchase (and later sell) troubled mortgage loans or mortgage-related assets from banking organizations and other financial institutions.3 The Bill also includes several potentially significant provisions urged by different Congressional groups, including a three-step process for use of the full $700 billion, a mortgage guarantee program as an alternative to outright asset purchases, a recoupment provision to allow Treasury to recover losses in five years, a systematic loan modification program to assist struggling borrowers, certain limits on executive compensation by participating institutions, enhanced oversight of Treasury’s operation of the program, and — most recently and importantly — a temporary increase in federal deposit insurance limits. The Bill does not include any amendments to the bankruptcy code to permit judicial modification of mortgage loans, as some Democrats had sought.
To help attract votes, the Bill would extend a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels, and continue a number of other expiring tax breaks, including the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns. The Bill also includes another year of middle class taxpayer relief from the Alternative Minimum Tax.
Even after enactment of the Bill, several important substantive issues for institutions holding mortgage-related assets will have to be resolved by Treasury and other executive-branch and independent agencies. Still uncertain are such critical features as the pricing mechanisms for troubled asset purchases and sales, the details of the mortgage guarantee program, the loan modification guidelines and the precise character of the limits on executive compensation. The Bill’s invocation of several “considerations” that must guide Treasury’s implementation of the relief plan, coupled with strict Congressional oversight and reporting requirements, are likely to ensure that the program will remain in the political spotlight for months to come.
Structure of the Troubled Asset Relief Program
- Basic Authority. The Bill provides for a Troubled Asset Relief Program (TARP), under which Treasury may purchase and hold up to $700 billion in “troubled assets” (a term discussed below). The language of the Bill suggests that the $700 billion limit applies to assets held by Treasury at any one time, so Treasury could sell assets and use the proceeds to purchase additional mortgage-related assets, although other provisions of the Bill indicate that proceeds of asset sales must be used to retire public debt. Treasury has authority to purchase assets through December 31, 2009, and it may extend that authority until early October 2010, but only if the Treasury Secretary certifies to Congress why the extension is necessary to assist American families and stabilize financial markets, together with estimated taxpayer costs for the extension.
Unlike Treasury’s original proposal, Treasury may obtain the $700 billion only in three graduated installments, not all at once. First, Treasury may acquire up to $250 billion of assets immediately. Second, Treasury may acquire up to an additional $100 billion, when the President certifies to Congress that the Treasury Secretary needs the additional authority. Third, the remaining $350 billion is available to the Treasury Secretary if (i) the President submits a written report to Congress detailing the Treasury Secretary’s plan to exercise that authority under the Bill, and (ii) Congress does not pass a joint resolution disapproving such authority within 15 days of receipt of the President’s report.
- Management and Oversight. The Bill creates a new Office of Financial Stability within Treasury’s Office of Domestic Finance to manage the TARP. To enhance Congressional oversight of the implementation of the Act, the Bill also creates an Office of the Inspector General for the TARP, with the inspector general appointed by the President and approved by the Senate. Key functions of the inspector general include conducting, supervising and coordinating audits and investigations of the TARP, and providing quarterly reports to Congress summarizing the Treasury Secretary’s activities. The Bill also establishes the Congressional Oversight Panel comprised of five outside experts appointed by Congress to review the financial markets and regulatory system and present monthly reports to Congress regarding the Treasury Secretary’s use of authority under the Bill and its market impact, as well as an annual report of recommendations for regulatory reform.
- Legal Standards. The only fixed legal standards in the Bill are (i) the $700 billion cap (itself a somewhat ambiguous limit), (ii) the time limit on asset purchases by Treasury, (iii) an apparent requirement that (with certain exceptions) Treasury generally pay no more for an asset than what the seller paid to acquire it and (iv) an express requirement in section 113(b)(1) that Treasury pay the lowest price determined by the Treasury Secretary to be consistent with the purposes of the Bill. There is no hard-and-fast standard, however, as there is, for example, in the duty of the FDIC to resolve failed banks at “least cost.”
Indeed, the purposes of the Bill, set forth in section 2(2), are both so broad and potentially conflicting as to give Treasury considerable discretion in determining a “lowest price” and other elements of TARP while also giving Congress ample room to second-guess those decisions. For example, one stated purpose is to preserve home ownership and another is to maximize overall returns to taxpayers; whatever pricing mechanism Treasury adopts is likely to advance one of these purposes at the expense of the other.
Similarly, section 103 of the Bill enumerates nine “considerations” that Treasury must take into account in exercising its authorities, but, in the application to TARP, several of these considerations are likely to work at cross-purposes. The nine considerations are
- the protection of taxpayer interests by maximizing overall returns and minimizing the impact on the national debt;
- the provision of stability and the prevention of disruption to financial markets in order to limit the impact on the economy and to protect American jobs, savings and retirement security;
- the need to help families keep their homes and stabilize communities;
- the long-term viability of prospective sellers of troubled assets in order to determine whether a purchase represents the most efficient use of funds;
- the confirmation that all financial institutions are eligible to participate in TARP, without discrimination based on size, geography, form of organization or the size, type and number of assets eligible for purchase by Treasury;
- the provision of financial assistance to banks that serve low- and moderate-income populations, have assets of less than $1 billion and have capital levels that dropped as a result of the devaluation of Fannie Mae and Freddie Mac stock;
- the stability for local governments that have suffered significant increased costs or losses in the current market turmoil;
- the protection of retirement security by purchasing assets from certain eligible retirement plans; and
- the utility of purchasing other real estate owned, and instruments backed by mortgages on multifamily properties.
Treasury also is authorized (but not specifically required) to take any necessary steps to prevent the unjust enrichment of participating institutions.
Troubled Asset Purchases
- Eligible Assets. The Bill authorizes Treasury to purchase “Troubled Assets,” defined as
(A) 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 financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
Three features of the definition of “Troubled Asset” are noteworthy. First, it is not clear whether credit derivatives are covered, although they arguably are to the extent they may be “instruments that are based on or related to such mortgages.”4 Second, while the term includes the word “troubled,” the definition includes no express requirement that the loan, security, obligation or other instrument be delinquent, in default or even under-performing, although Treasury may only purchase assets that it believes will promote financial market stability. Treasury thus appears to have the legal authority to purchase any mortgage-related assets, even if fully performing, which should provide ample flexibility for Treasury to purchase whole loan pools that include both defaulted and performing mortgages, and trenches of mortgage-backed securities that are not in default. Third, Treasury has originally proposed a September 14, 2008, cut-off date for eligible assets, but the cut-off date in the Bill is approximately six months earlier. It is not clear why Congress elected to exclude more recently originated assets from eligibility, but it is perhaps no coincidence that the March 14 cut-off date in the Bill was the last business day before the announcement that JPMorgan Chase was acquiring Bear Stearns with Federal Reserve assistance.
- Eligible Sellers. Treasury may purchase Troubled Assets from any “financial institution,” defined as
any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.
Treasury’s regulations, when adopted, will likely provide more explicit guidance about institution eligibility, but on its face and without clarification, this definition raises some questions. Although it is reasonably clear from the statutory language (and abundantly clear from statements made during the legislative process) that banks “established and regulated” under the laws of Puerto Rico or Guam, for example, are intended to be eligible, what is intended by the additional requirement that those institutions have “significant operations in the United States”? Is this intended to make a nuanced distinction between operations in the 50 states and operations in U.S. territories and possessions, or is it just unfortunate shorthand?
It appears that a U.S. broker-dealer subsidiary of a foreign (non-government owned) bank is intended to be eligible, since the asset seller in that case would be a U.S. “established and regulated” institution. It equally appears that a U.K. brokerage subsidiary of a U.S. banking organization would not be eligible (since the U.K. subsidiary would not be “established and regulated” in the United States), but perhaps otherwise eligible Troubled Assets of the U.K. subsidiary could be transferred to an eligible U.S. subsidiary.
Can a licensed U.S. branch or agency of a foreign bank participate in the TARP? Arguably the U.S. branch or agency is “established and regulated” under the laws of the United States, but is a branch or agency an “institution” within the meaning of the Bill? What else could be the purpose of the “having significant operations in the United States” requirement?
The Bill excludes institutions “owned” by a foreign government, but does not specify what level of foreign government ownership will trigger the exclusion. Presumably an otherwise eligible U.S. institution would not be excluded if a sovereign wealth fund or foreign government-controlled entity held a non-controlling investment in the U.S. institution, but what level of investment would be sufficient to bar participation?
Notwithstanding the Bill’s exclusion for foreign central banks and foreign-government owned institutions, to the extent that foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions (presumably those satisfying the definition above) that have failed or defaulted on that financing, Treasury does have the authority to purchase those troubled assets.
- Price of Purchases. Treasury’s pricing decisions will be critical to the success of TARP, but the Bill does not dictate these decisions. Section 101(d) of the Bill requires Treasury to establish pricing and valuation methods, without providing specifics. Section 113(b), however, directs the use of market mechanisms, including auctions and reverse auctions, “where appropriate,” to ensure that Treasury is paying the lowest price consistent with the purposes of the Bill and using taxpayer resources most efficiently. Where market mechanisms are not feasible, section 113(c) provides for direct purchases, provided the Treasury Secretary pursues additional measures to ensure that prices are reasonable and reflect the underlying value of the asset.
The nine considerations listed above also apply to the pricing decisions covered by sections 101(d) and parts of section 113(c). These considerations could complicate Treasury’s purchasing decisions considerably. For example, the fourth consideration relating to the long-term viability of a selling institution suggests that Treasury should reject sales by some institutions and accept sales by others, even though they all may ask the same price for comparable assets. The seventh and eighth considerations similarly imply that Treasury may favor purchases, almost regardless of price differentials, where a greater benefit to a local government or a retirement plan can be identified.
Section 113(a)(3) encourages Treasury to allow private investors to participate in purchases of troubled assets. Such participation would likely be beneficial in terms of both pricing and reducing Treasury’s actual outlays, but given Treasury’s built-in economic advantage — it can afford to lose up to $700 billion — it may be difficult to find private participants.
As Treasury purchases troubled assets, it must make information about the purchases public within two days, pursuant to section 114. This element of transparency may help prices reach the appropriate marketclearing levels, even if the initial prices seem too high or too low. Treasury also is required to assess whether sellers are making appropriate disclosures about sales, but, if they are not, Treasury only has authority to make recommendations to the seller’s regulator and cannot force additional disclosures.
- Equity or Debt Interests. Section 113(d) of the Bill would require any institution selling Troubled Assets to provide warrants for non-voting stock5 to Treasury or, in the case of sellers that are not publicly traded, warrants for debt securities. Earlier versions of the legislation set forth complicated terms for these warrants. Under the Bill, however, terms and conditions, including the exercise price, are essentially open to negotiation between Treasury and the seller, subject to the parameters of a “reasonable” return to Treasury and protection for Treasury against losses from the disposition of Troubled Assets. The warrants must contain certain conversion and anti-dilution features. Treasury may make exceptions from this requirement for de minimis sales by an institution (Treasury may set the de minimis ceiling, but it may not be greater than $100 million in sales by one institution) and may make alternative arrangements if the seller is legally prohibited from issuing securities and debt instruments.
- General Authority. Within 90 days from the enactment of the legislation, the Treasury Secretary must establish a guarantee program for troubled assets originated before March 14, 2008, for which participating institutions would pay premiums. The Treasury Secretary is authorized to set the terms and conditions of guarantees, consistent with the purposes of the Bill, provided that the guarantee amount cannot exceed 100 percent of the principal and interest due to the financial institution from the troubled asset; however, it does not state that all troubled assets (or even all categories or classes of troubled) must be eligible for a guarantee.
- Premiums. The Bill explicitly states that the premiums may be determined by category or class of troubled asset, subject to an over-arching obligation to ensure that premiums are set at a level necessary to protect taxpayers and create reserves sufficient to meet anticipated claims, based on actuarial analysis. While the premiums must be collected from any financial institution participating in the guarantee program, the Treasury Secretary may vary premiums according to associated credit risk. The methodology employed to establish the premiums must be published, together with an explanation of the types of troubled assets that comprise, or are eligible for inclusion in, each class or category. Premiums collected will be maintained in a separate fund — the Troubled Assets Insurance Financing Fund — to be used to satisfy guarantee obligations.
- Adjustments. The total amount of guarantees outstanding, less the balance in the Troubled Assets Insurance Financing Fund, will be counted against, or deemed to reduce the amount available for, troubled asset purchases under the TARP.
Executive Compensation and Corporate Governance.
- Compensation Restrictions. Financial institutions that sell troubled assets to the TARP must submit to certain executive compensation restrictions that were a significant point of debate surrounding the Bill. For these purposes, financial institutions that sell troubled assets to the TARP and those that obtain federal insurance for, or guarantees of, assets are treated differently — only the former are subject to compensation restrictions.
- Direct Sales. In cases where Treasury makes direct purchases of troubled assets where no bidding process or market prices are available, and Treasury receives a “meaningful” equity or debt position, Treasury must require that the selling financial institution “meet appropriate standards for executive compensation and corporation governance.” Those standards must include (i) limits on executive compensation that exclude incentives that encourage unnecessary and excessive risks; (ii) clawbacks or recoupment of bonuses paid to executives for financial performance later proven to be materially inaccurate;6 and (iii) prohibitions on golden parachute payments to senior executive officers. These restrictions generally must last for so long as Treasury holds an equity or debt stake in the financial institution.
- Auction Sales. Financial institutions that sell more than $300 million in troubled assets to the TARP through auction purchases incur additional taxes, including a 20 percent excise tax, on golden parachute payments and are prohibited from adopting new employment agreements that provide for golden parachute payments upon involuntary termination, bankruptcy, insolvency or receivership. In addition, compensation in excess of $500,000 to certain executives is not deductible. Sections 208G and 162(m) of the Internal Revenue Code are revised to reflect these restrictions. These restrictions expire upon the termination of the Treasury Secretary’s authority under the Bill, currently established as December 31, 2009.
- Potential Implications. Because restrictions in the case of auction sales apply only to new employment agreements, participating institutions may have incentives to update and extend employment contracts in a manner favorable to executives immediately before becoming subject to these restrictions, to the extent they have that flexibility.
Homeowner Assistance and Foreclosure Avoidance
- Foreclosure Minimization. Section 109(a) of the Bill requires the Treasury Secretary to implement a plan to minimize foreclosure through loan modifications and provides the Treasury Secretary with the authority to use loan guaranties and credit enhancements to accomplish this. Section 109(a) also requires the Treasury Secretary to coordinate with other federal government entities that hold troubled assets, in order to identify loans that might successfully be modified to avoid foreclosure, with consideration toward the net present value to the taxpayers.
The Bill also requires Treasury to use its authority to “encourage” servicers to take advantage of the HOPE for Homeowners and similar programs, considering net present value to the taxpayer. The utility of this provision is unclear. Treasury’s responsibility is only to “encourage,” all the while considering the net present value to the taxpayer. This highlights the broad and conflicting purposes of the Bill. In addition, it does not address the fact that the HOPE for Homeowners program provides only a limited safe harbor for servicers. In the case where the investment contract does not permit the servicer to modify a loan through the reduction of principal, the “encouragement” of the Treasury Secretary would seem to have little value.
Section 109(c) does require the Treasury — where appropriate, considering the net present value to the taxpayers — to consent to “reasonable requests for loss mitigation measures.” Reasonable loss mitigation measures may include term extensions, rate reductions, principal write downs, increases in the proportion of loan within a trust or other structure or other modifications permissible under the investment contract. Reasonable measures also include the removal of other limitations on modifications. While not entirely clear, this would seem to extend the servicer’s safe harbor where a reduction in principal is not permitted by the investment contract but is consented to by Treasury. Any implementing regulations should provide servicers with a clear safe harbor to further “encourage” participation in the HOPE for Homeowners program.
Similarly, Section 110 of the Bill requires any other federal entity that holds, owns or controls mortgages and mortgaged-backed securities to implement a plan to minimize foreclosure through loan modifications.7 It also requires these entities to use their authority to “encourage” servicers, considering the net present value to the taxpayers, to take advantage of the HOPE for Homeowners and similar programs. Section 110 does not, however, provide the federal entities with the consent authority provided to the Treasury Secretary in Section 109 and does not otherwise address the only limited servicer safe harbor provided in the HOPE for Homeowners program. As a result, it is not clear how useful “encouragement” by the federal entities will be.
- Tenant Protections. Sections 109(b) and 110(b) of the Bill provide protections with respect to residential rental properties. Where the underlying mortgaged property is a residential rental property, any loan modifications must protect any federal, state and local rental subsidies and protections, as well as take into account the need for operating funds to maintain the property in a decent and safe condition. Section 109 also requires that, where possible, any modification of troubled assets acquired by Treasury permit a bona fide tenant to remain in the home under the terms of the lease. This provision does not seem to apply to the modification of troubled assets held by the other federal entities.
- HOPE for Homeowners Expansion. Section 24 of the Bill directly expands the availability and utility of the HOPE for Homeowners program.8 Specifically, it expands the applicability of the program from only those with a 31 percent mortgage debt-to-income ratio as of March 31, 2008, to those that had or thereafter are likely to have a 31 percent mortgage debt as a result of a reset of the mortgage terms. Additionally, where the initial program limits a refinanced principal obligation to no more than 90 percent of the mortgaged property’s appraised value, the legislation provides the Federal Reserve with the discretion to permit a refinanced principal obligation to exceed that amount.
Further, section 124 of the Bill permits the Treasury Secretary to make payments to subordinate lien holders in lieu of any authorized future appreciation payments. It also permits the use of HOPE Bond proceeds to make payments to subordinate lien holders.
- Management Responsibilities. Under section 101(c) and sections 106(a) and (b) of the Bill, Treasury would be able to exercise all rights received in a purchase of troubled assets, and would have broad discretion to manage the assets. In establishing TARP, however, the Treasury Secretary must consult with the Federal Reserve Board, the FDIC, the Comptroller of the Currency, the Director of the OTS and the Secretary of HUD.
- Use of Financial Agents; Outsourcing. Treasury may manage troubled assets itself or designate third parties to do so, and has broad discretion in making these decisions. This authority is natural since Treasury has almost no internal capacity to manage the purchase process or to manage assets once acquired (including servicing), but such outsourcing of services may be politically charged: Virtually all of the institutions with expertise that Treasury would need were active in the mortgage origination and sales business over the past several years. Treasury is required to adopt regulations and guidelines to address potential conflicts of interest.
The outsourcing process must comport generally with the Office of Federal Procurement Policy Act of 1974 and the Federal Acquisition Regulations (FAR) established to codify uniform policies for acquisition of supplies and services by most executive agencies. FAR set forth prescribed standards for publication of proposed government acquisitions, competition among contractors, the bidding process and other aspects of government procurement. Under the Bill, the Treasury Secretary may waive specific provisions of FAR upon finding that urgent and compelling circumstances make compliance contrary to public interest; however, the Treasury Secretary must document and submit justification for such findings to various legislative committees.
Troubled Asset Sales or Other Dispositions
- General Authority. Section 106(c) of the Bill would authorize the Treasury Secretary to sell any mortgagerelated assets at such prices and under such terms and conditions as the Treasury Secretary may determine. Treasury is not limited to direct sales, however. It may enter into securities loans, repurchase transactions or other financial transactions. Indeed, section 101(c)(4) would allow Treasury to securitize the assets that it purchases or engage in other transactions through special purpose vehicles. Secretary Paulson has indicated that Treasury is likely to use this disposition authority.
- Use of Proceeds. Treasury would, under section 106(d) of the Bill, retain all sale proceeds and place resulting profits (after payment of expenses) in Treasury’s general fund for the reduction of public debt. Efforts over the past week to earmark a portion of the asset sale proceeds for certain community development and affordable housing activities were unsuccessful.
Deposit Insurance Coverage
- Increase of Coverage. The Bill provides for a temporary increase in federal deposit insurance coverage from $100,000 to $250,000, by amendment to the Federal Deposit Insurance Act. The temporary increase in FDIC insurance coverage amounts should provide some badly needed liquidity relief to financial institutions. The amount of deposit coverage would return to $100,000 on January 1, 2010. The FDIC reportedly has advised Congress that, based on current deposits nationwide, the coverage increase will increase total nationwide insured deposits by approximately 15 percent. Corresponding increases in coverage limits are made for the National Credit Union Share Insurance Fund. This provision was added after the House rejected a similar bill on Monday. The amendment was supported by both presidential candidates and the FDIC Chairwoman Shelia Bair, and met with strong public support.
- Impact on Assessments. The temporary increase may not be taken into account by the FDIC in setting assessments, but the Bill does not prohibit the FDIC from utilizing its existing authority to increase assessments based on existing statutory factors, such as estimated case resolution expenses and income and information regarding risk of loss and economic conditions. The board of the FDIC is scheduled to meet on October 7 to set — and presumably increase — assessment rates, but this decision should be independent of the increase in coverage limits. To enable the FDIC to pay the increased insured amounts, the Bill allows the FDIC to borrow from Treasury without regard to the $30 billion limit on credit in section 14(a) of the FDIA or the other limitations on borrowing in section 15(c) of the FDIA.
- Misrepresentation of Deposit Insurance Coverage. The Bill also amends Section 18(a) of the Federal Deposit Insurance Act to, in part, prohibit knowing misrepresentation, fraud and false advertising of a product’s federal insurance coverage, and to grant enforcement authority to the FDIC for violations by individuals who are not associated with an institution. For institutions and their affiliated persons, the appropriate federal banking agency may enforce the prohibition, and the FDIC may recommend enforcement which, if not followed by the appropriate federal banking agency, permits the FDIC to enforce the prohibition directly. Violations will trigger civil money penalties, even in cases where there is no loss to an insured institution.
Mark-to-Market Accounting Relief
- Mark-to-Market Impact. Effective after November 15, 2007, FAS 157 required companies to use actual market data as opposed to models to price assets when possible, which triggered substantial balance sheet write-offs for banks and a corresponding need to conserve capital or raise additional capital. The Bill reaffirms the SEC’s authority to suspend the application of FAS 157 for an issuer, if the SEC determines that it is in the public interest and consistent with the protection of investors to do so.
- A Study. In the face of criticism that mark-to-market accounting fails to reflect the actual economic value or worth of assets, the SEC, in consultation with the Board of Governors of the Federal Reserve System and the Treasury Secretary, is required to further study the impact of mark-to-market accounting as applied to financial institutions. The study must consider, at a minimum, the impact on (i) a financial institution’s balance sheet; (ii) recent bank failures; and (iii) the quality of financial information available to investors. The study, which is to be submitted to Congress 90 days from the Act’s passage, must also consider FASB’s process to develop accounting standards, advisability and feasibility of modifications to standards, and alternative accounting standards.
- Public Debt Issues. The Treasury securities issued to fund the purchases would be considered part of the public debt, and section 122 of the Bill raises the public debt ceiling accordingly.
- Review of Treasury Decisions. All actions by Treasury are subject to the standard judicial review provisions of the Administrative Procedures Act. Injunctive actions, however, are subject to strict time and other conditions.
- Reports. The Bill requires Treasury to make several reports to Congress, including monthly reports after the first 60 days, reports with respect to every $50 billion of purchased assets, and a special report on April 30, 2009, that broadly reviews the financial markets and makes recommendations regarding any additional regulation.
- Reports on Federal Reserve Loans. On several occasions during the current crisis, the Federal Reserve has invoked its broad, but rarely used, authority under section 13(3) of the Federal Reserve Act to make loans in “unusual and exigent circumstances” to “any individual, partnership, or corporation.” Section 129 of the Bill requires a report from the Federal Reserve to Congress within seven days after future use of the section 13(3) authority, as well as reports every 60 days on the status of all section 13(3) loans outstanding.
- Interest on Reserve Balances. As part of the Financial Services Regulatory Relief Act of 2006, Congress authorized interest to be paid on balances held at the Federal Reserve pursuant to Regulation D. They also increased the Federal Reserve’s flexibility to establish reserve requirements. Those amendments were initially set to take effect on October 1, 2011; however, the Bill accelerates that effective date to October 1, 2008.
- Exchange Stabilization Fund. Losses incurred by the Exchange Stabilization Fund due to the recently established temporary money market fund guaranty program must be reimbursed by the Treasury Secretary using funds made available under the Bill.9 Moreover, the Treasury Secretary may not use the Exchange Stabilization Fund in the future for any guaranty program for the money market mutual fund industry. This provision addresses a critical competitive concern of insured depository institutions that the government could continue to provide a guaranty for otherwise uninsured money market accounts and thereby cause an even greater liquidity crisis for depository institutions.
- Tax Revisions. The Act amends the Internal Revenue Code for taxable years ending after December 31, 2007, and requires certain financial institutions to treat the gains or losses from the sale of Fannie Mae and Freddie Mac preferred stock as ordinary income or loss. The specified financial institution must have held the preferred stock on September 6, 2008, or have sold or exchanged the preferred stock between January 1, 2008, and September 7, 2008.10 The Secretary may extend ordinary treatment to gains or losses if the preferred stock did not meet the requirements of the foregoing sentence and either had a carry-over basis in the hands of the financial institution or was held by a partnership and certain other conditions apply.