The massive financial asset bailout request by Treasury and the Federal Reserve is being hashed out now behind Congressional leadership doors. Nicknamed TARP (Troubled Asset Recovery Program), it will have far-reaching impacts in the financial and financial services markets for years to come. The legislation may be short and spare, and leave several key questions to the next Administration and regulation writers. Some key issues:
- What financial institutions will TARP be available to in addition to banks - insurance companies, finance companies? We know from the debate over who can own Industrial Loan banks that defining what is and is not a financial services company can be very difficult.
- What assets will be purchased, and at what price - book, actual value, or something in the middle? The idea is that troubled mortgage assets are the target, but how broad will the definitions be?
- How can the borrower rework a bad loan - the troubled assets may not typically be whole mortgages, but bundles of tranches of individual loans, often junior to the principal debt. If the whole loan is reformed, or if there is foreclosure relief, how is that reflected through to the junior debt holder of a small piece of the loan? How is that reform valued?
- Treasury will now have the power to regulate wages, at least the wages of senior management of companies shopping assets to Treasury. What will the standards be, and how much litigation will that generate?
- Goldman and Morgan Stanley are now bank holding companies, and the banks within them will be intensely regulated. How much more vigilant will Federal and state regulators be to how troubled assets may be transferred among holding company units, either for liquidity purposes, or to facilitate sale to the TARP? Will liberalized Fed rules on non-banks holding bank interests encourage more insurers to get in with banks?