Since the last publication of our Reference Guide to U.S. Rescue Efforts on February 24, the U.S. government has announced new measures—and provided further details on previously-announced measures—to combat the global financial crisis. These recent developments are summarized below.
- Three-Pronged Plan to Address Toxic Assets. On March 23, Treasury announced a three-pronged approach to ridding financial institutions of as much as $1 trillion of their so-called “toxic” assets. First, the government will expand the Term Asset-Backed Lending Facility (“TALF”) to make financing available for purchases of certain securities that were issued prior to 2009—specifically, nonagency residential mortgage-backed securities (“RMBS”) originally rated AAA, and commercial mortgage backed securities (“CMBS”) and asset-backed securities that are currently rated AAA. Second, in what will be called the “Legacy Loans Program,” the FDIC will conduct auctions for pools of loans held by U.S. banks or savings associations. The bidders in these auctions will be public-private investment funds (“PPIFs”) capitalized with investments by Treasury and private investors (on substantially similar terms and in most cases 50/50) and to which the FDIC will offer up to six-to-one non-recourse financing. Third, pursuant to the “Legacy Securities Program,” Treasury will hire five or more investment management firms to raise separate PPIFs to purchase RMBS or CMBS issued prior to 2009 and originally rated AAA from financial institutions. Treasury will contribute one dollar of equity capital to these funds for each dollar contributed by private investors and may—if the private investors in a fund agree to certain restrictions regarding withdrawal rights, disposition priorities or other factors— provide non-recourse debt capital in an amount equal to either 50% or 100% of the fund’s equity capital, in addition to the senior leverage available under the newly expanded TALF program. Please see our Alert published on March 24 for additional details.
- TALF launched and first round of requests received. The New York Federal Reserve Bank reported that in the first subscription period for TALF investors requested $1.9 billion in loans to buy securities backed by auto loans and $2.8 billion for debt linked to credit-card loans. The settlement date for the first-round loan requests will be March 25 and the subscription date and settlement date for the April TALF fundings will be April 7 and April 14, respectively. TALF was launched on March 3 on slightly revised terms, including more defined collateral requirements, reduced lending margins and haircuts and looser executive compensation restrictions. Specifically, executive compensation restrictions will not be applied to TALF sponsors, underwriters, or borrowers as a result of TALF participation. (February guidance, issued before passage of the stimulus bill, would have required sponsors to comply with executive compensation restrictions and would have imposed certification requirements on sponsor CEOs.) Please see our Alert published on March 6 for a more complete description. In addition, on March 19, the Federal Reserve further expanded the list of TALF eligible collateral to include mortgage servicing advances, loans or leases relating to business equipment, leases of vehicle fleets and floorplan loans. Detailed eligibility criteria for this collateral is set forth in the Frequently Asked Questions regarding TALF issued March 19, 2009 by the New York Federal Reserve. The scope of eligible collateral will be further expanded in connection with the plan to address toxic assets, as described above.
- Capital Assistance Program. On February 25, Treasury (i) released details of the forward looking capital assessments or “stress tests” it will apply to the 19 largest U.S. financial institutions (institutions with more than $100 billion in assets at year-end 2008) and (ii) launched the previously-announced Capital Assistance Program (“CAP”), pursuant to which it will offer to purchase mandatorily convertible preferred stock and warrants from qualifying financial institutions. Participation in CAP will be mandatory for large institutions that have a capital deficiency (based on the results of the stress tests) and that are unable to eliminate such deficiency within six months through private capital raising. Participation in CAP will be voluntary for smaller institutions, with an application process similar to that of the existing Capital Purchase Program (the “CPP”). Treasury did not disclose the total amount of funds that will be available under CAP.
- Restructuring of assistance to AIG. On March 2, Treasury announced that its assistance to AIG will be restructured as follows:
- Exchange of preferred equity. Treasury will exchange its existing $40 billion of cumulative preferred shares for new preferred shares that more closely resemble common equity. The new preferred (i) will be entitled to 10% noncumulative dividends and certain voting rights if such dividends are unpaid and (ii) may not be redeemed for three years except with the proceeds of equity capital.
- New equity capital. Treasury will make $30 billion available through an equity capital facility that AIG may draw down in exchange for issuing preferred stock to Treasury. Such preferred stock will be similar to the preferred issued in the $40 billion exchange, but will not be subject to the three-year restriction on redemption.
- Restructuring of revolving credit facility. The $60 billion Revolving Credit Facility will be substantially restructured: (i) in exchange for a reduction of $26 billion, the New York Fed will receive non-controlling interests in two special purpose vehicles created to hold the common stock of American Life Insurance Company and American International Assurance Company Ltd., two life insurance holding company subsidiaries of AIG; (ii) in exchange for an additional $8.5 billion reduction, the New York Fed will receive interests in securitized pools of life insurance policies held by AIG’s domestic life insurance subsidiaries; and (iii) on the remaining $25 billion facility, which pays interest at a rate of LIBOR plus 300 basis points, the existing floor of 3.5% on the LIBOR base rate will be removed.
On March 4, as required by the terms of the Revolving Credit Facility, AIG issued shares representing a 77.9% interest in AIG to an independent trust for the sole benefit of Treasury. Pursuant to the terms of the revamped assistance and newly adopted management policies, AIG must be in compliance with the executive compensation and governance requirements of the Emergency Economic Stabilization Act and must enforce restrictions on corporate expenses, lobbying and corporate governance.
- Disclosure of AIG Counterparties. Under pressure from lawmakers, AIG disclosed the names of counterparties to which it had remitted government bailout funds between September 16, 2008 and December 31, 2008 and the amounts such counterparties received. Specifically, AIG paid: (i) $22.4 billion to credit default swap (CDS) counterparties of AIG Financial Product Corp. (AIGFP); (ii) $27.1 billion to other CDS counterparties to purchase the securities underlying such CDS contracts (with funds from the collateralized debt obligation facility created pursuant to the government’s November 10 bailout); (iii) $12.1 billion to municipalities in satisfaction of guaranteed investment agreement obligations; and (iv) $43.7 billion to counterparties to which AIG had lent securities (in exchange for cash) pursuant to its securities lending operation.
- Budget provision for additional $250 billion. In its blueprint for the 2010 budget, the Administration included a $250 billion “placeholder”—which through government lending could grow to $750 billion—for additional assistance to the financial sector. White House Budget Director Peter Orszag said that the government has no “plans” to ask Congress for such funds, but that it included the figure in the budget “in case the situation deteriorates.” Note that as of March 24, after giving effect to the $75 to $100 billion allocated by Treasury to the toxic asset plans, only approximately $35 billion of unallocated TARP funds remain for use in the Capital Assistance Program for banks and any further assistance to the auto industry.
- Housing plan launched. On March 4, Treasury launched the previouslyannounced housing assistance plan—now called “Making Home Affordable.” The Home Affordable Refinance Program will, until June 2010, allow borrowers of Fannie Mae or Freddie Mac owned or guaranteed loans with current loan-to-value ratios over 80% to refinance into lower interest rate loans. The Home Affordable Modification Program will create incentives for lenders and servicers to modify the terms of loans made to a broader group of borrowers. Among other criteria, the loans eligible for modification must have been originated before January 1, 2009, be secured by first-liens and have principal balances of less than $729,750. Modifications may be made only once and must be made prior to December 31, 2012.
- Additional Purchases of Government-Sponsored-Entity (GSE) Obligations and Long Term Treasuries. On March 18, the Federal Open Market Committee announced that the Federal Reserve would increase its purchases of direct and indirect obligations of GSEs. The Federal Reserve will purchase (i) an additional $100 billion in direct obligations of the GSEs (beyond the $100 billion previously announced) for a total of $200 billion and (ii) an additional $750 billion in GSE mortgage-backed-securities (beyond the $500 billion previously announced) for a total of $1.25 trillion. The Federal Reserve will also purchase up to $300 billion in longer-term Treasury securities over the next six months.
- Implementation and Expansion of Assistance to Small Businesses. On March 16, Treasury, the Small Business Administration (SBA) and the IRS initiated several measures called for by the Financial Stability Plan’s Consumer and Business Lending Initiative to assist small businesses. First, pursuant to provisions of the American Recovery and Reinvestment Act, the SBA temporarily increased the size of the government guarantee of SBA loans to 90% and lowered up-front fees for borrowers and lenders. Second, Treasury announced that it would purchase (presumably with TARP funds) up to $15 billion in securities backed by SBA loans or first-lien mortgages originated in connection with the SBA’s 504 Community Development Loan Program. (This measure complements Treasury’s previous determination that SBA-backed securities be eligible for TALF financing.) Third, also pursuant to the Recovery Act, the IRS issued guidance regarding several programs providing tax relief to small businesses, including a five-year carryback for tax refunds.
- Proposed Changes to Mark-to-Market Rules. Following a March 12 appearance before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, on March 18 the Financial Accounting Standards Board (“FASB”) proposed two staff positions clarifying rules regarding fair value measurements and impairments of securities. The first guidance concerns FAS 157, which classifies financial assets based upon the certainty of information that exists regarding such assets’ value; the proposed staff position provides for a twostep process to determine whether the market for an asset is inactive or inactive, and whether a transaction is distressed. The second guidance concerns FAS 115, 124 and EITF Issue No. 99-20, which require reporting entities to assess the extent to which distressed securities are impaired and whether such impairment is temporary. Among other things, the proposed staff position requires that the impairment be separated into (i) the amount of the total impairment related to credit losses and (ii) the amount of the total impairment related to other factors. The comment period for both proposals will end on April 1, with the FASB planning to vote on April 2. Should the proposals be approved, the new guidance would be effective for interim and annual periods ending after March 15, 2009.
- Say-on-pay applies for 2009 proxy season. Guidance from the SEC, issued on February 24 and updated on February 26, states that the SEC is following the views expressed by Senator Christopher Dodd in a February 20 letter to the agency, that the stimulus bill’s requirement that TARP recipients include in shareholder proxy and consent forms non-binding, advisory say-on-pay proposals for the approval of executive compensation be applicable on February 17. The stimulus bill had not specified an effective date for this rule and left open the possibility that the rule would not be applicable until the SEC issued guidance that is not due until February 2010. The SEC has now stated that TARP recipients filing preliminary or definitive proxy statements after February 17 must include this proposal. The vote must occur at each of the company’s annual shareholder meetings, or special meetings in lieu of such annual meetings. Companies are not required to hold any separate, special meetings for the vote. Companies must permit the vote every year, even if they do not receive any shareholder proposal on approval of executive compensation.
- CEO and CFO certifications of compliance with TARP executive compensation rules delayed until Treasury issues guidance. The SEC is also following Senator Dodd’s views that the stimulus bill’s requirement that TARP recipient CEOs and CFOs provide annual written certifications (in annual filings for public TARP recipients) of compliance with the bill’s executive compensation and corporate governance standards is not effective until Treasury has issued regulations required by the bill.