President Bush and Congress came to terms this weekend on the $700 billion bailout bill designed to aid the struggling U.S. economy. It is expected that the House of Representatives will vote on the “Emergency Economic Stabilization Act of 2008” (the “Act”) today, with the Senate to follow shortly afterward. Last week during a televised address, President Bush asked Congress to move swiftly on the proposed bailout to avoid a “long and painful recession.”
Among other things, the Act would authorize United States Treasury Secretary Henry Paulson to establish a Troubled Asset Relief Program (“TARP”), which would purchase residential and commercial mortgages and other related instruments from financial institutions to restore liquidity and stability to the U.S. financial system. Insurance companies are included in the financial institutions eligible for TARP. Any financial institution that participates in TARP would be subject to certain executive compensation and corporate governance requirements. These requirements include limiting incentive compensation and prohibiting golden parachutes for executive officers, and would apply for the duration in which the financial institution participates in TARP.
The Act also requires the Treasury to establish an insurance program for TARP. The Treasury would collect premiums from financial institutions participating in TARP based on the troubled assets’ risk. The premiums would be placed in a Troubled Assets Insurance Financing Fund that could be utilized to fulfill obligations of the guarantees provided to the financial institutions under TARP. Financial institutions would be allowed to request that the Treasury guarantee the timely payment of principal and interest on troubled assets up to 100%. The Treasury would determine the terms and conditions of the guarantees.