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.
- TALF launched. The Term Asset-backed Lending Facility (“TALF”) was launched on March 3 on slightly revised terms, including more defined collateral requirements, looser executive compensation restrictions and reduced lending margins and haircuts. Please see our Alert published on March 6 for a more complete description. In addition, an updated set of Frequently Asked Questions regarding TALF, issued March 3, 2009 by the New York Federal Reserve, provides that 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.)
- 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.
- Public-Private Investment Fund(s). Citing unnamed sources, the Wall Street Journal reported on March 3 that the Administration is considering structuring the previously-announced Public-Private Investment Fund as a series of separate funds run by private investment managers. These funds would be capitalized partially by government funds and partially by capital contributed by the managers. The government would seek to attract additional private investment for the funds from institutional investors, potentially by offering non-recourse financing. The same article reported that the Administration is considering making TALF loans available for purchases of banks’ “legacy assets” (in addition to purchases of newly issued asset-backed securities for which it is currently available). The article did not articulate how the terms of such loans—including the term, interest rate and collateral haircut—would differ from the terms of existing TALF loans.
- 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.
- 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.”
- 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.
- 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.