September 25, 2008
The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets.
What follows is our latest in a series of updates on key regulatory and legislative issues.
Deal or No Deal
Legislation designed to rescue financial markets moved in fits and starts today as Capitol Hill, the Administration, and the two presidential candidates all weighed in on the measure. As of 8:00 p.m. EST, no deal had been endorsed by all key players but a deal nonetheless appeared likely to emerge.
Last night, President Bush gave a speech designed to rally bipartisan support for quick action, while driving home the enormity of the crisis to the American public. This afternoon, a bipartisan, bicameral group of lawmakers announced a plan that would grant funding to Treasury to bailout the financial markets. But were the right Republicans in the room? Soon after the agreement was announced and later in the afternoon, House Minority Leader John Boehner and Senate Banking Committee Ranking Member Richard Shelby both criticized the deal. Senator Shelby went a step further to say that a deal would not be reached.
Details of the agreement are sketchy. But a one-page summary indicates that the plan differs from the Treasury Department’s original proposal in significant respects. Perhaps most notably, it would give Treasury access to $250 billion immediately and another $100 billion via self-certification that the funds are needed.[1] An additional $350 billion would be subject to a Congressional joint resolution of approval.[2] While these components sum to the $700 billion requested by the Administration, its request was for the entire sum to be available without strings attached.
According to the one-page summary, the agreement requires the Secretary to set standards to prevent excessive executive compensation for participating companies, but does not define what those standards would be. Responding to concerns about taxpayer protection, the agreement requires than any transaction include equity sharing, and requires that if profits are made from the plan, that most of them be used to reduce the national debt.
The agreement also institutes stronger oversight than originally included in Treasury’s proposal. The oversight provisions establish an oversight board and an independent Inspector General to monitor the program, as well as regular, specific reports to Congress and GAO audits.
The agreement also includes protections for homeowners but appears to not include a proposal, favored by some Democrats, to empower bankruptcy judges to modify the terms of mortgages.
Timing
Though Congress and the Administration will have to hammer out the details of the package, leaders on both sides of the aisle are optimistic that legislation will be passed before the markets open on Monday.
On a procedural note, Senator Majority Leader Harry Reid filed cloture on the motion to proceed to the Continuing Resolution (CR) today. Cloture will ripen on Saturday. This is significant in terms of timing because it is expected that bailout legislation will be offered as an amendment to the CR (as will a second "stimulus" package).
Questions About the Structure of Treasury’s Bailout Program and Asset Manager Selection
Many of our clients have raised two important questions about Treasury’s bailout program. They want to know exactly how the purchases and sales of these troubled assets will occur and how asset managers and other contractors will be selected. While these two issues have not been the focus of the legislative debates as of yet, they have received considerable attention in recent hearings and will become critical components of the rescue bill’s implementation. Below, we have summarized the key points we know about these issues thus far. As the plan evolves, we will continue to provide timely updates focusing on the specific details of the program and how those details affect our clients.
Mechanics of the Treasury Bailout Program
The mechanics of the Treasury bailout program have not been established either by Treasury in its proposal or Congress in its various bill drafts. In hearings over the past two days, Federal Reserve Chairman Bernanke and Treasury Secretary Paulson have made it clear that, while the precise pricing mechanisms have not been determined, one mechanism that will be used is some form of reverse auction. While there are different forms of reverse auctions, the central notion is to determine the market value of the assets by having sellers of the assets bid against each other for the purchaser’s business. In short, the roles of buyer and seller are reversed.
During his congressional testimony, Secretary Paulson, speaking in generalized terms, emphasized the need for a process designed for "immediate implementation" and that would be "sufficiently large to have maximum impact and restore market confidence." He explained that the process would involve market mechanisms available to “small banks, credit unions and thrifts, large banks, financial institutions of all size[s] across the country.” For the market to determine the assets’ value, he stressed the need for participation by “hundreds, even thousands, of institutions” in a variety of different processes. At one point Committee Chairman Frank directly asked Secretary Paulson if community banks would be allowed to participate. Secretary Paulson responded, “Absolutely. And S&L’s and credit unions.” [3]
Hiring of Asset Managers
The Treasury proposal would authorize the Secretary broadly to contract for services as needed to carry out the authorities of the legislation. At a minimum, Treasury is expected to retain private companies to serve as asset managers during the process of buying and selling troubled mortgages and asset-backed securities. The draft legislation issued by the House on September 22, 2008 also provides the Secretary with broad contracting authority but imposes greater restrictions on the process for awarding contracts to asset managers. The House legislation would require the Secretary to take "appropriate steps to manage conflicts of interest," including by requiring firms to disclose potential conflicts and to submit mitigation strategies. The Secretary also would be required to solicit a wide range of proposals and to publish a request for information.
As with most of the mechanics of the troubled asset purchase program, these likely will be left to Treasury’s discretion within certain parameters. We will provide our clients with updates on key developments as this effort moves forward.
[1]Damian Paletta, Michael R. Crittenden & Patrick Yoest, Agreement Reached on Bailout
Ahead of High-Level Meeting, Wall St. J., Sept. 25, 2008.
Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above. Please contact Michael Bopp (202-955-8256, [email protected]) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:
Public Policy Expertise
Mel Levine – Century City (310-557-8098, [email protected])
John F. Olson – Washington, D.C. (202-955-8522, [email protected])
Amy L. Goodman – Washington, D.C. (202-955-8653, [email protected])
Alan Platt – Washington, D.C. (202- 887-3660, [email protected])
Michael Bopp – Washington, D.C. (202-955-8256, [email protected])
Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671, [email protected])
K. Susan Grafton – Washington, D.C. (202- 887-3554, [email protected])
Brian Lane – Washington, D.C. (202-887-3646, [email protected])
Lewis Ferguson – Washington, D.C. (202- 955-8249, [email protected])
Barry Goldsmith – Washington, D.C. (202- 955-8580, [email protected])
John H. Sturc – Washington, D.C. (202-955-8243, [email protected])
Alan Bannister – New York (212-351-2310, [email protected])
Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, [email protected])
Christopher Bellini – Washington, D.C. (202- 887-3693, [email protected])
Amy Rudnick – Washington, D.C. (202-955-8210, [email protected])
Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589, [email protected])
Richard Russo – Denver (303- 298-5715, [email protected])
Dennis Friedman – New York (212- 351-3900, [email protected])
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, [email protected])
Robert Cunningham – New York (212-351-2308, [email protected])
Joerg Esdorn – New York (212-351-3851, [email protected])
Stewart McDowell – San Francisco (415-393-8322, [email protected])
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, [email protected])
Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, [email protected])
Alan Samson – London (+44 20 7071 4222, [email protected])
Andrew Levy – New York (212-351-4037, [email protected])
Dennis Arnold – Los Angeles (213-229-7864, [email protected])
Andrew Lance – New York (212-351-3871, [email protected])
Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, [email protected])
Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, [email protected])
Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, [email protected])
Paul Issler – Los Angeles (213-229-7763, [email protected])
Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
© 2008 Gibson, Dunn & Crutcher LLP
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