February 10, 2009
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.
We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.
This update summarizes Treasury Secretary Timothy Geithner’s announcement regarding the Administration’s plans for the second tranche of TARP funds and his testimony at this afternoon’s Senate Banking Committee hearing. [1]
TARP Renamed
This morning, Secretary Geithner announced the Obama Administration’s plans for the second $350 billion tranche of funds authorized by the Emergency Economic Stability Act. In order to improve the program’s public image and provide a more accurate reflection of the funds’ uses, the Administration has renamed the program the "Financial Stability Plan." Secretary Geithner identified two overarching objectives for the program – to create jobs and encourage private investment, and to improve the flow of credit. He touted the new plan as a more comprehensive and unified effort than the original TARP.
This afternoon, Secretary Geithner testified before the Senate Banking Committee where he was peppered with questions about Treasury’s new plans. The Committee expressed concerns that Treasury had not offered enough specific details about how Treasury will implement the stability program and pressed him for those details. Though he offered a few more specifics, Secretary Geithner largely demurred and indicated that details would be developed over the coming weeks and months. Toward the end of the three hour hearing, senators expressed frustration that the new plan sounded a lot like the old plan and that they had not learned enough about how its components would be implemented.
Plan Specifics and Hill Reaction
Stabilizing the Economy
Secretary Geithner explained that the second wave of funding and its accompanying regulations would focus on preventing home foreclosures, improving transparency, bolstering confidence in the markets, and fostering a public-private partnership. He outlined five steps to achieve these goals:
1) Banking Regulations: Bank regulators, including the Federal Reserve, FDIC, OCC, and OTS, will implement uniforms standards to govern banks and will require that banks undergo "comprehensive stress tests" to measure their stability and ensure they can weather the ongoing crisis. All "banking institutions" with $100 billion or more in assets will be required to participate in the stress tests.
After passing the test, banking institutions will be eligible to receive funds under the "Capital Assistance Program" (CAP). Secretary Geithner emphasized that the banks will use capital from Treasury as a "bridge" to private capital, and that Treasury capital will come with conditions that require the banks to use the funds to increase lending. The Treasury investments will be placed in a new Financial Stability Trust.
During the Banking Committee hearing, several of the senators pressed Secretary Geithner for details about the stress tests. The Secretary did not directly answer whether large U.S. banks are at risk for failing but agreed that it would be dangerous to allow the large institutions to fail. He did explain that the stress tests would require regulators to acquire a better understanding of banks’ accounting regimes and to examine various possible scenarios and to judge how well banks will be able to handle those situations depending on their resources. He stated that approximately twenty-five institutions exceed the $100 billion mark and will be required to undergo the stress tests.
It is not entirely clear whether banks or larger financial holding companies are to be subject to the $100 billion floor and, hence, the stress test. While Secretary Geithner mainly referred to "banks" during his Congressional testimony today, the Treasury fact sheet refers to "banking institutions" in the context of the stress test.
2) TALF Expansion: With Treasury’s support, the Fed will expand its Term Asset-Backed Securities Loan Facility (TALF) to improve consumer and business lending. The government will provide up to $1 trillion to support secondary lending markets, which will reduce the cost of borrowing. Initially directed at student loans, auto loans, and credit card debt, Secretary Geithner stated that the program would be extended to commercial real estate backed securities.
The Fed and Treasury also are considering whether to expand TALF to include other assets, such as non-Agency residential mortgage backed securities and assets collateralized by corporate debt. To improve small business lending, the federal government will guarantee an increased amount of SBA loans, and, in the coming weeks, will detail a Small Business and Community Bank Lending Initiative.
3) Public-Private Investment Fund: Treasury will create a "Public-Private Investment Fund" – a so-called "bad bank" which will leverage private funds to purchase troubled housing-related assets, allowing financial institutions to remove those assets from their balance sheets. The fund will allow the market to set the price for purchasing the formerly illiquid assets. Treasury expects to invest $1 trillion into the fund, but plans to invest $500 billion initially.
As with the original TARP plan, Treasury again anticipates hiring private asset managers to run the fund, though the fund’s structure has not been finalized. Treasury will be seeking comments on the fund’s structure in the coming weeks.
Many of the Banking Committee senators questioned Secretary Geithner how these assets will be valued. Though Secretary Geithner explained that by encouraging private participants to purchase these assets will allow the market to determine the asset prices, the Committee seemed dissatisfied with the level of detail the Secretary could provide about this portion of the plan.
4) Mortgage Reductions: Treasury and the Fed will commit $50 billion to reduce monthly mortgage payments, will require Fannie Mae and Freddie Mac to modify loans, and will offer financial incentives to private lenders to implement similar loan modification guidelines. Treasury also will consider means by which to value homes more accurately. Secretary Geithner indicated that the President’s economic team would announce a "comprehensive housing program" in the next few weeks.
During the Banking hearing, Senators Dodd and Vitter criticized Secretary Geithner for speaking about foreclosure mitigation last, saying they would have addressed it first. In response to Senator Robert Bennett’s questions about how the plan will help qualified homebuyers obtain loans, Secretary Geithner stated that by supporting job creation and private investment, spreads would narrow. He also emphasized that Treasury would work to ensure that bank supervisors are not making it too difficult for banks to extend lending.
Imposing Accountability and Transparency
Secretary Geithner mentioned five ways by which the Administration will increase accountability of recipient institutions and transparency in the funding process:
1) Treasury will launch a website to track FSP funds and the impact they have on the economy at www.financialstability.gov. Treasury will post monthly reports from recipient institutions to show how the funds are being used.
2) To receive FSP funds, banks will have to show how the funds will be used to increase lending.
3) Treasury will restrict recipient institutions’ dividend payments, stock repurchases and acquisitions until they pay back the taxpayer funds.
4) Recipient institutions will have to comply with the executive compensation and "say on pay" shareholder vote requirements announced on February 4, 2009, as well as abide by new disclosure requirements regarding "luxury spending."
5) Treasury will restrict lobbyists’ contact with the funding processes under previously-announced regulations.
Broader Financial Reform
After outlining the new Financial Stability Plan, Secretary Geithner briefly discussed President Obama’s broader economic plan during his morning announcement. He stated that the President wants to reform the entire financial regulatory system. To that end, the Administration has been consulting with congressional leaders and plans to work with international economies, the IMF, and the World Bank. A firm timetable for a broad reform plan has not been revealed.
1. To view Secretary Geithner’s prepared opening statement and an additional fact sheet he presented to the Committee, see http://banking.senate.gov/public/index.cfm?Fuseaction=Hearings.Detail&HearingID=9c25b13a-bc33-468a-b548-6b5a9e108c47.
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])
Dorothee Fischer-Appelt – London (+44 20 7071 4224, [email protected])
Alan Bannister – New York (212-351-2310, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
Mark K. Schonfeld – New York (212-351-2433, [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])
Rachel Couter – London (+44 20 7071 4217, [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])
Wayne P.J. McArdle – London (+44 20 7071 4237, [email protected])
Stewart McDowell – San Francisco (415-393-8322, [email protected])
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, [email protected])
Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, [email protected])
Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, [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])
Fred Pillon – San Francisco (415-393-8241, [email protected])
Dennis Arnold – Los Angeles (213-229-7864, [email protected])
Michael F. Sfregola – Los Angeles (213-229-7558, [email protected])
Andrew Lance – New York (212-351-3871, [email protected])
Eric M. Feuerstein – New York (212-351-2323, [email protected])
David J. Furman – New York (212-351-3992, [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])
David M. Feldman – New York (212-351-2366, [email protected])
Oscar Garza – Orange County (949-451-3849, [email protected])
Craig H. Millet – Orange County (949-451-3986, [email protected])
Thomas M. Budd – London (+44 20 7071 4234, [email protected])
Gregory A. Campbell – London (+44 20 7071 4236, [email protected])
Janet M. Weiss – New York (212-351-3988, [email protected])
Matthew J. Williams – New York (212-351-2322, [email protected])
J. Eric Wise – New York (212-351-2620, [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])
Charles F. Feldman – New York (212-351-3908, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected])
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