October 14, 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.
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 focuses on the status of the Treasury Department’s implementation of the Troubled Asset Relief Program ("TARP") and announcements made today after a meeting of the President’s Working Group on Financial Markets ("PWG").
Implementation of the Troubled Assets Relief Program
Over the weekend, Treasury continued its efforts to rapidly implement TARP. In a speech yesterday before the Institute of International Bankers, Treasury Interim Assistant Secretary for Financial Stability, Neel Kashkari, broadly described the status of the TARP program. Of particular note were the following developments:[1]
- Treasury has chosen the law firm Simpson, Thacher & Bartlett to advise the Department on taking equity stakes in banks.
- Treasury has chosen consultants Ennis Knupp & Associates to help select asset managers for TARP.
- Treasury likely will announce the firms chosen to serve as asset managers in the next few days. The Department received more than one hundred submissions for each of the whole loan and securities asset management solicitations.
- Treasury received seventy submissions in response to its solicitation for a custodian/auction manager. At the time of Kashkari’s speech, Treasury had narrowed the list of possible TARP custodians down to ten.
- Treasury has created seven policy teams to implement TARP. The teams are broken down into the following policy areas: the mortgage-backed securities purchase program, the whole loan purchase program, the insurance program, the equity purchase program, homeownership preservation, executive compensation, and compliance.
- The policy team for the insurance program has submitted to the Federal Register a public request for comment about how to structure the program to insure troubled assets required by Section 102 of the Emergency Economic Stabilization Act ("EESA"). Responses are required by October 28, 2008.
- Treasury has appointed several key interim leaders of TARP. The ones Kashkari mentioned in his speech all were serving in other government positions and most have significant private sector experience.
Mr. Kashkari also discussed Treasury’s previously released statements regarding procurement procedures and conflicts of interest, which we outlined in a previous client alert. Though Mr. Kashkari offered few new details about these policies, he did emphasize that Treasury is taking seriously its duty to manage conflicts of interest, to ensure proper oversight of the program, and to include small, veteran, minority- and women-owned businesses as TARP subcontractors.
President’s Rose Garden Announcements
As reported yesterday by the news media,[2] President Bush this morning announced several measures designed to strengthen banks. He made the announcements during a Rose Garden speech that followed a meeting with his working group on financial markets. The new measures he announced were as follows:
1. Treasury would invest part of the $700 billion authorized by EESA into banks in exchange for non-voting equity shares;
2. The FDIC would temporarily guarantee new debt issued by insured banks and would lift the cap on depository insurance for non-interest bearing transaction accounts; and
3. The Federal Reserve would "finalize work" on its program to purchase commercial paper.
Details of these new measures emerged throughout the day, beginning with statements made by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair after the President spoke. Additional details on new measures follow.
1. Treasury Investment in Banks: Treasury announced this new measure as "voluntary capital purchase program" that would be available to a "broad array" of financial institutions. Expected for days, the program entails using $250 billion of the $700 billion authorized under the EESA to inject capital into financial institutions. Financial institutions are to "apply" for a preferred stock investment by the Treasury. The preferred stock is to pay cumulative dividends at five percent for year for five years and nine percent thereafter. Nine large financial institutions have agreed to receive an equity investment of $125 billion. [3]
The reaction on Capitol Hill to the bank investment program was positive – surprisingly so for its vehemence – as Democratic and Republican leadership both claimed credit for writing the authority for the program into the EESA.
2. FDIC Temporary Liquidity Guarantee Program: The FDIC announced this new program to guarantee newly-issued senior unsecured debt and demand deposit accounts at certain financial institutions. The program applies to a narrower of entities than does TARP, and is limited to the following: (1) FDIC-insured depository institutions; (2) U.S. bank holding companies; (3) U.S. financial holding companies; and (4) U.S. savings and loan holding companies operating in compliance with section 4(k) of the Bank Holding Company Act.
The program is comprised of two parts, both of which will apply to eligible entities unless they affirmatively opt out. First, a guarantee of eligible entities’ unsecured debt issued on or before June 30, 2009. The amount of debt will be limited to 125 percent of debt outstanding as of September 30, 2008 and maturing before June 30, 2009. The FDIC will charge an annual fee of 75 basis points for each dollar of guaranteed debt.
The second component is a lifting of the Federal Deposit Insurance Act limit on the guarantee on funds in non-interest-bearing transaction deposit accounts. Eligible accounts would have no insurance limit until December 31, 2009. However, the FDIC will impose a 10 basis point surcharge on covered accounts.
We understand that the FDIC limited coverage to non-interest-bearing transaction deposit accounts at least in part so as not to upset the balance between bank deposits and money market mutual funds.
3. Federal Reserve Commercial Paper Funding Facility: This facility is intended to provide a "liquidity backstop" to U.S. issuers of commercial paper. The program begins October 27, 2008 and will operate through a special purpose vehicle ("SPV") that the Federal Reserve will create pursuant to section 13(3) of the Federal Reserve Act. The Federal Reserve has chosen to permit only commercial paper rated at least A-1/P-1/F-1 by a nationally recognized statistical rating organization to participate in the program. The program will stop purchasing commercial paper on April 30, 2009, though the SPV will continue holding the paper to maturity.
[1] The full text of Mr. Kashkari’s speech can be found at: http://www.treas.gov/press/releases/hp1199.htm.
[2] David Cho, Peter Whoriskey, & Lori Montgomery, Treasury to Use First $250B of Bailout on Bank Stakes, Wash. Post, October 13, 2008, Online Edition. Edmund L. Andrews & Mark Landler, White House Overhauling Rescue Plan, N.Y. Times, Oct. 12, 2008. Deborah Solomon, Damian Paletta, Aaron Lucchetti, & Jessica Holzer, Treasury to Roll Out New Approach to Credit Crisis, Wall St. J., Oct. 13, 2008, Online Edition.
[3] For the list of financial institutions see, e.g., Deborah Solomon, Damian Paletta, Jessica Holzer, Jon Hilsenrath and Aaron Lucchetti, "U.S. to Take Equity Stakes in 9 Banking Behemoths," Wall St. J., October 14, 2008, Online Edition.
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])
Adam H. Offenhartz – New York (212-351-3808, [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])
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])
Dennis Arnold – Los Angeles (213-229-7864, [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])
Oscar Garza – Orange County (949-451-3849, [email protected])
Craig H. Millet – Orange County (949-451-3986, [email protected])
Janet M. Weiss – New York (212-351-3988, [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])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected])
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