Capital Markets in Crisis: The Government Formulates a Response

September 22, 2008

Gibson, Dunn & Crutcher Deploys a Team of Experts

Many of our clients are facing new challenges because of the dramatic economic events that have occurred over the last two weeks and as a result of changes that in their scope and reach we have not seen since the Depression.  Financial markets are literally being reshaped in Washington on a real-time basis.  As the Administration and Congress move forward to address the liquidity crisis and related problems, we are positioned to keep our clients apprised of key developments and to ensure that their voices are heard in the debate about how to repair our financial infrastructure.

To that end, Gibson, Dunn has assembled a team of attorneys with a broad range of experience in the securities, financial, corporate, real estate, tax, bankruptcy, and public policy fields to shape, monitor, understand, analyze, and respond to developments.  The team roster can be found at the conclusion of this client alert.

The Administration recently has taken a number of important steps to help the economy recover.  Among the most critical steps are the following:

  • The Treasury Department has proposed legislation to enable it to support the failing mortgage markets and resume the free flow of credit into the economy;
  • The Federal Reserve has instituted a program to lend money to depository institutions to purchase asset-backed securities;
  • Treasury has initiated a guaranty program for money market funds; and
  • The U.S. Securities and Exchange Commission (the “SEC”) has taken emergency actions to restore fair and orderly markets, including banning naked short selling, prohibiting most short sales in the public-traded securities of certain financial institutions, requiring institutional investment managers to report daily short positions, and lifting restrictions on issuer repurchases.

Proposed Treasury Legislation

On Friday, September 19th, the Treasury Department circulated  groundbreaking legislation to Congress.  The legislation would grant the Treasury Secretary broad authority to purchase asset-backed securities from financial institutions.  Significantly, the Treasury plan:

  • grants Treasury authority to issue up to $700 billion of Treasury securities to purchase mortgage-related assets and other assets the Secretary deems necessary to stabilize the financial markets.  Though the process for purchasing the securities has not been determined, Treasury is considering auction and reverse auction options;
  • gives Treasury authority to purchase assets originated or issued on or before September 17, 2008.  Treasury’s authority to continue purchasing these assets sunsets after two years; 
  • allows Treasury to purchase asset-backed securities primarily from American institutions, but also from international institutions that have significant operations in America, as well as other institutions the Secretary identifies as necessary to stabilizing the economy; 
  • authorizes Treasury to choose private asset managers who will act as government agents to manage the assets. Treasury will have full discretion over the management;
  • raises the federal debt limit by $700 billion, to $11.315 trillion, to fund this Treasury program. 

While members of Congress have expressed a willingness to grant Treasury substantial leeway to conduct this program, the most recent discussions between Congress and the Administration have focused on, among other things, the following:

  • How the program will be overseen;
  • The categories of assets Treasury will be authorized to purchase;
  • Whether the bill should include taxpayer and homeowner mortgage assistance;
  • Executive compensation limits and other corporate governance provisions; and
  • Taxpayer protections.

Depository Institution Lending

On Friday, September 19, the Federal Reserve announced that it would establish a lending program to assist depository institutions and bank holding companies to purchase asset-backed securities, which will provide liquidity to the asset-backed commercial paper markets.[1]  Eligible borrowers include United States depository institutions, bank holding companies, and United States branches and agencies of foreign banks.  The borrowers may borrow funds to purchase asset-backed commercial paper from funds that qualify as money market mutual funds under Securities and Exchange Commission Rule 2a-7, issued pursuant to the Investment Company Act of 1940.  Eligible issues of asset backed commercial paper are limited to U.S. dollar denominated issues from U.S. issuers which have been rated First-Tier Securities under Rule 2a-7.[2] 

The Federal Reserve Bank of Boston will administer the program, but eligible borrowers may settle their loans through their accounts with any Federal Reserve Bank.  Loans made under the program will be made at a rate equal to the primary credit rate in effect on the date the loan is initiated.  Because advances under the program are non-recourse to the Federal Reserve Bank of Boston, borrowers are at no risk of loss unless the asset backed commercial paper is found to be non-conforming.[3] 

The program began on September 19, 2008, and will continue until January 30, 2009, unless the Federal Reserve Board extends the program to a later date.[4] 

Treasury Guaranty Program for Money Market Funds

The Treasury Department has established a temporary guaranty program for money market mutual funds.  For a fee, Treasury will insure the holdings of any eligible publicly offered retail or institutional money market mutual fund for the next year.  Eligible funds include all funds regulated under Rule 2a-7 of the Investment Company Act of 1940 and that are publicly offered and registered with the SEC.  Taxable and tax-exempt funds are eligible, and the guaranty will not affect the tax-exempt treatment of payments by tax-exempt money market funds.  The guaranty will be limited to balances that existed as of the close of business on Friday, September 19, 2008. 

Treasury intends for this guaranty to bolster investor confidence and stabilize the global economy by maintaining the standard $1 net asset value of money market mutual funds.  The program will be funded out of the Exchange Stabilization Fund, which currently holds approximately $50 billion of assets.[5] 

While Treasury’s announced program did not include limits on the guaranty that would apply to a particular eligible money market mutual fund, both House and Senate drafts of broader capital markets rescue legislation would limit the guaranty to the insurance provided to individual depositors under the Federal Deposit Insurance Act. 

SEC Emergency Orders

The SEC has issued emergency orders that, among other things:

  • Ban short selling, subject to certain exceptions, in the securities of certain financial institutions selected by the listing markets;[6]
  • Adopt a new antifraud rule, Rule 10b-21, which prohibits naked short selling;[7]
  • Require institutional investment managers (i.e., persons required to file Form 13F), to report daily net short positions beginning September 29, 2008 for trading during the week of September 22, 2008;[8] and
  • Adopt temporary Rule 204T, which imposes hard close out requirements on failures to deliver and mandatory pre-borrow requirements on all equity sales transactions.[9]

The emergency orders expire October 2, 2008 unless further extended by the SEC, which has authority to extend the orders until October 18, 2008.  Although Rule 204T was adopted on an interim final basis, the SEC is accepting comments for 30 days.

Finally, the SEC issued an emergency order on September 19 which suspended the timing and volume restrictions of Rule 10b-18.  Rule 10b-18 states that repurchases by a company will not be viewed as manipulative if they are effected in accordance with the rule.  The SEC emergency order allows repurchases to be made at any time during the day and raises the volume of permissible repurchases to 100% of the average daily trading volume.  The emergency order does not, however, alleviate potential insider trading concerns, so companies should continue to assess whether they possess any material nonpublic information before they effect discretionary transactions in the open market.  This order will expire on October 2, 2008 unless further extended by the SEC.[10]


  [1]   Press Release, The Board of Governors of the Federal Reserve System, (September 19, 2008),

  [2]   Federal Reserve Frequently Asked Questions about ABCP MMMF Liquidity Facility (AMLF or "the Facility"),

  [3]   Id.

  [4]   Id.

  [5]   More information about the Fund can be found at: 

  [6]   See Exchange Act Release No. 58592 [] and Exchange Act Release No. 58622 []

  [7]   See Exchange Act Release No. 58572 []

  [8]   See Exchange Act Release No. 58591 []  and Exchange Act Release No. 58591A []

  [9]   See Exchange Act Release No. 58572 []

[10]   See Exchange Act Release No. 58588 []

Gibson, Dunn & Crutcher LLP

    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 team members.

    Public Policy Expertise

    • Mel Levine (310-557-8098, [email protected]):  Chairs firm’s Public Policy practice group. He previously served for ten years as a Democratic member of Congress from California. He retains close ties with the leadership of the US Senate and House of Representatives and senior members of the key Committees of the Congress.
    • John F. Olson (202-955-8522, [email protected]):  Extensive experience in general representation of business organizations as to corporate governance, corporate securities, corporate finance and merger and acquisition matters.  He has counseled many boards of directors and board committees on governance issues and in assessing shareholder litigation, responding to business combination proposals and conducting internal investigations.
    • Ronald O. Mueller (202-955-8671, [email protected]):  Strong policy background and extensive experience in areas of securities law and corporate governance. His practice focuses on proxy and disclosure issues, corporate governance, executive compensation and corporate transactions.
    • Alan Platt (202-887-3660, [email protected]):  Key member of the firm’s Public Policy Group for the past fifteen years where he has focused on economic issues. Prior to joining the firm, he held senior positions in the US Department of State and the US Senate. He is the author of three books and more than thirty articles on a wide range of international policy issues.
    • Michael Bopp (202-955-8256, [email protected]):  Served for more than two years as Associate Director of the White House Office of Management and Budget where he set budgets and coordinated policy for multiple agencies including the Treasury Department, the Department of Housing and Urban Development, the new Federal Housing Financing Agency, and the financial services regulatory agencies.  He also served for eleven years on Capitol Hill running investigations and as a Legislative Director and as Staff Director and Chief Counsel of the Senate Homeland Security and Governmental Affairs Committee.   Michael has extensive high level contacts within the Administration and on Capitol Hill.

    Securities Law and Corporate Governance Expertise

    • Amy L. Goodman (202-955-8653, [email protected]):  Served eleven years on the SEC staff in the Divisions of Corporation Finance and Investment Management and in the Chairman’s office.  In addition to advising clients on securities regulation and disclosure matters, she is a nationally recognized corporate governance expert, advising companies and their boards of directors and board committees on regulatory matters, best practices and D&O insurance and indemnification.
    • K. Susan Grafton (202-887-3554, [email protected]):  Chair of the American Bar Association’s’ Subcommittee on Market Regulation.  Advises broker-dealers, hedge funds and other market participants on a wide variety of sales, trading, financial and operational issues, including Regulation SHO.  Joined the firm after nearly 7 years at Goldman, Sachs & Co., where she advised the Securities Division on sales and trading issues.
    • Brian Lane (202-887-3646, [email protected]):  Extensive expertise in a wide range of SEC issues.  He counsels companies on the most sophisticated corporate governance and regulatory issues under the federal securities laws.  He is a nationally recognized expert in his field as an author, media commentator, and conference speaker.
    • Lewis Ferguson (202-955-8249, [email protected]):  Served for more than three yeas as the first General Counsel of the Public Company Accounting Oversight Board where he was in charge of all legal affairs and was involved in drafting the PCAOB’s rules and regulations and auditing standards.  His practice focuses on the representation of accounting and auditing firms and their employees, securities regulation and disclosure issues and corporate governance matters.
    • Barry Goldsmith (202-955-8580, [email protected]):  Served as Executive Vice President for Enforcement of the National Association of Securities Dealers (now the Financial Industry Regulatory Authority), the primary private-sector regulator of the country’s securities industry, during a period of major change and enforcement activity on Wall Street.  His practice focuses on the representation of securities firms, broker-dealers, investment companies and investment advisers and other financial institutions and their employees.  He has been recognized as one of the top securities regulatory and enforcement attorneys in the District of Columbia.

    Banking Law Expertise

    • Chuck Muckenfuss (202-955-8514, [email protected]):  For more than twenty-five years has represented financial institutions in a broad spectrum of regulatory and policy matters.  Before joining the firm in 1981, Mr. Muckenfuss was Senior Deputy Comptroller for policy at the Office of the Comptroller of the Currency (1978-81) and Special Assistant to the Director (1974-77) and Counsel to the Chairman (1977-78) of the Federal Deposit Insurance Corporation.
    • Christopher Bellini (202-887-3693, [email protected]):  Co-chairs firm’s financial institutions group.  Advises clients in financial services industry concerning mergers and acquisitions, strategic investments, legislation, regulatory matters and government investigations and enforcement actions.  As counsel to the mutual fund industry, negotiated the compromise with the Federal Reserve Board and other banking agencies on the financial holding company functional regulation provisions of the Gramm-Leach-Bliley Act. Served for five years in the Office of the General Counsel at the Federal Reserve Board and for three years as a senior auditor at Arthur Andersen.
    • Amy Rudnick (202-955-8210, [email protected]):  Specializes in representing clients in criminal and regulatory enforcement actions, internal investigations, and compliance and due diligence reviews involving anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act. She counsels financial institution holding companies, domestic and foreign banks, securities broker-dealers, investment companies, insurance companies, hedge funds, finance companies, money services businesses, other financial services businesses, and multinational corporations with respect to risk-based anti-money laundering compliance programs, customer identification and enhanced due diligence procedures, currency transaction and suspicious activity reporting, and other USA PATRIOT Act requirements.

    Corporate Expertise

    • Howard Adler (202-955-8589, [email protected]):  Co-chairs the firm’s corporate transactions practice group.  He represents major corporations, investment banks, merchant banks and financial institutions in securities offerings, mergers and acquisitions, joint ventures, venture capital investments, and other matters.  He is regularly listed in legal publications as one of the country’s top corporate lawyers.
    • Richard Russo (303-298-5715, [email protected]):  Co-chairs firm’s corporate transactions practice group and is senior corporate partner in firm’s Denver office.  He focuses on the representation of business entities, with emphasis on securities and disclosure matters, mergers and acquisitions, restructurings and corporate governance.  He is regularly listed in legal publications as one of the country’s top corporate lawyers.
    • Dennis Friedman (212-351-3900, [email protected]):  Co-chairs the firm’s mergers and acquisitions practice group.  He has extensive experience, over a legal career of more than thirty years, in mergers and acquisitions, corporate governance, and capital markets.  He served for several years as a an investment banker at major Wall Street firms and as the head of a merchant banking group.  He is regularly listed in legal publications as one of the country’s top corporate lawyers.
    • Stephanie Tsacoumis (202-955-8277, [email protected])More than twenty five years’ of experience representing clients in the financial services industry in a broad range of sophisticated transactional and advisory matters.  From her involvement in one of the earliest credit card securitizations to her representation of debtholders in major recapitalizations to handling acquisitions from the Resolution Trust Corporation to representing clients in loan and servicing portfolio transactions to representing underwriters in finance company securities offerings, she has experience in a wide variety of financial services-related matters.  Following the savings and loan crisis in the late 1980’s, Ms. Tsacoumis handled dozens of acquisitions of failed thrifts and thrift assets.  She also was instrumental in assisting the FDIC and RTC revise their forms of asset purchase agreement.  She is regularly listed in legal publications as one of the country’s top corporate lawyers.
    • Robert Cunningham (212-351-2308, [email protected]):  Co-chairs firm’ s global finance practice group.  He has extensive experience in a wide range of financing arrangements, including secured and unsecured, multi-borrower, multi-currency revolving credit, term loan, letter of credit and BA facilities, first lien/second lien financings, acquisition and bridge financings, project financings, restructurings and DIP facilities, bankruptcy exit financings, complex structured financings, asset monetizations and securitizations, leveraged lease financings, and private placements.  He was recently named Vice Chair of the American Bar Association First Lien/Second Lien Model Intercreditor Agreement Task Force.
    • Joerg Esdorn (212-351-3851, [email protected]): Co-Chair of the firm’s Global Finance Group. He focuses on the representation of providers of capital and issuers/borrowers in a wide variety of financing transactions and in workouts and restructurings, including those involving real estate assets. He is regularly listed in legal publications as one of the country’s top finance lawyers. 

    Real Estate Expertise

    • Jesse Sharf (310-552-8512, [email protected]):  Co-chairs firm’s real estate group where he represents financial institutions, investors and developers in all manner of real estate transactions, including acquiring and disposing of portfolios of loans and REO, forming entities to acquire these and other real estate and real estate debt instruments, creating and unwinding complex syndication, participation and other structures used to own real estate and real estate related debt, and workouts and restructurings of real estate transactions. 
    • Alan Samson (+44 20 7071 4222, [email protected]):  Co-chairs firm’s real estate group.  Based in London and dual UK/US qualified, he represents real estate opportunity funds, financial institutions and private equity investors in the full range of real estate transactions, including acquiring and disposing of portfolios of loans (whole loans, structured pieces and CMBS) and other real estate debt instruments and participations, and workouts and restructurings of real estate transactions.
    • Dennis Arnold (213-229-7864, [email protected]): Extensive experience in all aspects of commercial and residential real estate and finance, as well as workouts, bankruptcy and debt restructure. He is a nationally recognized expert in real estate, finance, insolvency and commercial law, including significant expertise in UCC remedies and mezzanine loan foreclosures. His primary areas of concentration include real estate, banking and finance, commercial law (including Articles 3, 5 and 9 of the Uniform Commercial Code), workouts, bankruptcy and debt restructure.

    Bankruptcy Law Expertise

    • Michael Rosenthal (212-351-3969, [email protected]):  Co-chairs the firm’s business restructuring and reorganization practice group. Focuses on insolvency, corporate reorganization, workouts and debt restructuring matters and has a particular expertise in the representation of debtors, creditors and acquirors of distressed businesses. Among other matters in the financial services sector, he has been heavily involved in the recent failure of a large financial services firm.

    Tax Law Expertise

    •  Arthur D. Pasternak (202-955-8582, [email protected]):  Chairs the firm’s tax practice group.  Areas of expertise include tax advice to domestic corporations and partnerships on U.S. tax issues generally.  Strong background in mergers and acquisitions and in transactions involving major financial institutions. 

© 2008 Gibson, Dunn & Crutcher LLP

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