October 23, 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 two congressional hearings today and today’s FDIC board approval of interim rules to govern its Temporary Liquidity Guarantee Program.
Today, the Senate Banking Committee heard testimony concerning the regulatory responses to the financial crisis. Witnesses included FDIC Chair Sheila Bair, Interim Assistant Secretary for Financial Stability Neel Kashkari, Director of the Federal Housing Finance Agency ("FHFA") James Lockhart, Elizabeth Duke, a governor of the Federal Reserve System, and Federal Housing Commissioner Brian Montgomery. The witnesses detailed many of the programs initiated by each of their agencies in the wake of the financial crisis, which we have outlined in our previous client alerts, including the Fed’s funding facilities, the FHFA’s conservatorship of Fannie and Freddie, and the FDIC’s increased deposit insurance limits. All of the witnesses focused on the need to provide liquidity to the markets and to prevent home foreclosures.
In his prepared statement, Director Lockhart warned against tightening credit standards too much now. FDIC Chair Bair stated that the majority of the U.S. banking system is healthy, and that the main problem we currently face is one of liquidity. She cited efforts by the FDIC and Treasury to find new and creative ways to use loan guarantees and credit enhancements as means by which to modify loans and prevent foreclosures. She suggested that the FDIC and Treasury are working on a new program to guarantee home loans that meet certain standards. It is unclear how or whether any such new program will relate to the Hope for Homeowners program expanded by the Housing and Economic Recovery Act passed this summer.
On the House side, the Committee on Oversight and Government Reform also held a hearing on the role of federal regulators during the crisis. The committee heard testimony from the Former Chairman of the Federal Reserve Alan Greenspan, the former Treasury Secretary John Snow, and SEC Chairman Christopher Cox.
Former Chairman Greenspan called the crisis a "once-in-a-century credit tsunami," identifying subprime mortgage lenders as the "original source of the crisis." Former Treasury Secretary Snow laid the blame heavily on a "critical lack of transparency" produced by lenders selling exotic mortgages and investment bankers producing "a variety of complex and opaque asset-backed financial vehicles." SEC Chairman Cox agreed with their assessments, but also recognized credit default swaps as the fuel that fed the crisis fire, as they allowed lenders to buy protection against credit risks, which encouraged unsound lending practices while exposing the lenders to other risks.
Both Secretary Snow and Chairman Greenspan claimed that though they rang warning bells in 2005 that the underpricing of risk eventually would cause problems, that they never would have predicted a situation as dire as this crisis has become. Greenspan stated that he believes TARP to be adequate to prevent "severe retrenchment." Regarding regulatory changes, he reluctantly advocated that the government require that all securitizers retain a portion of the securities they issue. Chairman Cox called for the government to establish a statutory regulator for investment bank holding companies, to rely on specialists at the SEC to strengthen securities regulations, to ensure that securities regulation and enforcement remain "fiercely independent" from the firms being regulated, and to promote a more unified overarching regulatory scheme to replace the current "balkanized" system.
Federal Deposit Insurance Corporation Meeting
Also today, the FDIC met to discuss the interim rule governing its Temporary Liquidity Guarantee Program, which it announced on October 14th. The program has two parts: the Debt Guarantee Program and the Transaction Account Guarantee Program. Under the Debt Guarantee Program, the FDIC will guarantee the payment of certain newly issued senior unsecured debt. Under the Transaction Account Guarantee Program, the FDIC will guarantee certain noninterest-bearing transaction accounts. With these initiatives, the FDIC hopes to encourage insured depository institutions to loan money, thereby freeing up the credit markets, and to help creditworthy companies issue commercial paper. The program will be funded by special fees and will not depend on taxpayer funding.
The interim rule provides further detail on who and what are eligible for the program and how it will be implemented. Regarding eligibility, the rule includes a provision giving the FDIC discretion to include "other affiliates of insured depository institutions" in the definition of "eligible entity." According to the rule, the FDIC would first consult with the "appropriate Federal banking agency." Specifically eligible under the rule are FDIC-insured depository institutions, U.S. bank holding companies and financial holding companies, and certain U.S. savings and loan holding companies.
While the interim rule takes effect upon publication, the FDIC has provided for a comment period of fifteen days.
 For the full text of the Interim Rule and for information about commenting on the Rule, see
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@example.com) 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, firstname.lastname@example.org)
John F. Olson – Washington, D.C. (202-955-8522, email@example.com)
Amy L. Goodman – Washington, D.C. (202-955-8653, firstname.lastname@example.org)
Alan Platt – Washington, D.C. (202- 887-3660, email@example.com)
Michael Bopp – Washington, D.C. (202-955-8256, firstname.lastname@example.org)
Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671, email@example.com)
K. Susan Grafton – Washington, D.C. (202- 887-3554, firstname.lastname@example.org)
Brian Lane – Washington, D.C. (202-887-3646, email@example.com)
Lewis Ferguson – Washington, D.C. (202- 955-8249, firstname.lastname@example.org)
Barry Goldsmith – Washington, D.C. (202- 955-8580, email@example.com)
John H. Sturc – Washington, D.C. (202-955-8243, firstname.lastname@example.org)
Alan Bannister – New York (212-351-2310, email@example.com)
Adam H. Offenhartz – New York (212-351-3808, firstname.lastname@example.org)
Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, email@example.com)
Christopher Bellini – Washington, D.C. (202- 887-3693, firstname.lastname@example.org)
Amy Rudnick – Washington, D.C. (202-955-8210, email@example.com)
Howard Adler – Washington, D.C. (202- 955-8589, firstname.lastname@example.org)
Richard Russo – Denver (303- 298-5715, email@example.com)
Dennis Friedman – New York (212- 351-3900, firstname.lastname@example.org)
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, email@example.com)
Robert Cunningham – New York (212-351-2308, firstname.lastname@example.org)
Joerg Esdorn – New York (212-351-3851, email@example.com)
Stewart McDowell – San Francisco (415-393-8322, firstname.lastname@example.org)
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, email@example.com)
Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, firstname.lastname@example.org)
Alan Samson – London (+44 20 7071 4222, email@example.com)
Andrew Levy – New York (212-351-4037, firstname.lastname@example.org)
Fred Pillon – San Francisco (415-393-8241, email@example.com)
Dennis Arnold – Los Angeles (213-229-7864, firstname.lastname@example.org)
Andrew Lance – New York (212-351-3871, email@example.com)
Eric M. Feuerstein – New York (212-351-2323, firstname.lastname@example.org)
David J. Furman – New York (212-351-3992, email@example.com)
Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, firstname.lastname@example.org)
Oscar Garza – Orange County (949-451-3849, email@example.com)
Craig H. Millet – Orange County (949-451-3986, firstname.lastname@example.org)
Janet M. Weiss – New York (212-351-3988, email@example.com)
Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, firstname.lastname@example.org)
Michael J. Collins – Washington, D.C. (202-887-3551, email@example.com)
Sean C. Feller – Los Angeles (213-229-7579, firstname.lastname@example.org)
Amber Busuttil Mullen – Los Angeles (213-229-7023, email@example.com)
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