January 13, 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 focuses on H.R. 384, the TARP Reform and Accountability Act of 2009"TARP II"), a bill that Congressman Frank introduced on January 9, 2009. Below, we have provided an overview of the bill, as well as an analysis of several provisions that we have identified as being most relevant to our clients.
Congressman Frank introduced TARP II on the heels of the TARP Congressional Oversight Panel’s release of its second report on the Administration’s implementation of the program. The highly-critical report focused on the following four areas as they relate to implementation of the TARP: bank accountability, transparency and asset evaluation, foreclosure mitigation, and strategy for economic stabilization.
TARP II addresses many of the issues raised in the Panel’s report. Specifically:
Procedural Posture and Prospects
TARP II was brought before the House Rules Committee at 5 p.m. on Tuesday, January 13. The bill is scheduled for floor consideration on Wednesday and Thursday of this week. Reportedly, the incoming Obama administration has been working with Frank to develop the legislation, but it is not clear whether it supports the entirety of the bill. Frank also has suggested that the bill may not be necessary if the new administration acts to reform Treasury’s implementation of TARP on its own. House Speaker Nancy Pelosi, however, has expressed strong support for congressional action to impose transparency and accountability on the executive branch’s use of the funds.
While H.R. 384 may well pass the House with a considerable margin, it is unlikely to pass the Senate soon, at least in its current form. The bill includes a number of controversial provisions (including some of those discussed below) and contains drafting ambiguities and/or errors. It is clear that the bill is designed, at least in part, to assure Members of Congress that the balance of TARP funds will not be spent in the same manner as the first $350 billion. To that extent, the bill may end up serving as a sounding board for Member frustration and not as an act that changes the contours of the TARP.
Provisions Relevant to Our Clients
Gibson, Dunn’s Financial Markets Crisis Group has identified several provisions which may be of particular relevance to our clients, including the executive compensation and real estate provisions. Below are more detailed explanations and commentary of those provisions.
Executive Compensation Provisions
TARP II includes a number of provisions that would apply more stringent executive compensation requirements on any institution that receives assistance under TARP. According to Chairman Frank’s summary of H.R. 384, the goal of the bill is to apply "the most stringent non-tax executive compensation restrictions [other than tax provisions] from EESA across the board." It is not clear that the provisions of TARP II actually effect the Chairman’s intent. Nor is it clear whether TARP II executive compensation provisions would apply retroactively by their terms, or at the discretion of the Secretary of the Treasury. The bill provides that Treasury may apply these standards to any institution that receives assistance under TARP on or after the date of TARP II’s enactment. The language in this provision is unclear, but it is likely that it is meant to authorize the Secretary to retroactively apply the new requirements to currently participating institutions.
While the original TARP provisions had varying levels of executive compensation requirements depending on which of the three TARP program was being utilized, TARP II would apply consistent requirements across the board for all institutions participating in any TARP program as follows:
Curiously, there is language at the beginning of Section 102 — where TARP II provides that these new requirements are in addition to any original TARP requirements — that has a carveout for the application of the original definition of SEO (which is generally the CEO, CFO and other three most highly compensated executive officers). It is not clear why that carveout is necessary unless the Treasury is proposing to increase the scope of SEOs beyond the top five executives. As set forth above, the prohibition on bonus/incentive payments applies to the top twenty-five executives, but none of the other requirements appear to have such a broad application.
Real Estate-Related Provisions
The second title of TARP II contemplates a "Foreclosure Mitigation Plan" for mortgagor-occupied residential real estate. Section 201(a) would prevent the Treasury Secretary after March 15, 2009 from disbursing further funding previously made available under the Emergency Economic Stabilization Act ("EESA") "unless a comprehensive plan to prevent and mitigate foreclosures on residential properties . . . has been developed by the Secretary and approved by the Financial Stability Oversight Board by such date."
Section 201(b) would reserve EESA funding for the comprehensive plan in the range of $40B-$100B. The Secretary would have to begin disbursing these funds by April 1, 2009.
Section 202 details the elements of the plan and calls on the Secretary to leverage private capital and focus the plan on "areas that are most seriously affected by such foreclosures." In Section 203, systematic loan modifications, reductions of HOPE for Homeowners Program fee costs and interest rates, buy-downs of second lien mortgages, servicer incentives and direct government loan purchases are discussed as alternative methods to mitigate the foreclosure crisis. The systematic loan modification plan, which appears to be the legislation’s favored alternative, is pursued separately in greater detail in Section 204.
Section 205 would provide a "safe harbor" from liability for home-loan servicers entering into loan modifications or workouts, notwithstanding other laws or "any investment contract between a servicer and a securitization vehicle or investor," and subject to the lender’s compliance with the Truth in Lending Act. The safe harbor would apply to owners of residential mortgage loans or related interests/securities, those obligated to make payments on such loans, and insurers thereof. Liability would not be limited by the number, frequency or range of the servicer’s loan modifications, nor would the servicer be required to repurchase loans from, or make payments to a securitization vehicle holding residential mortgages modified under the plan. This plan would apply to all payment-defaulted mortgages as well as those in which payment defaults are "reasonably foreseeable." The plan is also limited to situations where "[t]he servicer reasonably and in good faith believes that the anticipated recovery on the principal outstanding obligation of the mortgage under the particular modification or workout plan or other loss mitigation action will exceed, on a net present value basis, the anticipated recovery on the principal outstanding obligation of the mortgage to be realized through foreclosure." Parties who lose actions brought against applicable servicers would bear litigation fees. Finally, servicers participating in the program would be required to report loan modification activities to the Secretary "on a regular basis."
Section 403 amends the EESA to authorize the Secretary "to establish or support facilities to support the availability of commercial real estate loans, including through purchase of asset-backed securities, directly or though the Board of Governors of the Federal Reserve System or any Federal reserve bank."
 Accountability for the Troubled Asset Relief Program, The Second Report of the Congressional Oversight Panel, Jan. 9, 2009, available at http://cop.senate.gov/documents/cop-010909-report.pdf.
 Phil Mattingly, House Chairman Unveils Conditions for Second Half of Bailout Funding, Cong. Quarterly, Jan. 9, 2009.
 The Chairman’s summary of H.R. 384 may be found at the following web site: http://www.house.gov/apps/list/press/financialsvcs_dem/press0109093.shtml
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)
Dorothee Fischer-Appelt – London (+44 20 7071 4224, email@example.com)
Alan Bannister – New York (212-351-2310, firstname.lastname@example.org)
Adam H. Offenhartz – New York (212-351-3808, email@example.com)
Mark K. Schonfeld – New York (212-351-2433, 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)
Rachel Couter – London (+44 20 7071 4217, firstname.lastname@example.org)
Howard Adler – Washington, D.C. (202- 955-8589, email@example.com)
Richard Russo – Denver (303- 298-5715, firstname.lastname@example.org)
Dennis Friedman – New York (212- 351-3900, email@example.com)
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, firstname.lastname@example.org)
Robert Cunningham – New York (212-351-2308, email@example.com)
Joerg Esdorn – New York (212-351-3851, firstname.lastname@example.org)
Wayne P.J. McArdle – London (+44 20 7071 4237, 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)
Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, firstname.lastname@example.org)
Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, 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)
Michael F. Sfregola – Los Angeles (213-229-7558, email@example.com)
Andrew Lance – New York (212-351-3871, firstname.lastname@example.org)
Eric M. Feuerstein – New York (212-351-2323, email@example.com)
David J. Furman – New York (212-351-3992, firstname.lastname@example.org)
Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, email@example.com)
Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, firstname.lastname@example.org)
David M. Feldman – New York (212-351-2366, email@example.com)
Oscar Garza – Orange County (949-451-3849, firstname.lastname@example.org)
Craig H. Millet – Orange County (949-451-3986, email@example.com)
Thomas M. Budd – London (+44 20 7071 4234, firstname.lastname@example.org)
Gregory A. Campbell – London (+44 20 7071 4236, email@example.com)
Janet M. Weiss – New York (212-351-3988, firstname.lastname@example.org)
Matthew J. Williams – New York (212-351-2322, email@example.com)
J. Eric Wise – New York (212-351-2620, firstname.lastname@example.org)
Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, email@example.com)
Paul Issler – Los Angeles (213-229-7763, firstname.lastname@example.org)
Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, email@example.com)
Charles F. Feldman – New York (212-351-3908, 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)
© 2009 Gibson, Dunn & Crutcher LLP
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