Financial Markets in Crisis: Oversight of Federal Rescue Efforts Ramps Up

December 16, 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 a number of recent developments, including the release of new GAO and Congressional Oversight reports, continued Congressional inquiries, and two announcements made by the Federal Reserve, including new information about its direct purchase program of GSE obligations and the extension of three liquidity facilities.

GAO and COP Reports

GAO Report.  On December 2, the U.S. Government Accountability Office (GAO) released a report[1] critical of Treasury’s implementation of the Troubled Asset Relief Program (TARP), created by the Emergency Economic Stabilization Act (EESA).[2] The EESA  charged Treasury with, among other things, preserving homeownership and promoting jobs and economic growth.  In answering the question of whether these goals are being achieved, the report concludes that it is too soon to tell.

The report discusses Treasury’s decision to use the TARP funds to purchase direct equity stakes in financial institutions through the Capital Purchase Program (CPP) in lieu of purchasing troubled housing-related assets.  Treasury contends that cash infusions will free up credit markets, which will benefit the housing markets.  GAO questions, however, whether Treasury will be able to measure the CPP’s effects.  The report points out that Treasury has yet to implement any reporting system for the institutions that receive TARP funds.  Though the agreements between Treasury and the recipient institutions do state that the institutions should use the funds to further TARP’s homeownership goals, they do not provide any specific requirements to accomplish those goals; nor do the agreements require the institutions to track the use of the funds to ensure that they are using capital investments to help meet the purposes of the EESA.

GAO also faults the Treasury’s communication strategy, which failed to explain adequately to the markets, to Congress and the public the shift to the CPP.  According to GAO, Treasury should have brought on additional staff to ensure the transition of TARP to the incoming Presidential administration was handled smoothly.  GAO also notes that the Treasury needed to develop better internal controls to oversee the contractors it was hiring under TARP, including by shifting to fixed-price contracts and finalizing and monitoring conflict-of-interest provisions.

GAO does cite with approval certain aspects of Treasury’s TARP implementation.  For example, GAO notes that Treasury quickly established an organizational structure for the new Office of Financial Stability, has taken steps, such as establishing the Office of the Chief of Homeownership Preservation within the Office of Financial Stability, toward supporting homeownership, quickly brought on contractors needed to assist with implementing the TARP, and has begun to establish a system of internal controls.

COP Report.  On December 10, the Congressional Oversight Panel for Economic Stabilization (COP) issued its first report on TARP.[3]  The panel, chaired by Harvard University Law Professor Elizabeth Warren, likewise found that Treasury has administered TARP "without seeking to monitor the use of funds provided to specific institutions."  It also notes that Treasury needs to better explain its strategies and how those strategies will reduce home foreclosures.  The report states the Treasury ought clarify its criteria for determining which banks receive money and what reforms it is imposing on those financial institutions.  One member of the panel, Representative Jeb Hensarling, refused to sign the report because he believes the panel itself does not have the resources and access necessary to conduct effective oversight.

The COP report promises "a series of field hearings" in "the weeks ahead" in order to "shine light on the causes of the financial crisis, the administration of TARP, and the anxieties and challenges of ordinary Americans." The COP has also announced that it will release public reports on January 10th and January 20th.  It will be interesting to see how the media and Congressional committees with jurisdiction over aspects of the financial crisis and the government’s rescue efforts respond to the COP’s hearings and reports.  To the extent that the hearings are focused on witness discussion than actual investigations, it is likely that they will not displace investigative efforts that have begun already in the House and Senate.

Congressional Response

Congressional response was sharply negative toward the Administration in the wake of both reports.  The House Financial Services Committee held a hearing on December 10 examining oversight concerns regarding the Treasury Department’s implementation of TARP.  Throughout the hearing, legislators lamented that the Administration had persuaded them to pass a program to buy distressed assets, only to shift to a strategy of capital injections.  Chairman Barney Frank led a chorus of committee members who complained that the intent of TARP had been to thaw credit markets and reduce foreclosures, but that the funds received by financial institutions were not being used for these purposes.  Several congressmen threatened to force Treasury to make more detailed oversight of the institutions through legislation if the Department refused to do so on its own.  Most immediately, Frank stated that Congress would be hard pressed to allow the distribution of the second $350 billion installment of TARP funds if the Administration sought it.  Unless the Treasury could provide evidence that the money already appropriated was being used by banks as intended, Congress would likely reject any request for the remaining $350 billion.  Frank also noted that the Congressional hearings for any such request would likely subpoena CEOs of institutions that had received TARP funds.  CEO pay at institutions supported by TARP came under harsh criticism by the committee.  Several members demanded that either Treasury impose more stringent limits on executive compensation or Congress would.

Last week and today, Interim Assistant Secretary for Financial Stability Neel Kashkari offered a more positive outlook on TARP.  Testifying before the House Committee on December 10, and the Senate Appropriations Subcommittee on Financial Services and General Government on December 4, he reiterated TARP’s priorities of stabilizing financial markets, opening housing markets and saving taxpayer dollars.  He promised that Treasury would meet the oversight requirements established by Congress in the Emergency Economic Stabilization Act of 2008, the TARP’s authorizing legislation, though it would not be immediate.  He assured the Committee that he shared their interest in obtaining data on how banks were using taxpayer money, but that it would be several weeks before such data would be available.  He noted that it was not until this week that the Senate confirmed a Special Inspector General for TARP.  Kashkari touted the CPP for enabling banks to offer credit, as well as to absorb losses and write down troubled assets.  He cited the efficiency with which the CPP has been deployed – over the last month, over 50 institutions have received approximately $151 billion through the program.  Looking ahead, Kashkari warned that banks and non-banks may need additional capital.

Kashkari also explained that Treasury has been working to promote homeownership through three initiatives: the 2007 establishment of the HOPE NOW Alliance, the conservatorship of the GSEs earlier this year, and the initiation of a streamlined loan modification program by HOPE NOW, the FHFA, and the GSEs. 

Announcements from the Fed

On December 3, the Federal Reserve Bank of New York issued more detailed information about the Fed’s newly announced program to purchase direct obligations of the housing-related GSEs.[4]  Through this program, which will be financed through bank reserves, the Fed hopes to provide potential homeowners with greater access to credit and to unfreeze the housing markets.  The Fed plans to purchase $100 billion in non-callable, senior benchmark securities issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and may expand the program to include other types of securities later.  Only primary dealers may sell obligations to the Fed, but they are encouraged to make offers both for themselves and for clients.  The Fed plans to hold auctions approximately weekly on FedTrade.  The auctions will be announced the day prior to the auction on the New York Fed’s website and will last about thirty minutes once they are up on FedTrade.  Dealers may submit up to three propositions during each auction, with a minimum bid of $1 million, and a minimum increment of $1 million.  Results will be posted on the website, as well.

The Fed also announced that it will extend three of its recently-created liquidity facilities, including the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), and the Term Securities Lending Facility (TSLF) through April 30, 2009.[5]  Details of these programs can be found in previous alerts in this series.

 [1]   For the text of the report, see

 [2]   P.L. 110-343 (enacted October 3, 2008).

 [4]   For additional information, see

 [5]   For additional information, see

 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, 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,
John F. Olson – Washington, D.C. (202-955-8522,
Amy L. Goodman
– Washington, D.C. (202-955-8653,
Alan Platt – Washington, D.C. (202- 887-3660,
Michael Bopp – Washington, D.C. (202-955-8256,

Securities Law and Corporate Governance Expertise
Ronald O. Mueller
– Washington, D.C. (202-955-8671,
K. Susan Grafton – Washington, D.C. (202- 887-3554,
Brian Lane – Washington, D.C. (202-887-3646,
Lewis Ferguson – Washington, D.C. (202- 955-8249,
Barry Goldsmith – Washington, D.C. (202- 955-8580,
John H. Sturc
– Washington, D.C. (202-955-8243,
Dorothee Fischer-Appelt – London (+44 20 7071 4224,
Alan Bannister – New York (212-351-2310,
Adam H. Offenhartz – New York (212-351-3808,
Mark K. Schonfeld – New York (212-351-2433,

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514,
Christopher Bellini – Washington, D.C. (202- 887-3693,
Amy Rudnick – Washington, D.C. (202-955-8210,
Rachel Couter – London (+44 20 7071 4217,

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589,
Richard Russo – Denver (303- 298-5715,
Dennis Friedman – New York (212- 351-3900,
Stephanie Tsacoumis – Washington, D.C. (202-955-8277,
Robert Cunningham – New York (212-351-2308,
Joerg Esdorn – New York (212-351-3851,
Wayne P.J. McArdle – London (+44 20 7071 4237,
Stewart McDowell – San Francisco (415-393-8322,
C. William Thomas, Jr.
– Washington, D.C. (202-887-3735,

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065,

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918,

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512,
Alan Samson – London (+44 20 7071 4222,
Andrew Levy – New York (212-351-4037,
Fred Pillon – San Francisco (415-393-8241,
Dennis Arnold – Los Angeles (213-229-7864,
Michael F. Sfregola – Los Angeles (213-229-7558,
Andrew Lance – New York (212-351-3871,
Eric M. Feuerstein – New York (212-351-2323,
David J. Furman – New York (212-351-3992,

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804,

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969,
David M. Feldman – New York (212-351-2366,

Oscar Garza – Orange County (949-451-3849,
Craig H. Millet – Orange County (949-451-3986,
Thomas M. Budd – London (+44 20 7071 4234,
Gregory A. Campbell – London (+44 20 7071 4236,
Janet M. Weiss – New York (212-351-3988,
Matthew J. Williams – New York (212-351-2322,
J. Eric Wise – New York (212-351-2620,

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582,
Paul Issler – Los Angeles (213-229-7763,

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385,
Charles F. Feldman – New York (212-351-3908,
Michael J. Collins – Washington, D.C. (202-887-3551,
Sean C. Feller – Los Angeles (213-229-7579,
Amber Busuttil Mullen – Los Angeles (213-229-7023,

© 2008 Gibson, Dunn & Crutcher LLP

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