November 19, 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 series of hearings which are being conducted by Congressman Henry Waxman, chair of the House Committee on Oversight and Government Reform, and, in particular, the recent hearing on hedge funds’ role in the financial crisis.
On Thursday, October 2, 2008, Representative Waxman announced that the House Committee on Oversight and Government Reform would hold a series of hearings to examine the events that led to the current financial crisis. These hearings have included:
The Hedge Fund Hearing
On November 13th, Representative Waxman held the latest hearing in this series. The hearing focused on hedge funds and their role, if any, in causing the financial crisis. The committee heard two panels of witnesses.
The first panel was comprised of the following academic witnesses:
The second panel of witnesses was comprised of hedge fund managers. Prior to the hearing, Representative Waxman asked the witnesses to be prepared to testify about whether hedge funds pose a systemic risk to the markets, whether they should come under federal regulation, whether hedge funds’ executive compensation encourages inappropriate risk-taking behavior, and whether capital gains tax treatment of carried interest is warranted. The following witnesses testified:
Many of the questions posed to this panel suggested that hedge funds contributed to the financial crisis. The witnesses generally disagreed but allowed that some new regulation could be warranted provided that it did not discourage investment and did not require public disclosure of investment plans. The panelists also generally agree that overleveraging contributed to the crisis and that the derivative industry was both overleveraged and opaque, making products like credit default swaps risky to the markets and investors.
In his closing remarks, Representative Waxman signaled that additional regulation of hedge funds is warranted but stopped short of calling for any specific regulation or for a change in the tax treatment of carried interest.
A number of developments over the past week bear mention.
First, the Treasury Department issued a new transaction report listing all "completed transactions" under the Capital Purchase Program. Treasury has pledged to disclose on its website all transactions within two days of their completion. Note that the most recent transaction report (dated November 17, 2008) includes roughly $160 billion in preferred stock purchases. We understand, however, that the Treasury has agreed to more than $200 billion of preferred stock purchases, though some portion of them are not yet "completed."
Second, Treasury issued term sheets that set forth requirements for private and thinly traded institutions to participate in the CPP. According to Treasury, the terms are "economically equivalent" to those applicable to public corporations seeking to participate in the CPP. As a general matter, while public companies are required to provide warrants to purchase their common stock, private company warrants are for preferred stock, which are to pay dividends at a rate of 9 percent per year. In addition, a private sector institution that receives an investment of $50 million or less and is certified as a Community Development Financial Institution is not required to provide warrants.
Third, both the Administration and Congress moved to fill positions created by the Emergency Economic Stabilization Act ("EESA"), signed into law six weeks ago. President Bush nominated Neil Barofsky, a federal prosecutor in New York and chief of his district’s mortgage fraud unit, as the special inspector general created by the rescue bill.
Democratic leaders appointed three of the five members of a Congressional panel, also created by the EESA, that will oversee Treasury rescue efforts and explore potential regulatory changes.
House Speaker Pelosi picked Richard H. Neiman, the New York state bank superintendent, while Senate Majority Leader Reid chose Elizabeth Warren of Harvard Law School. Pelosi and Reid jointly appointed Damon Silvers, associate general counsel of the AFL-CIO.
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)
Mark K. Schonfeld – New York (212-351-2433, email@example.com)
Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, firstname.lastname@example.org)
Christopher Bellini – Washington, D.C. (202- 887-3693, email@example.com)
Amy Rudnick – Washington, D.C. (202-955-8210, 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)
Stewart McDowell – San Francisco (415-393-8322, email@example.com)
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, firstname.lastname@example.org)
Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, email@example.com)
Alan Samson – London (+44 20 7071 4222, firstname.lastname@example.org)
Andrew Levy – New York (212-351-4037, email@example.com)
Fred Pillon – San Francisco (415-393-8241, firstname.lastname@example.org)
Dennis Arnold – Los Angeles (213-229-7864, 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)
Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, 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)
Janet M. Weiss – New York (212-351-3988, 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)
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