Corporate Practice
Employee Benefits and
Executive Compensation Practice
Client Advisory
October 3, 2008
Summary of the Emergency Economic
Stabilization Act of 2008
by Farhad K. Patel, Matthew J. Renaud, Deanne B. Millison and Julie A. Wenell
In unprecedented economic times, punctuated by
investment bank failures, consolidation of the financial
services industry and a gyrating stock market, President
Bush signed the Emergency Economic Stabilization Act
(the “Act”) on Friday, October 3, 2008. This Act is a
revised version of the original bill that failed to pass in
the House of Representatives on Monday, September
29, 2008. The revised bill includes other legislative acts
that, among other things, extend tax incentives related to
renewable energy, extend relief from the Alternative
Minimum Tax and require health insurance coverage for
mental health to be on par with coverage for physical
health. In general, the Act (i) authorizes the Secretary of
the Treasury (the “Secretary”) to establish a program to
purchase up to $700 billion of troubled assets,
(ii) requires the establishment of a program for the sale
of insurance on troubled assets, (iii) places certain
restrictions on executive compensation and (iv) provides
for certain taxpayer/consumer protections. This client
advisory highlights and summarizes some of the major
provisions of the Act.
The Troubled Asset Relief Program and
Troubled Asset Insurance
The Act authorizes the Secretary to establish the
Troubled Asset Relief Program (“TARP”) to purchase
troubled assets from financial institutions. The mandate
given to the Secretary is very broad and includes the
authority to set guidelines for identifying troubled assets,
to price and value troubled assets, to purchase troubled
assets and to sell troubled assets. The total purchase
authority under TARP is capped at $700 billion and is
available in installments. $250 billion are immediately
available under TARP for the purchase of troubled
assets with an additional $100 billion accessible upon
the President’s request. The balance of $350 billion
may become available after the President gives
Congress a written report requesting the Secretary to
have such access. However, Congress can block the
final $350 billion request through a joint resolution of
disapproval. Additionally, the Act raises the statutory
public debt ceiling from $10 trillion to $11.3 trillion.
Key factors in implementing TARP will be the
identification of troubled assets and the purchase
price paid for them. The Act gives the Secretary broad
discretion in determining both what types of assets will
be purchased and the price paid for such assets. If the
purchase price is set too low, banks may be unwilling to
participate in the program. If the purchase price is set
too high, the assets may eventually be sold at a loss to
the taxpayers.
The Act also requires the Secretary to establish a
program to insure troubled assets originated or issued
prior to March 14, 2008. Financial institutions
participating in the insurance portion of TARP will pay
premiums for such insurance. The premium rates will be
set by the Secretary, and must be at a level that will
create reserves sufficient to cover anticipated claims.
The premium payments will be placed in a fund to be
used to pay claims on the TARP insurance. If the
insured obligations exceed the amount in such fund, the
©2008 Jenner & Block LLP. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended
to provide legal advice but to provide information on legal matters. Transmission is not intended to create and receipt does not establish an attorney-client
relationship. Readers should seek specific legal advice before taking any action with respect to matters mentioned in this publication. The attorney
responsible for this publication is Farhad K. Patel. Masthead image from the Collection of the Supreme Court of the United States.
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October 3, 2008
purchase authority under TARP would be reduced by
such excess. Therefore, the participation in and
effectiveness of this insurance program will depend in
large part on the amount of the insurance premiums.
Oversight of TARP
One of the major criticisms of the initial plan presented
by the administration was the tremendous authority and
discretion granted to the Secretary. To address this
concern, the Act provides several layers of oversight and
review. The Act establishes the Financial Stability
Oversight Board, which is responsible for reviewing the
exercise of authority under TARP, making
recommendations to the Secretary regarding the use of
such authority and reporting fraudulent activity.
Additionally, the Oversight Board is charged with ensuring
that the policies implemented by the Secretary are in
compliance with the Act, protect taxpayers and are in the
economic interest of the United States. The Oversight
Board is comprised of the Chairman of the Board of
Governors of the Federal Reserve System, the Secretary,
the Director of the Federal Home Finance Agency, the
Chairman of the Securities and Exchange Commission
and the Secretary of the Department of Housing.
assets acquired under TARP, within two business days of
purchase, trade, or other disposition.
Executive Compensation
The Act has direct and immediate effects on financial
institutions holding troubled assets, but the executive
compensation provisions are also a possible indicator of
where Congress is going with future executive
compensation legislation.
Financial Institutions that Sell Troubled Assets
Directly to TARP
Financial institutions that sell troubled assets directly to
TARP are subject to explicit limits on the compensation
of their top five executives. These institutions must
conform to “appropriate standards for executive
compensation and corporate governance” which
include (i) the exclusion of incentives to executives
who take risks that threaten the value of the
institution, (ii) clawback rights to incentive pay based on
earnings or other criteria later proven to be materially
inaccurate, and (iii) a prohibition on golden parachute
payments (to be defined by the Secretary) to senior
executive officers (generally, the chief executive officer,
the chief financial officer, and the three most highly
In addition to the Oversight Board, the Act provides other compensated officers other than the CEO and CFO).
checks on TARP and the Secretary’s implementation of
Financial Institutions that Sell Troubled Assets to
TARP Through an Auction
the program. The Act requires the Comptroller General
to conduct ongoing oversight and annual audits of TARP Limits on executive compensation by financial
and to provide reports to Congress every 60 days.
institutions that sell troubled assets to TARP at auction
Further, the Act establishes the Office of the Special
are triggered when the sale of such assets exceeds
Inspector General for TARP to conduct, supervise and
$300 million per institution. These institutions are
coordinate audits and investigations of the purchase,
prohibited from entering into new employment contracts
management and sale of assets under TARP and of the with senior executive officers that provide golden
management of any insurance provided under TARP.
parachutes in the event of an involuntary termination,
The Special Inspector General must submit a quarterly
bankruptcy filing, insolvency or receivership. Special
report to Congress summarizing its activities and the
rules regarding the tax treatment of executive
activities of the Secretary under TARP. Further oversight compensation also apply. Amending Tax Code Section
is provided by a Congressional Oversight Panel that
162(m), the tax deduction for compensation paid to
must review (i) the current state of financial markets and senior executive officers of these financial institutions
the regulatory systems and (ii) among other things, the
(whether public or privately held) is limited to $500,000
Secretary’s use of authority under TARP. The Oversight and applies to monies paid during and after employment
Panel must report to Congress every 30 days and
as well as performance-based pay. The Act also
submit a special report on the regulatory reform prior to amends Tax Code Section 280G to apply to these
January 20, 2009. As an additional governor on the
financial institution’s senior executive officers who
Secretary’s authority under TARP, and to provide
receive any severance payment triggered by an
transparency, the Act mandates the Secretary to publicly involuntary termination or termination due to bankruptcy,
electronically post a description, amounts, and pricing of liquidation or receivership.
October 3, 2008
Taxpayer/Consumer Protections
The Act contains several provisions that are intended to
minimize the costs of TARP, to provide a possible benefit
to the taxpayers and to provide certain protections. With
some exceptions, the Act requires any financial
institution participating in TARP to provide the Secretary
with a warrant for non-voting common stock or preferred
stock of such financial institution or with a senior debt
instrument from such financial institution. The warrants
and senior debt instruments are intended to allow the
taxpayers to reap some benefit as the financial
institutions that participate in TARP grow stronger.
However, this requirement may discourage certain
financial institutions from participating in the program
and may increase the price paid by TARP to purchase
troubled assets (i.e., sellers may seek compensation for
both the troubled assets and the value of the warrant or
debt instrument).
insurance for each insured account from $100,000 to
$250,000. This increase should not increase premiums
in the short term, but it is likely to create long term
higher insurance premiums to cover the losses from the
temporary expansion in coverage.
Additional provisions intended to protect taxpayers
include a mechanism to recoup taxpayer losses under
TARP and the authority given to the Securities and
Exchange Commission (the “SEC”) to suspend mark-tomarket accounting. Under the Act, if at the end of five
years there is any loss to the taxpayer as a result of
TARP, the President must submit a proposal that
recoups such loss from the financial industry to ensure
that TARP does not add to the national debt. The details
regarding the contours and implementation of the
required proposal are not set forth in the Act. Further, if
the SEC determines it is in the public interest or is
consistent with investor protection, the Act authorizes
the SEC to suspend mark-to-market accounting with
To further help consumers, the Act contains provisions
respect to any class or category of transaction. In its
intended to mitigate foreclosures and to increase deposit simplest terms, the mark-to-market rule forces a
insurance. The Act requires the Secretary to encourage company to value an asset at its market price. There
servicers of mortgages related to troubled assets
has been much debate about this accounting rule.
purchased under TARP to modify loans and to use
Some argue that the application of this rule is one of the
available programs to minimize foreclosures. Further,
root causes of the crisis forcing banks to write down
when appropriate, the Act requires the Secretary to
assets because the market price has fallen dramatically
consent to requests for loan modifications, including
or is not ascertainable. Others argue that the rule forces
term extensions, rate reductions and principle write
banks to objectively and honestly disclose the value of
downs. Practically, the Secretary’s ability to modify a
their assets. If the SEC suspends the mark-to-market
mortgage loan may be limited to cases where TARP
rule, the key issue will be what replaces the rule and
actually owns the applicable mortgage loan or where
how the applicable assets will be valued on financial
TARP owns all or a majority of the troubled assets
statements. However, by purchasing and setting a price
related to the applicable mortgage loan. Additionally, the for troubled assets, TARP may reduce the likelihood that
Act allows the FDIC and the National Credit Union
the SEC would have reason to suspend the mark-toAdministration to temporarily increase standard deposit
market rule for such troubled assets.
If you have any questions regarding the matters discussed in this client advisory, please feel free to contact
any of the lawyers listed below or your regular contact at Jenner & Block.
For more information, please contact the following Jenner & Block attorneys:
Bill Scogland, Partner
Tel: 312 923-2878
Email: [email protected]
Matt Renaud, Partner
Tel: 312 923-2958
Email: [email protected]
Peter M. Gaines, Partner
Tel: 312 923-2673
Email: [email protected]
Farhad K. Patel, Partner
Tel: 312 923-2629
Email: [email protected]
Elizabeth A. Davidson, Partner
Tel: 312 840-8693
Email: [email protected]
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