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In the last few hours the US House of Representatives approved the Emergency Economic Stabilization Act of
2008, amended after initially being rejected. The Act has now been passed by the Senate and the House and is
now law.
Its aim is to provide stability to, and prevent disruption of, the US economy and financial system while protecting
taxpayers and providing help to families and homeowners.
It gives the US Treasury Secretary (the “Secretary”) power to set up programmes and issue regulations and
guidelines to use up to $700 billion of taxpayers money to buy or guarantee distressed assets held by US financial
institutions.
The amendments to the original Bill did not change the nature of the powers given to the Secretary, but provided
sweeteners to help the Bill’s passage through Congress. These include increasing the amount of savings the state
will guarantee, from $100,000 to $250,000 and tax breaks to help families and small businesses, to promote
renewable energy, fuel diversity and energy conservation and to help victims of recent natural disasters in the US.
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$250 billion will be available on enactment.
A further $100 billion will be available if the President certifies the need to Congress.
The balance of $350 billion will be available if the President gives a written report to Congress detailing the
Secretary’s plan to purchase further assets unless Congress passes a joint resolution disapproving the plan
within 15 days of receiving the report.
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Buying troubled assets: The Secretary is given authority to establish a programme for purchasing and managing
“troubled assets” from “financial institutions”.
“Troubled assets” are:
residential or commercial mortgages (and any securities, obligations, or other instruments based on those
mortgages) originated or issued on or before 14 March 2008, the purchase of which the Secretary determines
promotes financial market stability; and
• any other financial instrument the Secretary, after consultation with the Chairman of the Board of Governors of
the Federal Reserve System, determines the purchase of which is necessary to promote financial market
stability.
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“Financial institutions” are: banks, savings associations, credit unions, security brokers or dealers, and insurance
companies established and regulated under US law or under the laws of any State, territory or possession of the
US and having significant operations in the US. It excludes any central bank of, or institution owned by, a foreign
government.
*berwin leighton paisner
Emergency Economic Stabilization Act of 2008
The purchase price: the Secretary must purchase troubled assets at the lowest price being consistent with the Act
and use appropriate market mechanisms (such as auctions) to maximise efficient use of taxpayer resources.
Receipts: Revenues of, and proceeds from sales must be paid into the general fund of the Treasury to reduce the
public debt.
The insurance alternative: The Secretary must also establish a programme to guarantee troubled assets. This
effectively acts as an insurance contract that financial institutions can buy as an alternative to selling assets to the
Secretary. The insurance premium will be based on the relevant credit risk.
Timescales:
• The Secretary must publish programme guidelines within 45 days from the date of the Act.
• The Secretary’s authority to purchase or guarantee troubled assets ends on 31 December 2009. This may be
extended, by certification to Congress, to up to 2 years from the date of enactment of the Act. The
certification must justify why the extension is necessary to assist families and stabilise financial markets.
Private sector involvement: The Secretary must encourage the private sector to participate in purchasing troubled
assets, and to invest in financial institutions. He may also award contracts to private sector asset and property
managers, expert consultants and other service providers.
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Curbs on executive compensation and corporate governance: Financial institutions must meet appropriate
standards to limit executive compensation and corporate governance where the Secretary (a) holds troubled assets
purchased but no bidding process or market prices are available and (b) receives a meaningful equity or debt
position in the relevant institution as a result. Those standards include:
excluding incentives for executive officers to take unnecessary and excessive risks that threaten the value of
the financial institution;
• recovering bonuses or incentive compensation paid to senior executive officers based on criteria that are later
proven to be inaccurate; and
• prohibiting golden parachute payments to senior executive officers. Where the Secretary makes auction
purchases of troubled assets exceeding $300 million from a financial institution, that financial institution may
not enter new employment contracts with senior executive officers and non-public company counterparts that
provide golden parachutes.
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Recoupment: After 5 years the President shall submit a proposal to recoup from the financial industry an amount
equal to any shortfall under the programme.
Protections for homeowners: The Secretary must implement a plan to maximise assistance for homeowners and
avoid repossessions. This will include co-ordinating with the Federal Reserve, Federal Deposit Insurance
Corporation and other Government agencies holding troubled assets to identify opportunities to acquire classes of
Modifications to residential mortgage loans may include reducing interest rates and loan principle. Modifications
to mortgages on residential rental properties shall ensure (a) the continuation of Governmental and local rental
subsidies and protections and (b) the maintenance of safe and decent conditions at the property.
Minimising impact on taxpayers: The Secretary must minimise any potential long-term negative impact on
taxpayers including before purchasing a troubled asset, requiring from the financial institution selling:
for listed financial institutions, a warrant giving the Secretary the right to receive non-voting stock in that
institution (so as to ensure taxpayers benefit from equity appreciation) - the warrant shall convert to senior
debt if the institution ceases to be listed; or
• for others, a senior debt instrument from it in an amount determined by the Secretary (to give a reasonable
interest rate return to taxpayers).
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Judicial review: The Act provides standards for judicial review to ensure the Secretary’s actions are not arbitrary,
capricious, an abuse or discretion or not in accordance with law.
Misuse and misrepresentation: There is a prohibition on false advertising and misuse of FDIC names and on
misrepresenting that assets are guaranteed under the Act.
Market transparency: The Secretary must electronically publish pricing details of troubled asset transactions within
2 business days of the transaction. He must also make recommendations for additional disclosure requirements if
a financial institution’s public disclosure requirements are inadequate.
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Two new appointments are made: (a) the ‘Office of the Special Inspector General’ who will conduct, supervise and
coordinate audits and investigations of the purchase, management, guaranteeing and sale of assets by the
Secretary; and (b) the ‘Financial Oversight Board’ which will review the exercise of the Secretary’s authority under
the programme and make recommendations regarding use of that authority. The Comptroller General of the
United States will oversee the activities and performance of the programme.
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The Comptroller General of the United States must report, by 1 June 2009, on the extent to which leveraging and
sudden deleveraging of financial institutions was a factor behind the financial crisis.
The Act establishes a ‘Congressional Oversight Panel’ to: (a) review the state of the financial markets and the
regulatory system and report on its proposals for regulatory reform by 20 January 2009; and (b) report on the
programme to Congress every 30 days.
*berwin leighton paisner
troubled assets that will improve the Secretary’s ability to improve loan modification and restructuring processes
and allow tenants to remain in their homes.
The Act authorises the SEC to suspend the application of mark-to-market accounting for any issuer or class of
transaction if it decides it is in the public interest to do so. It must conduct a study on mark-to-market accounting
standards and report to Congress within 90 days of enactment of the Act with administrative and legislative
recommendations.
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Simon Allan
T: +44 (0)20 7760 4217
M: +44 (0)7767 790904
[email protected]
Mark Waghorn
T: +44 (0)20 7760 4120
M: +44 (0)7879 885353
[email protected]
Tamara Box
T: +44 (0)20 7760 4058
M: +44 (0)7785 922812
[email protected]
Nathan Willmot
T: +44 (0)20 7760 4367
M: 44 (0)7720 561220
[email protected]
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