The Emergency Economic Stabilization Act A Brief Orientation By: Brian A. Nettleingham

You cannot look at a newspaper or magazine, turn on the television or tune in your radio these days without hearing about the $700 billion bailout contained in the recently enacted Emergency Economic Stabilization Act (the "Act"). While the Act spans hundreds of pages, the following is a brief overview of some of the Act's key provisions:

• The Act creates a new department within the Department of Treasury referred to as the "Office of Financial Stability" ("OFS"), which is currently led by Interim Secretary Neel Kashkari.
• The Act provides Treasury/OFS with several tools for addressing the current economic crisis, including:
  • Creation of the "Troubled Asset Relief Program" (the "TARP") under which Treasury will buy "mortgage based assets" from "financial institutions", the definitions of which are extremely broad. The definition of "mortgage based assets" includes mortgage backed securities (including Certified Debt Obligations) and whole mortgages. The Act also allows the Treasury to purchase "troubled assets" that are not "mortgage related". As a result, we may see the purchase of other sorts of debt instruments (such as car loans).
    
    
    • Although initial media reporting focused heavily on the purchase of mortgage based Troubled Assets, the purchase program will take time to implement. Initially, the Treasury must create a method for valuing and purchasing Troubled Assets, and valuation of these types of assets has been a fundamental problem for financial institutions. The Act requires that Treasury issue written guidelines regarding its plans for purchasing Troubled Assets within the earlier of: (a) two business days following the first purchase of troubled assets; or (b) forty-five days from enactment. The guidelines will describe the mechanisms for purchasing Troubled Assets, methods for pricing and valuing Troubled Assets, procedures for selecting asset managers and criteria for identifying troubled assets for purchase. The Act also provides, however, that establishment of these policies and procedures should not delay commencement of the TARP. Indeed, Treasury has already issued guidelines regarding the selection of Asset Managers, applications for which were due in early October.
    • 2. The Act authorizes Treasury to purchase $700 billion in Troubled Assets, $250 billion of which can be outstanding at any one time. That amount can increase to $350 billion upon the President’s certification that the additional $100 billion is needed. Upon the President’s further certification, the amount allowed to be outstanding can then be increased to the full $700 billion.
  • Creation of an Equity Purchase Program, under which the Treasury will purchase equity interests in financial institutions.
  • Creation of executive compensation and corporate governance requirements for participating financial institutions, including anti-Golden Parachute rules for such institutions and other limitations on executive bonuses.
  • Creation of a Troubled Assets Insurance Fund, under which the Treasury may guarantee the timely payment of principal and interest on certain Troubled Assets.
  • Strengthening of foreclosure mitigation measures, which are intended to encourage servicers of underlying mortgages to take advantage of federal programs to minimize avoidable foreclosures.
  • Commissioning of a study on mark-to-market accounting requirements, and allowing the SEC to suspend Statement Number 157 of the Financial Accounting Standards Board (regarding mark-to-market accounting), as a response to concern that mark-to-market accounting requirements forced financial institutions to reduce the value of their mortgage related capital assets, thereby contributing to the institutions' current under-capitalization.
  • Creation of various oversight mechanisms, including a Special Inspector General for TARP and a Congressional Oversight Panel.
  • Temporarily increasing FDIC deposit coverage for banks, and share coverage for credit unions, from $100,000 to $250,000, with coverage limits scheduled to revert back to pre-Act amounts after December 31, 2009.
  • Changes in the treatment of gains and losses from the sale (or exchange) of certain preferred stock of Freddie Mac and Fannie Mae, under which "applicable financial institutions" may treat these gains and losses as "ordinary gains or losses" for federal income tax purposes.