Legal Update
Dec 18, 2008
SERT ALERT
Strategic Economic Response Team (SERT)
Seyfarth Shaw's Strategic Economic Response Team (SERT) was formed to assist clients in responding to regulatory and business challenges posed by the current economic conditions. The multi-disciplinary team consists of attorneys throughout the country who bring a wide range of practice proficiencies and insights to help businesses weather the rapidly changing economic climate.
SERT is comprised of attorneys who specialize in securities law, structured finance, secured lending, mergers, real estate, asset sales, tax, private equity, litigation, bankruptcy and workouts, restructuring and executive compensation. The attorneys share their knowledge across practice areas to devise solutions to clients’ intricate challenges requiring a multi-disciplinary approach. Together, SERT attorneys work to mitigate clients’ exposure to risks from market economic conditions, including the subprime mortgage crisis, and also to assist clients in pursuing opportunities that may arise from the Emergency Economic Stabilization Act of 2008 and related government actions.
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Recent Developments Related to the Emergency Economic Stabilization Act of 2008
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Seyfarth Shaw Announces Formation of Strategic Economic Response Team
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Executive Summary of the Emergency Economic Stabilization Act of 2008
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Detailed Summary of the Emergency Economic Stabilization Act of 2008
News Items
12/18/2008
Kashkari Remarks on Financial Markets and TARP Update
"Throughout the crisis, we have consistently acted with the following three critical objectives: one, to stabilize financial markets and reduce systemic risk; two, to support the housing market by avoiding preventable foreclosures and supporting mortgage finance; and three, to protect taxpayers."
Kashkari Testimony Before the Senate Appropriations Subcommittee on Financial Services and General Government and Before the U.S. House of Representatives Financial Services Committee
An update on the Treasury Department's actions to work through the financial crisis and restore the flow of credit to the economy.
Sobel Remarks on the Global Financial Crisis and the IMF’s Response
The IMF is facing a critical juncture in implementing its agenda for institutional reform, and there are changes underway in the IMF that will require Congressional support.
SIFMA’s Economic Advisory Roundtable Unveils Predictions for 2009
The general consensus is that the U.S. economy will face its longest postwar recession, of approximately 18 months, before we see subdued growth in the second half of 2009.
11/25/08
Treasury Provides TARP Funds to Fed's Consumer ABS Lending Facility
Treasury announced today (11/25/08) that it will allocate $20 billion to back a lending facility for the consumer asset backed securities (ABS) market established by the Federal Reserve Bank of New York. Under the new facility, the Federal Reserve Bank of New York will lend up to $200 billion on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year. The Federal Reserve will lend an amount equal to the market value of the ABS less a "haircut" and will be secured at all times by the ABS. Treasury will provide $20 billion of credit protection to the Federal Reserve in connection with the facility, using its authorities in the EESA.
Fed to Purchase the Direct Obligations of Housing Related GSEs and Mortgage Backed Securities
The Federal Reserve announced today (11/25/08) that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.
FDIC Releases Loan Modification Program Guide ("Mod in a Box")
On 11/20/08, FDIC released the "Mod in a Box" program tools for the implementation of the systematic and streamlined loan modification program. This guide provides an overview of the FDIC's program to assist bankers, servicers, and investors in this process. It outlines FDIC program terms at IndyMac Federal Bank, offers insight into the specific portfolio characteristics that drive modification modeling at that bank, and provides a framework for developing and implementing a similar program at other institutions.
Citi Faces Pressure to Slim Down
Citigroup executives acknowledged Monday (11/24/08) that the government expects the company to continue to reduce its appetite for risk, and to seriously weigh more drastic actions, including possibly breaking up the company. The company faces losses on loans that aren't covered under the government's loss-sharing agreement, which amounts to insurance on a $306 billion pool of assets. Under the plan, Citigroup will shoulder the first $29 billion in losses on that pool. After that, three government agencies will absorb 90% of any remaining losses, which amounts to $249 billion. Absent from the arrangement are Citigroup's credit-card business and its overseas lending operations. In exchange for covering hundreds of billions of dollars in potential losses, Citigroup is issuing the government a total of $27 billion in preferred shares, in which the government will receive regular dividends. The government now holds a 7.8% stake in Citigroup, which entitles it to $3.4 billion a year in dividends. Wall Street Journal 11/25/08
11/11/2008
Treasury to Invest in AIG Restructuring Under the Emergency Economic Stabilization Act
The Treasury Department announced that it will purchase $40 billion in senior preferred stock from the American International Group (AIG) as part of a comprehensive plan to restructure federal assistance to the systemically important company. Together with steps taken by the Federal Reserve, this restructuring will improve the ability of the firm to execute its asset disposition plan in an orderly manner. AIG will use the equity to pay down $40 billion of the Federal Reserve's secured lending facility.
Neel Kashkari Remarks on GSE, HOPE NOW Streamlined Loan Modification Program
Treasury Assistant Secretary Neel Kashkari joined officials from the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development and HOPE NOW today to announce a new streamlined modification program. HOPE NOW is an alliance between HUD approved counseling agents, servicers, investors and other mortgage market participants that provides free foreclosure prevention assistance.
Neel Kashkari Remarks at the SIFMA Summit on the TARP
In Corporate Debt, Silence Isn't Golden
Since August there have been just seven U.S. junk-bond deals, according to Dealogic, and 83 deals for all of 2008. Not only is that total a fraction of the number of deals done last year, it is just one-third the number done in 2002, the last time that market struggled. Even the market for the most highly rated corporate bonds remains fickle. The pace of U.S. investment-grade deals has slumped by about 25% during 2008. So far, most companies have managed to stay afloat by tapping corporate bank lines or sharply paring costs. But that won't last. Nearly $800 billion of bonds comes due between now and the end of 2009, according to S&P. Unless a sudden turnaround develops, it will be either impossible -- or dearly expensive -- to replace that financing. (Wall Street Journal, November 11, 2008)
11/06/2008
Treasury Issues Additional Information on Capital Purchase Program
The Treasury Department issued additional documents for publicly traded financial institutions applying for the capital purchase program authorized by the EESA. Documents include: Securities Purchase Agreement; Form of Letter Agreement; Certificate of Designations; Form of Warrant; Term Sheet; SEC, FASB Letter on Warrant Accounting. Once the investment agreements are complete and the investment is authorized, within two business days Treasury will publicly disclose the name and capital purchase amount for the financial institution. The information will be posted at http://www.treasury.gov/initiatives/eesa/ and updated daily at 4:30 p.m. (EDT) as needed.
Participants in Government Investment Plan
U.S. Explores Its Options With TARP
"Treasury is committed to deploying the [Troubled Asset Relief Program] aggressively and is actively considering additional programs to strengthen financial institutions, restore the flow of lending, and address the many challenges to our financial markets posed by the ongoing housing correction," the Treasury said in its report, delivered to Congress Tuesday. The Treasury said it hasn't made any decisions about new rescue programs and offered few details about what areas policy makers are exploring. The report addresses the issue of trying to slow the record levels of foreclosures. "In particular, Treasury will continue efforts to ensure loan modifications are sustainable," said the report. There is growing pressure for Treasury to attach binding requirements to any capital injections, to prevent firms from hoarding the government funds or using them to pay for acquisitions. Treasury is considering broadening the range of financial institutions in which it could purchase stakes to include bond insurance firms and specialty finance firms, said people familiar with the matter. Meanwhile, the Treasury has clarified life insurers are eligible to participate in its capital-infusion program, provided they are or apply to become a federally regulated bank or thrift. A significant number of insurance companies in the U.S. would qualify as they operate banks or thrifts. (Wall Street Journal 11/6/2008)
U.S. Weighs Purchasing Stakes in More Firms
The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers, after tentative signs of the program's success, according to people familiar with the matter. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric Co.'s GE Capital unit, CIT Group Inc. and others, these people said. (Wall Street Journal 11/4/2008)
Rescue Cash Lures Thousands of Banks
Treasury and banking regulators say as many as 1,800 publicly held institutions could apply for government investments in coming weeks, out of concern that failing to do so could make them losers in a banking sector reshaped by the Treasury's $700 billion rescue plan. Depending upon conditions still being crafted by Treasury, thousands more private banks could apply for government capital as well, a Treasury spokeswoman said Sunday. Institutions across the U.S. worry that if they don't try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments. (Wall Street Journal 11/3/2008)
10/31/2008
Treasury, IRS Issue Guidance on Indirect Ownership of Fannie and Freddie Preferred Stock
The Treasury Department and the Internal Revenue Service today issued Revenue Procedure 2008-64 (Rev. Proc. 2008-64), which provides that certain gains and losses from indirect ownership of Fannie Mae and Freddie Mac preferred stock can be treated as ordinary income and loss.
Acting Under Secretary for Domestic Finance Remarks at the SIFMA Annual Meeting
An update on the state of the capital markets and the global economy, and on Treasury's efforts to implement the Emergency Economic Stabilization Act (EESA).
FDIC Issues Interim Rule to Implement the Temporary Liquidity Guarantee Program
On October 23rd FDIC approved an interim rule to govern its newly created Temporary Liquidity Guarantee Program (TLGP).
Interim Assistant Secretary for Financial Stability Neel Kashkari Testimony before the Senate Committee on Banking, Housing and Urban Affairs
Kashkari outlines the plan for EESA implementation and touches on recruitment and procurement
Lawmakers Mull New Terms for Rescue
U.S. lawmakers are considering steps to alter the terms of the Treasury Department's financial-rescue plan, including forcing banks to lend funds they've received from the government and imposing new limits on executive compensation at firms that are part of the program. Treasury in recent days has put pressure on banks to fulfill the program's goals, even as it has argued that banks will start lending again because that's how they make money. Officials have balked at adding criteria, worried that such a move would reduce participation in the program. Currently, there are few stipulations on how banks use the funds. Lawmakers are stepping up pressure on Treasury and the Bush administration through a series of hearings expected to occur in the coming weeks. House Financial Services Chairman Barney Frank (D., Mass.), who has said he is open to imposing limitations on the program, has already scheduled a Nov. 18 hearing on efforts by the Treasury and Federal Reserve to address the financial crisis. (Wall Street Journal 10/31/2008)
Banks Promise to Use Rescue Funds for New Loans
As political pressure mounts, at least a few banks are promising to use capital infusions from the federal government's bailout program to swiftly make new loans. But it might not be enough to offset the lending shortfall that is threatening the economy. Even as lawmakers pressure bank executives to make more loans, some executives say it is too soon for that to happen -- in part because most institutions haven't pocketed any of government money yet. Other banks remain noncommittal about how much of their federal help will go toward new loans. Citigroup Inc. executives have said they plan to use $25 billion of taxpayer funds to take advantage of opportunities such as buying other banks, but haven't described plans for new loans. Bankers say that stance is consistent with directives from the Treasury Department, which is telling them not to rush to use the capital or to make loans that aren't profitable or carefully vetted. But that may complicate TARP's objective of jump-starting lending. At the 24 banks that expect to receive federal funding -- ranging from the largest, which got infusions this week, to big regional players, to smaller community banks -- loan portfolios generally shrank or posted sluggish growth in the past six months. (Wall Street Journal 10/31/2008)
ICE to Buy Clearing Corp. as Big Banks Support Plan
The world's largest investment banks are preparing to commit more capital to support the $55 trillion credit-default-swap market ahead of tighter regulation. Thursday (10/30/08), nine large credit-default-swap dealers expressed support for a central clearinghouse being developed by derivatives-exchange-operator IntercontinentalExchange Inc. ICE, of Atlanta, said it is acquiring Clearing Corp., the Chicago company that dealers had earlier picked to set up a clearinghouse to guarantee their credit-default swaps. Dealers supporting the combination include Deutsche Bank AG, Credit Suisse Group, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Terms of the acquisition weren't disclosed. ICE expects the operation to be up and running by the end of the year. Rival futures-exchange-operator CME Group Inc. is preparing to launch a swaps clearinghouse and trading platform that could begin operation as soon as next week. CME Executive Chairman Terry Duffy said ICE's acquisition of Clearing Corp. doesn't shut out the CME's initiative. (Wall Street Journal 10/31/2008)
10/21/2008
Additional Guidance on Capital Purchase Program
Treasury, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation today issued application guidelines and other documents for the Capital Purchase Program announced last week.
U.S. Rescue Fund Is Likely to Foster Bank Takeovers
The federal government's $250 billion plan to bolster U.S. financial institutions is aimed at persuading healthy banks to lend again, but it's likely to foster further consolidation in the industry, with some banks already saying they intend to use the funds to help make acquisitions. If the banks use the government funds to pay for acquisitions, it could prove controversial. Taxpayers essentially would be footing the bill as strong banks gobble up their weaker peers. Such acquisitions probably would provide less of a boost to the economy than would new bank lending. "If a healthy institution is making an acquisition, we would look very favorably on that," a senior government official said. The government views consolidation as a good thing if it helps weaker banks survive instead of failing. Wall Street Journal 10/22/2008 Edition
- The effects of mark-to-market accounting on financial reporting by financial institutions.
- Potential market behavior effects from mark-to-market accounting.
- The usefulness of mark-to-market accounting to investors and regulators.
- Aspects of the current accounting standards that can be improved.
- Treasury is announcing a voluntary capital purchase program
- FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as
deposits in non-interest bearing deposit transaction accounts - FED announces Commercial Paper Funding Facility (CPFF) program
- Press Release (Federal Reserve)
- Press Release (Treasury)
- Note: More detail on above programs provided below
- Press Release (Paulson Remarks)
- TARP Capital Purchase Program Description
- TARP Capital Purchase Program Public Term Sheet
Fed Announces the Creation of the Money Market Investor Funding Facility (MMIFF)
Intended to support a private-sector initiative designed to provide liquidity to U.S. money market investors. The Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.
Treasury Hires Accounting Firms Under the Emergency Economic Stabilization Act
The U.S. Treasury Department today announced that PricewaterhouseCoopers LLP and Ernst & Young will assist the Department in the implementation of the Troubled Asset Relief Program authorized under the Emergency Economic Stabilization Act.
10/17/2008
Decision on Regulatory Capital Impact of EESA on Fannie Mae and Freddie Mac Preferred Stock
The federal banking and thrift regulatory agencies announced today that they will allow banks, bank holding companies, and thrifts (collectively, "banking organizations") to recognize the effect of the tax change enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (EESA) in their third quarter 2008 regulatory capital calculations
Interim Final Rule to Allow Bank Holding Companies to Senior Perpetual Preferred Stock Issue to Treasury in Tier 1 Capital
The Federal Reserve Board on Thursday announced the adoption of an interim final rule that will allow bank holding companies to include in their Tier 1 capital without restriction the senior perpetual preferred stock issued to the Treasury Department under the capital purchase program announced by the Treasury on October 14, 2008.
Treasury Posts Tax Guidance Related to EESA
Treasury Posts Executive Compensation Guidance Related to EESA
SEC Announces October 29 Roundtable on Mark-to-Market Accounting
The panel discussions will focus on:
'DIP' Loans Are Scarce, Complicating Bankruptcies
Credit has gotten so tight in recent weeks that companies contemplating a bankruptcy filing can't find the cash needed to get through the process.
10/14/2008
Joint Statement by Treasury, Federal Reserve, and FDIC to Strengthen Public Confidence in U.S. Financial Institutions
Treasury: Plan to Purchase Equity Stakes in Banks and Thrifts (TARP Capital Purchase Program)
From the $700 billion financial rescue package, Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock. Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program. In addition, taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions...Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury, and raise additional private capital, so that they can make more loans to businesses and consumers across the nation... Nine large financial institutions have already agreed to participate in this program. They have agreed to sell preferred shares to the US government, on the same terms that will be available to a broad array of small and medium-sized banks and thrifts across the nation. These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.
FDIC: Program to Guarantee Bank Debt and Fully Insure Non-Interest Bearing Deposit Transaction Accounts (The Temporary Liquidity Guarantee Program)
Under the plan, certain newly issued senior unsecured debt issued on or before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. This includes promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. Coverage would be limited to June 30, 2012, even if the maturity exceeds that date. In addition, any participating depository institution will be able to provide full deposit insurance coverage for non-interest bearing deposit transaction accounts, regardless of dollar amount. These are mainly payment-processing accounts, such as payroll accounts used by businesses.
Federal Reserve: Details Regarding the Commercial Paper Funding Facility (CPFF)
The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households.
Treasury: Executive Compensation Rules Under the Emergency Economic Stabilization Act
The U.S. Treasury Department today announced the development of three programs under the EESA and corresponding executive compensation and corporate governance standards: Troubled Asset Auction Program, Capital Purchase Program, Programs for Systemically Significant Failing Institutions.Treasury Hires Custodian - BNY Mellon - Under the EESA
Treasury hired the New York City-based firm Monday and work began immediately to help the Department with custodial, accounting, auction management and other infrastructure services needed to administer the complex portfolio of troubled assets the Department will purchase.
Treasury Requests Public Input on Establishment of Guaranty P
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