Update from Capitol Hill – 9/23/08

In our ongoing effort to provide our clients and friends of the firm with updated information and insight on developments related to legislation to support the financial markets, the Foley & Lardner LLP Financial Crisis Response Team is pleased to provide the following summary of today’s events in Washington. We have also set forth below a side-by-side comparison of the Senate Banking Committee Chairman Chris Dodd’s (D. CT) and House Financial Services Committee Chairman Barney Frank’s (D. MA) bills to bailout the financial markets. On Wednesday Frank plans to unveil a revised version of his legislation that he says incorporates some changes agreed to by the Bush Administration.

Most members of the House and Senate on both sides of the aisle continue to agree that a version of the Administration bailout proposal will ultimately pass, assuming it contains an oversight board, limitation on executive compensation of companies that participate in the program and government participation in any profits that accrue to participants. Although during the Senate Banking Committee hearing this morning Treasury Secretary Henry Paulson closed the door on a Democratic proposal to change bankruptcy law to allow judges to reduce the principal of mortgages to current market value, he appeared to leave the door open to expanding current anti-foreclosure programs to permit at-risk borrowers to refinance into fixed rate mortgages guaranteed by the Federal Housing Administration.

Administration officials spent all day Tuesday trying to shore up support for the bailout among increasingly wavering Republicans. Vice President Cheney and White House Chief of Staff Josh Bolton held several closed-door sessions with House and Senate Republicans, including members of the conservative Republican Study Committee (RSC), which offered its own “free market proposal.” The RSC’s proposal, which rejects direct government intervention in the markets, would suspend capital gains taxes for two years and privatize Fannie Mae and Freddie Mac, as well as suspend “mark-to-market” regulatory rules that require banks to set assets at market prices. Reportedly Cheney and Bolton told the RSC that its proposal is not a viable option and Democrats immediately dismissed the RSC’s ideas.

Given the lack of unity in the Republican ranks, the Congressional Democratic Leadership believes it has more leverage over the Bush Administration to obtain concessions on the bailout package, as well as other legislation such as the Continuing Resolution (CR) to fund the government after the fiscal year begins on October 1. For example, the CR that is currently pending in the House contains a $25 billion loan guarantee for the U.S. auto industry to start building hybrid and other energy efficient vehicles. On the other hand, many Democrats disagree with their leadership feeling that the longer the bailout legislation is pending and the longer the Democrats work on it, the greater their ownership of the issue will be.

Side-by-Side of Senate and House Financial Bail-Out Bills
Created September 23, 2008 (House Bill as of September 22, 2008)

Authority to Purchase Troubled Assets

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Authority: Secretary authorized to establish program to purchase and make fund commitments to purchase assets from financial institutions – on terms developed by Secretary. Establishment of Treasury Office: Est. “Office of Financial Stability” w/in Office of Dom. Fin. headed by Asst. Secretary of Treas. Necessary Actions – Secretary may: Hire. Enter into contracts. Designate entities as “financial agents” of Federal Government. Establish vehicles to purchase troubled assets and issue obligations. Issue appropriate regulations. Limitation of Secretary’s authority: Secretary may not purchase or commit to purchase without contingent shares equal in value to purchase price of assets. Contingent shares may include parents’, subs’, and affiliates’ shares. If not publicly traded, sr. contingent debt instrument in lieu of shares. If multiple classes of shares, Secretary receives those with highest trading price. Instruments shall include anti-dilution provisions.

Authority: Same except “financial institution” excludes any central bank of or institution owned by a foreign government. Secretary shall consult with Board of Governors of Federal Reserve, Federal Reserve Bank of NY; FDIC; Secretary of HUD. Establishment of Treasury Office: House bill silent on this point. Necessary Actions: Same as Senate. Limitations of Secretary’s authority: House bill silent on this point.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Considerations

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Senate bill silent on this point.	When acting pursuant to Act, Secretary shall take into account providing stability to the financial markets, protecting taxpayers, whether strength of financial institution indicates transaction is the best use of funds under this Act.

 

 

 

 

 

監督

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Establishment of Emergency Oversight Board: Responsible for reviewing exercise of authority under the Act, making recommendations to the Secretary.  Membership is Chairman of the Fed, Chairman of Board of Directors of FDIC, Chair of SEC, non-governmental experts appointed by the Majority & Minority.  Meet monthly.  Board may establish a Credit Review Committee. Monthly reports by Secretary to Senate and House committees with detailed financial statement including agreements, transactions, assets purchased, costs and liabilities, operating expenses, and valuation method of transactions. Weekly public reports of assets held and total purchased and sold that week

House bill silent on this point. Quarterly reports to Congress about authority exercised under Act. Public reports within 48 hours: Secretary shall make available to the public in electronic form within 48 hours amounts and pricing of assets acquired, traded, or disposed of.

 

 

 

 

 

 

 

 

 

 

 

 

Rights; Management; Sale of Troubled Assets

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Secretary has authority to manage troubled assets. FDIC manages all residential mortgages and mortgage-backed securities purchased by Secretary. (cont’d) FDIC shall use systematic approach for preventing foreclosures. FDIC shall report to Congress monthly on numbers and types of loan modifications (which increases affordability of loans) and foreclosures. FDIC may enter into financial transactions for its portfolio. Not less than 20% of profits deposited into Housing Trust Fund & Capital Magnet Fund of Federal Housing Enterprises Regulatory Reform Act.; remainder to Treasury for reduction of public debt.

Secretary has same authority. House bill silent on FDIC’s role with respect to residential mortgages and mortgage-backed securities. Revenues and proceeds into general fund of Treasury.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum Amount of Authorized Purchases

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$700B	同じ

 

 

資金調達

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Funded from proceeds from disposal of assets. Funds deemed appropriated at the time they are spent.	同じ

 

 

 

Limits on Review

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Troubled asset purchases will not be set aside unless arbitrary and capricious. Residential mortgage loans subject to all ordinary claims and defenses.	No injunctive or equitable relief from Secretary’s actions under the Act. Homeowner’s rights not curtailed by any Secretary action.

 

 

 

 

 

Assistant to Homeowners and Localities/Foreclosure Mitigation Efforts

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Freddie Mac, Fannie Mae, FDIC, and Federal Reserve develop programs within 60 days to prevent foreclosures and promote homeownership through loan modifications and use of HOPE for Homeowners Program.  Report to Congress within 60 days and monthly thereafter. Agencies sell properties they own through foreclosure to States & Localities to stabilize communities; agencies encourage owners of properties in which agencies hold an interest to do the same. Amendments to Chapter 11.

Silent on development of foreclosure prevention programs. Secretary must encourage owners of properties in which government holds an interest to modify loans (interest rates, principal) Amendments to Chapter 11.

 

 

 

 

 

 

 

 

 

役員報酬

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To be eligible to sell assets through this Act, entities must accede to limits on incentives to take risks that the Secretary deems inappropriate or excessive, other limitations deemed appropriate.	Same. Additional criteria where Secretary makes direct purchases of assets and effective for duration of equity position: some shareholders rights provisions, such as non-binding votes on executive compensation.

 

 

 

 

 

Insurance Parity

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Secretary may establish insurance or guaranty program for money market mutual funds for up to one year; the amount cannot exceed what is guaranteed by FDIC; money-market funds shall be charged premiums for insurance or guaranty.	同じ

 

 

 

 

 

Termination of Authority

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Authority terminates Dec. 31, 2009.  May be extended to no later than 2 years after enactment. Secretary may hold assets and assert rights after termination.	Authority terminates two years after enactment.  Secretary may hold assets and assert rights after termination.

 

 

 

 

 

Increase in Statutory Limit on Public Debt

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$11,315 (up from $10,615.)	同じ

 

 

Annual Financial Reports and Audits

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Authority terminates Dec. 31, 2009.  Comptroller General shall have authority to audit, to hire outside contractors, and to access any records.  Secretary of Treasury pays for oversight. Office shall implement internal controls.

Comptroller General shall commence ongoing oversight of whether goals of Act have been met, characteristics of transactions and assets, efficiency and compliance, conflicts of interest. Comptroller General shall conduct annual audit. GAO shall have a permanent presence in office, have access to records and personnel. GAO shall report to House Financial Services Committee, Senate Banking Committee, and IG of Treasury once every 60 days. Office shall implement internal controls.

 

 

 

 

 

 

 

 

 

 

利益相反

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Secretary shall issue regulations within 120 days concerning conflicts of interest relating to contactors, assets managers, purchase & management of troubled assets, post-employment restrictions.	Secretary shall solicit proposals from a broad range of qualified firms and individuals; shall manage conflicts of interest through disclosure and restricting info sharing where contractor serves federal government and other clients with whom conflicts exist.

 

 

 

 

 

Special IG for Troubled Asset Program

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Creation of Office of Special IG to conduct, supervise and coordinate audits and investigations of the purchase, management, and sale of assets by the Secretary.  Quarterly reports should include information on categories of troubled assets purchased, reasons for purchase, list of financial institutions they were purchased from, bios on persons hired to manage assets.	House bill silent on this point.

 

 

 

 

 

 

Coordination with Foreign Authorities and Central Banks

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Senate bill silent on this point.	Secretary shall coordinate with foreign financial authorities to work toward establishment of similar programs to maximize impact of purchases under Act.

 

 

 

Congressional Oversight Panel

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Senate bill silent on this point.

Establish Congressional Oversight Panel: responsibilities are to review and report to Congress on Secretary’s use of authority under the Act, on the impact of purchases on markets and financial institutions, on the extent to which information made public contributed to market transparency, and on the effectiveness of foreclosure mitigation efforts. Membership: 4 year terms, appointed by House and Senate leadership.  7-person committee with a chairperson.  Meet at the behest of the chair.  Will have a staff director, a staff, and will hold hearings.  Annual report to Congress. Congressional Oversight Panel terminated after disposition of last troubled asset. Funding half from House, half from Senate.