Treasury Looks to Second Half of TARP
By: Daniel F. C. Crowley, Karishma Shah Page
Treasury has committed the first $350 billion tranche of the $700 billion provided by Congress for the Troubled Asset Relief Program (TARP), which was created by the Emergency Economic Stabilization Act of 2008 (EESA). The remaining $350 billion is subject to Congressional disapproval by joint resolution enacted within 15 calendar days after Treasury certifies its intention to use those funds. Outgoing Treasury Secretary Paulson has seemingly been reluctant to utilize this second tranche of TARP funds because of considerable Legislative Branch resistance to the Capital Purchase Program (CPP), as described below. However, after auto industry bailout negotiations stalled in the Senate, it now appears that the White House and Treasury may be assessing whether to commit additional TARP funds for a short-term bridge loan in order to prevent a bankruptcy filing by a major domestic automaker before President-elect Obama is inaugurated. There is speculation that Congress may choose not to exercise its disapproval authority as part of a deal to help the auto industry.
Most of the first tranche of TARP funds was used to purchase preferred stock in banking institutions, including as part of the massive Citigroup bailout. As the program has matured, Treasury and the Federal Reserve have become increasingly inventive in addressing the continuing credit market crisis. For example, on November 25, Treasury allocated $20 billion in TARP funds to back a $200 billion Term Asset-Backed Securities Loan Facility (TALF) established by the Federal Reserve to increase liquidity in the consumer credit market. The underlying credit exposures of eligible TALF securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.
At a hearing on December 10, House Financial Services Committee Chairman Barney Frank (D-MA) stated that Treasury should not request use of the second tranche of TARP funds without addressing foreclosure mitigation and oversight issues. Chairman Frank’s statement reflects mounting Legislative Branch criticisms of Treasury’s implementation of TARP. The Government Accountability Office released a report on December 2 concluding that Treasury has yet to address critical oversight and compliance issues. The Congressional Oversight Panel (COP), a TARP oversight panel created by EESA, also released its first report on December 10, questioning Treasury’s strategy and oversight. COP members include Chair Elizabeth Warren (Professor, Harvard Law School), Congressman Jeb Hensarling (R-TX), Richard Neiman (Superintendent of Banks, New York Banking Department), and Damon Silvers (Associate Counsel, AFL-CIO). Congress has held a series of hearings on these matters, as well as Treasury’s decision to abandon efforts to purchase or guarantee troubled assets and instead focus on equity injections into banking institutions (see the previous issue of the Global Financial Markets Newsletter).
Congress is considering measures to strengthen oversight of TARP. On December 10, the Senate passed S. 3731, the Special Inspector General for the Troubled Asset Relief Program Act of 2008, by unanimous consent. The bill clarifies that the Special Inspector General (SIG) has the authority to investigate all actions taken under EESA (including the CPP); provides the SIG with temporary fast-track hiring authority and funds to set up his office; and requires Treasury to take actions to address deficiencies identified by the SIG. The Senate confirmed Neil Barofsky as the SIG on December 8.
Also on December 10, the House adopted an amendment to the auto industry bailout bill, H.R. 7321, to address the criticism that TARP participants are not using funds to provide loans and increase credit market liquidity. Adopted 403-0, the amendment would require TARP participants to report their lending activities quarterly. Both the H.R. 7321 amendment and S. 3731, however, have yet to be considered by the other chamber. With the end of the session fast approaching, it is not clear whether there will be further action on either measure before Congress adjourns for the year. Similar legislation may be reintroduced next year. Other possible provisions could include directing Treasury to require participating institutions to use bailout funds to restart lending; or limitations on the use of funds for acquisitions, dividends, or executive compensation.
Chairman Frank has also indicated interest in pursuing legislation that strengthens foreclosure mitigation efforts. Such legislation could take several forms. First, Congress could mandate that Treasury purchase or guarantee troubled assets as it initially contemplated in creating TARP. Second, Congress could direct Treasury to allocate a portion of the bailout funds to a loan modification and guarantee program, such as the $24 billion program recently proposed by the FDIC to guarantee 2.2 million modified loans. The FDIC plan would reduce mortgage payments to 31% of income, based on reductions in the applicable interest rate, extension of the loan term, and forbearance of principal. In exchange, servicers would get $1,000 for each modification and the government would share up to 50% of the re-default loss. Third, Congress could expand the Hope for Homeowners program (P.L. 110-289), under which the original lender takes a write-down on the loan and the borrower then refinances to a government-backed loan. Fourth, Congress could provide mortgage-backed security servicers with the legal authority to modify loans and indemnification from investor lawsuits.
Finally, as anticipated in previous newsletters, discussions continue on broader financial service industry reforms. Notably, COP Chair Elizabeth Warren recently called for the creation of a Financial Product Safety Commission, akin to the Consumer Product Safety Commission, that would regulate financial services products. On November 14, the G-20 ministers agreed to begin work on a coordinated response to the financial crisis. At present, the ministers are developing specific recommendations for the next summit, which is scheduled for April 2009. The bipartisan professionals in the K&L Gates Public Policy and Law Group are monitoring all such proposals for the benefit of firm clients.
