Congress Releases Second TARP Tranche; G30 Outlines Major Financial Reforms
By: Daniel F. C. Crowley, Karishma Shah Page
Congress failed to block release of the second $350 billion tranche of the $700 billion Troubled Asset Relief Program (“TARP”), which was created by the Emergency Economic Stabilization Act of 2008 (EESA; P.L. 110-343; H.R. 1424). The use of these funds was subject to Congressional disapproval by joint resolution enacted within 15 calendar days after the Treasury Department certified its intention to use the funds. On January 12, the Bush Administration, at the request of then President-elect Obama, formally sought release of the second $350 billion tranche. The Senate effectively approved the funds when it defeated S.J. Res. 5, a Republican resolution to disapprove the funds, by a vote of 52-42 on January 15. Notably, on January 22, the House approved the companion resolution, H.J. Res. 3, which would have rejected the release of the TARP funds, by a vote of 270-155.
The House vote was largely symbolic, but it does reflect Congress’ strong dissatisfaction with TARP implementation to date. On January 21, the House passed H.R. 384, the TARP Reform and Accountability Act of 2009, by a vote of 266-160. Introduced by House Financial Services Chairman Barney Frank (D-MA), H.R. 384, as amended, would place numerous conditions on the TARP program and its beneficiaries, such as:
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Setting conditions on TARP recipients, including executive compensation restrictions, providing the Treasury Secretary with the authority to apply new executive compensation restrictions retroactively to TARP beneficiaries;
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Requiring reporting, data collection, and analysis of use of TARP funds;
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Authorizing Treasury to place observers in board meetings of “assisted organizations” (a newly defined term);
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Increasing the size of the Financial Stability Oversight Board and providing the Board with the authority to overturn any policy determination made by the Treasury Secretary by a 2/3 vote; and
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Requiring the Treasury Secretary to commit at least $100 billion, but not less than $40 billion, to foreclosure mitigation.
It is not clear whether the Senate will act on the legislation. However, a recent letter from National Economic Council Director Lawrence Summers to House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) indicates that the Obama Administration has agreed in principle to many of the provisions contained in the legislation. Key elements of the plan include:
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Placing conditions on TARP recipients, including limits on executive compensation, dividend payments, stock repurchases, and acquisitions of healthy financial companies;
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Requiring reporting on and analysis of TARP funds use;
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Extending credit to consumers, homeowners, small businesses, and local governments; and
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Developing a foreclosure mitigation program, including a possible change to bankruptcy laws.
A number of new TARP programs have been developed to address the continuing credit market crisis. After Congressional negotiations stalled in December, President Bush announced an auto bailout package, consisting of a $17.4 billion short-term bridge loan to General Motors and Chrysler. The loan is contingent on the auto companies showing that they are financially viable by March 31, 2009 and also contains conditions allowing the government to block transactions over $100 million, restricting dividends, and limiting executive compensation. Subsequently, Treasury announced a $6 billion package to GMAC and a $1.5 billion loan to Chrysler Financial under the newly created Automotive Industry Financing Program.
On January 2, the Treasury Department released guidelines for the Targeted Investment Program (“TIP”). TIP was used by the Federal Reserve and Treasury in the Citigroup package announced in November. On January 16, Treasury, the Federal Reserve, and the FDIC announced assistance to Bank of America. In addition to a $118 billion loan guarantee, the deal includes a $20 billion preferred stock purchase through TIP, and requires that Bank of America comply with enhanced executive compensation restrictions and implement a mortgage loan modification program.
On January 14, the Treasury Department issued Capital Purchase Program (“CPP”) application guidelines for subchapter S corporation banks; applications are due on February 13, 2009. Unlike other CPP programs that provide government support through preferred stock purchases, CPP support for S Corporations will come through the issuance of subordinated debt at a rate of 7.75 percent for the first five years and 13.8 percent thereafter.
Finally, discussions continue on broader financial service industry reforms. On January 15, the Group of Thirty (“G30”) issued a report entitled Financial Reform: A Framework for Financial Stability. The G30 Working Group on Financial Reform that issued the report is chaired by former Federal Reserve Chairman Paul Volcker, one of President Obama’s economic advisors and Chairman of the President’s Economic Recovery Advisory Board. Mr. Volcker has stated that he will make the recommendations to President Obama and that the report is “a reasonable indication of the direction in which we might go.”
The G30 report recommends a massive, globally coordinated restructuring of the legislative and regulatory system that governs the financial services industry. Building on the momentum created by other recent proposals, such as the Treasury Department Blueprint for a Modernized Financial Regulatory Structure, the Group of 20 Financial Markets and the World Economy Summit Declaration, and the Government Accountability Office Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, the G30 report’s core recommendations include:
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Requiring that all systemically significant financial institutions be subject to prudential oversight;
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Improving the effectiveness of prudential regulation by increasing international coordination and enhancing resources available to regulators and central banks;
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Strengthening institutional policies and standards, with a particular focus on governance, risk management, capital, liquidity, credit and counterparty exposure, and leverage; and
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Increasing transparency and realigning risks associated with financial markets and products.
A detailed analysis of the G30 report is provided in our recent alert, Group of Thirty Issues Roadmap for Financial Reforms.
