Emergency Economic Stabilization Act of 2008 (EESA) as Passed by the House & Senate This past Monday the House of Representatives voted down the original EESA legislation. The Senate, in the of hopes garnering more support, combined EESA with two other popular pieces of legislation: HR 1424, Paul Wellstone Mental Health and Addiction Equity Act of 2007, and HR 6049, the Energy and Tax Extenders Act of 2008. The thought behind adding these two popular bills to the original EESA was that at least 12 House members would consider changing their “no” votes to “yes.”
HR 1424 would expand the Mental Health Parity Act of 1996 by requiring parity for mental health benefits that goes beyond annual and lifetime limits. It is partially offset by some of the tax provisions in HR 6049. HR 6049 would provide incentives for renewable energy production and conservation, “patch” the alternative minimum tax (AMT) for 2008, extend expiring tax incentives through 2009 and help victims of natural disasters. It is partially offset with revenue increases that would hit the oil and gas industry and hedge-fund managers. The following is an overview of key sections of the Senate passed EESA. The center piece of this legislation is the Troubled Assets Relief Program which is intended to purchase any “troubled asset.” Troubled Asset: o A residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress. Troubled Assets Relief Program (TARP) o Secretary of Treasury is authorized to establish the TARP to purchase and make commitments to purchase troubled assets from any financial institution. In order to provide the necessary flexibility to manage the troubled assets the Secretary will establish vehicles authorized to purchase, hold, and sell troubled assets and issue obligations. Issuing regulations and guidance will be necessary to define the terms to carry out the authority in this act and will be published no later then 45 days after enactment of the legislation. The program guidelines will include: Mechanisms for purchasing troubled assets;
Methods for pricing and valuing troubled assets; Procedures for selecting asset managers; Criteria for identifying troubled assets for purchase.
o The Secretary has been granted the authority to ensure that no unjust enrichment occurs form those that participate in this program. Including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. o The Secretary shall establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary may develop guarantees and the associated premiums. These guarantees and premiums will be determined by category and/or class of the troubled assets to be guaranteed. The Secretary may guarantee the timely payment of principal and interest not to exceed 100%. The Secretary shall collect premiums in the amount that is determined to be necessary. The Secretary may provide variations in such rates according to credit risk. The Secretary shall publish the methodology for setting the premium for a class of troubled assets. o Considerations for Purchase or Participation Protecting the interests of taxpayers by maximizing overall returns and minimizing the impact on the national debt; Providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs; The need to help families keep their homes and to stabilize communities; In determining whether to engage in a direct purchase from an individual financial institution, the long-term viability of the financial institution in determining whether the purchase represents the most efficient use of funds under this act; Ensuring that all financial institutions are able to participate in the program; Provide financial assistance to financial institutions, including those serving low and moderate-income populations that have assets less the $1 billion, that were well or adequately capitalized as of June 30, 2008; The need to ensure stability for United States public instrumentalities, such as counties and cities, that may have
suffered significant increased costs or losses in the current market turmoil; Protecting the retirement security of Americans; The utility of purchasing other real estate owned and instruments backed by mortgages on multifamily properties.
o Financial Stability Oversight Board Responsible for reviewing the exercise of authority from the programs developed under this act including: designation of assets to be purchased, plans for the structure of the vehicles used to purchase the troubled assets. Membership of the Board: Chairman of the Federal Reserve Secretary of the Treasury Director of the Federal Housing Finance Agency Chairman of the Securities Exchange Commission Secretary of Housing and Urban Development Chairperson of the board shall be elected by the members of the board. The board shall meet monthly after the initial meeting (2 days after the first exercise of purchase authority). o Management, Sale of Troubled Assets, Revenues and Sale Proceeds The Secretary has the authority to manage the purchased troubled assets. The Secretary at an time may sell, or enter into securities loans, repurchase transactions for any troubled asset purchased. Revenues of, and proceeds from the sale of troubled assets shall be paid to the general fund of the Treasury for reduction of the public debt. o Foreclosure Mitigation Efforts The Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. o Consent to Reasonable Loan Modification The Secretary shall consider net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified or removal of other limitations on modifications. o Executive Compensation and Corporate Governance Any financial institution that sells troubled assets to the Secretary shall be subject to executive compensation requirements.
Limits on compensation, not including incentives, for senior executive officers to take unnecessary and excessive risks that threaten the value of the financial institution during the period that the Secretary holds equity in the financial institution. The recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements or earnings, gains, or other criteria that are later proven to be materially inaccurate. A prohibition of the financial institution making any golden parachute payment to its senior executive during the period that the Secretary holds equity in the financial institution.
o Conditions on Purchase Authority for Warrants and debt Instruments The Secretary may not purchase or make any commitment to purchase any troubled asset unless the Secretary receives form the financial institution: In the case of an institution that trades securities on the national securities exchange, a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power. A warrant for common or preferred stock, or a senior debt instrument from such financial institution. o Graduated Authorization to Purchase Upon enactment the Secretary’s authority shall be limited to $250 billion outstanding at any one time. If the President submits to Congress a written certification that the Secretary needs more authority – the authority shall be extended to $350 billion. Any time after the certification of $350 billion, the President can transmit to Congress a written report detailing the plan of the Secretary to use the full $700 billion. Should Congress not approve of the report, they have 15 days to pass a joint resolution of disapproval. If Congress does not act, the $700 billion is approved. o Temporary Increase in Deposit and Share Insurance Coverage From the date of enactment until December 31, 2009 the Federal Deposit Insurance Corporation shall increase insurance on each account for any depositor from $100,000 to $250,000. This increase is also applicable to Federal Credit Unions.