In a joint-agency media conference and press release with the Federal Trade Commission today, the Consumer Financial Protection Bureau used the “rulemaking-through-enforcement” method of regulation to create several de-facto guidelines for what is “unfair, deceptive, or abusive” in mortgage advertising. Bypassing the more arduous rulemaking process, the CFPB published “sample warning letters” that effectively made the following advertising practices illegal:
On October 11, 2012, the U.S. Commodity Futures Trading Commission (CFTC) issued two interpretive letters and today, issued a no-action letter. The letters were issued to the National Association of Real Estate Investment Trusts (NAREIT), the American Securitization Forum (ASF) and certain persons designated as swap persons and ICE/NYMEX contract persons, respectively.
New FINRA Rule 5123 will require each FINRA member that sells a security in a private placement, subject to certain exemptions, to file with FINRA a copy of any private placement memorandum, term sheet or other offering document used in connection with such private placement within 15 calendar days after the date of the first sale, or to indicate to FINRA that no such offering documents were used. Due to the exemptions, the regulatory burden of this new requirement will fall primarily on offerings of Section 3(c)(1) private investment funds and other offerings made to individuals or retail investors. A copy of FINRA Regulatory Notice 12-40 (September 2012) (Private Placements of Securities) is available here.
On April 5, 2012, President Obama signed H.R. 3606, the Jumpstart Our Business Startups (JOBS) Act (the “Act”), into law. The Act is intended to help smaller companies access the U.S. capital markets by relaxing certain regulatory compliance and disclosure requirements and easing the capital formation process for private companies and private investment funds. A copy of the Act is available here.
On March 8, 2012, the House of Representatives (the “House”) passed H.R. 3606, the Jumpstart Our Business Startups (JOBS) Act (the “Bill”), by a vote of 390 to 23. The Bill consists of a collection of bills that have been introduced in the House over the past year, including four that had already passed the House by wide margins. The Bill is intended to help smaller companies access the U.S. capital markets by relaxing certain regulatory compliance.
On February 15, 2012, the Securities and Exchange Commission ("SEC") adopted new rules under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), as required by Section 418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). The new rules codify the SEC's July 12, 2011 order to increase the dollar amount tests applicable to qualified clients that may be charged performance fees under Rule 205-3. A copy of the SEC's adopting release is available here.
Institutional Shareholder Services (“ISS”) recently announced its updated voting policies for the 2012 proxy season. The policies will become effective for shareholder meetings held on or after February 1, 2012. While the policies cover various matters, we have summarized below certain policies relating to corporate governance matters that may be of particular interest to corporations.
Recently, in addition to questions regarding certain residential mortgage foreclosure processing improprieties, concerns have been expressed regarding the validity of certain transfers of residential mortgage loans in securitization transactions. We believe that these concerns are unfounded. To help clarify issues regarding the assignment process for residential mortgage loans, we have prepared the following questions and answers. These questions and answers are not intended to be comprehensive or to address every issue or situation but, rather, are intended to provide a general overview and explanation of matters related to mortgage loan transfers.
A number of regulatory and legislative developments will alter the municipal securities market significantly in the upcoming months. Among these developments are amendments to Rule 15c2-12 of the Securities and Exchange Act of 1934 that will enlarge the continuing disclosure obligations of municipal bond issuers, increased post-issuance diligence obligations for issuers of Direct Pay Build America Bonds, guidance on potential offsets by the Federal government to subsidy payments owed to issuers of Direct Pay BABs, and the effects of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This client alert summarizes these recent developments and offers an overview of consequent changes in the operation of the municipal marketplace for the remainder of this calendar year.
In addition, this alert addresses the status of the extension of authorization for certain tax credit bond structures originally enacted by the American Recovery and Reinvestment Act of 2009 ("ARRA"), including Build America Bonds and Recovery Zone Bonds, as well as the extension of certain favorable tax law provisions under ARRA relevant to municipal bonds in general.
This week, President Obama signed into law the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Act"). The Act contains a number of significant provisions that affect the securitization industry. One change with immediate effect is the repeal of Rule 436(g) of the Securities Act of 1933, which currently excludes NRSROs from being treated as "experts" when their ratings are included in a registration statement. The legislation also contains a 5 percent risk retention requirement for securitizations, other than those involving "qualified residential mortgage" or loans originated under approved underwriting standards indicating low credit risk. The Act calls for the issuance of regulations regarding the application of risk retention provisions and the specification of underwriting standards. We will be monitoring these developments and will provide updates to you as the picture becomes clearer.Continue Reading...
Title VII of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), substantially alters the regulation of over-the-counter ("OTC") derivatives markets. Financial reform, particularly as it relates to derivatives, had the initial purpose of mitigating systemic risk and interconnection concerns in the financial markets. Congress and regulators, nevertheless, are taking the opportunity in Dodd-Frank to address other perceived issues in the OTC derivatives markets and in the commodities sector.
On July 15, 2010 the Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), which represents the most sweeping change to banking law since Congress adopted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), if not before. FIRREA was the congressional action designed to "forever prevent" another banking catastrophe. Many statements from the late 1980s, such as the elimination of "too big to fail" ("TBTF"), have echoed in the debate over "systemically important" financial institutions. Hopefully, the Act's Financial Stability Oversight Council and the orderly liquidation authority over nonbanks that pose systemic risk will have more success than the FIRREA tools that were not effectively employed to prevent the subprime bubble.
Executive Compensation, Corporate Governance and Enforcement Provisions of The Dodd-Frank Act Affecting Public Companies
On July 15, 2010, the United States Senate approved a comprehensive regulatory reform bill entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). The United States House of Representatives approved Dodd-Frank on June 30, 2010. President Obama is expected to sign Dodd-Frank into law on July 21, 2010.
On July 15, 2010, the Senate approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), previously passed by the House on June 30, 2010. President Obama signs the Act into law on July 21, 2010. The Act includes expansive financial industry regulatory reforms, including new restrictions on the private investment fund activities of banking entities and their affiliates, known as the "Volcker Rule." The Volcker Rule will have a significant impact on these entities and their participation in the private investment fund industry.
On July 15, 2010, the Senate approved the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Act"), previously passed by the House on June 30, 2010. President Obama is expected to sign the Act into law on July 21, 2010. The Act includes expansive financial industry regulatory reforms, including the "Private Fund Investment Advisers Registration Act of 2010" (the "PFIARA"). The PFIARA is similar to a prior version of the PFIARA introduced by Sen. Christopher Dodd (D-CT) in the Senate in March and included in H.R. 4173, which was originally passed by the House on December 11, 2009. The PFIARA will have a significant impact on advisers to certain private funds, including hedge funds, private equity funds, venture capital funds and various other investment vehicles, by (1) requiring the registration of certain unregistered advisers under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and (2) imposing additional reporting and disclosure requirements on investment advisers, including those already registered under the Advisers Act. The PFIARA lays out a framework for regulation of private fund advisers, but delegates to the Securities and Exchange Commission ("SEC") rulemaking authority for many of the details concerning the types of advisers that will be facing additional regulatory burden. As a result, private investment fund advisers will need to run their businesses with a renewed focus on compliance.
On October 30, 2009, all of the federal regulatory agencies issued a new policy statement on commercial real estate (“CRE”) loan workouts. The policy statement does offer opportunities for financial institutions (“FI”) to reduce the amount of charge-offs on CRE loans, return restructured loans to a performing status faster and generally work with customers on mutually beneficial workouts. Nonetheless, the policy statement does present challenges before FIs can achieve such results, especially for those management teams seeking to “kick the can down the road” to await better days. Notably, however, the policy statement does not change regulatory reporting guidelines or the accounting requirements under generally accepted accounting principles (“GAAP”).
This is the fourth client alert that I have written this year dedicated solely to the evolving landscape that banks are confronting. Nowhere is the ground shifting more than in financial institutions’ interaction with regulatory authorities. Several of these issues are discussed below.
Commercial Real Estate
The regulators’ position with regard to commercial real estate lending (“CRE”) has changed dramatically in the past three years. In 2006, the bank regulators issued guidance regarding CRE lending. Specifically, the guidance provided that, in the event a bank’s non-owner-occupied CRE loans approached 300 percent of capital or more, then the financial institution had to ratchet up its underwriting, monitoring and other facets of risk mitigation. Nowhere in the guidelines was there a cap on CRE lending. Even still, the reaction of the banking industry to the guidelines was near pandemonium. Bankers were concerned that the guidelines would be a de facto cap. The bank regulators responded to clarify that the guidelines were merely benchmarks and were not limitations.
On July 2, 2009, the Federal Deposit Insurance Corporation (FDIC) issued its proposed Statement of Policy on Qualifications for Failed Bank Acquisitions (Policy Statement). The Policy Statement is designed to provide guidance to private investors who are interested in acquiring failed depository institutions with financial assistance from the FDIC. The Policy Statement acknowledges the interest of private investors in failed depository institutions, but also expresses the FDIC’s stated concern that some private investment structures present potential safety and soundness issues and risks to the deposit insurance fund (DIF), as well as other important issues. Public comments on the proposal are due in 30 days.Continue Reading...
On June 15, 2009, the U.S. Department of the Treasury (“Treasury”) announced an interim final rule regarding standards for executive compensation and corporate governance practices for those entities receiving financial assistance under the Troubled Asset Relief Program (“TARP”). Although the interim final rule contains many new standards for TARP recipients, the focus of this article is the requirement that TARP recipients adopt an “excessive or luxury expenditures policy.”
On June 15, 2009, the U.S. Department of the Treasury (“Treasury”) announced an interim final rule regarding standards for executive compensation and corporate governance practices for those entities receiving financial assistance under the Troubled Asset Relief Program (“TARP”). Although the interim final rule contains many new standards for TARP recipients, the focus of this article is the requirement that TARP recipients adopt an “excessive or luxury expenditures policy.”
Obama Administration Proposes Registration of Private Fund Advisers Following Recent Similar Proposals
On June 17, 2009, the Obama administration proposed a plan for Financial Regulatory Reform (the “White Paper”) that addresses five key objectives identified by the Obama administration to reform the financial regulatory system. Certain of the White Paper’s proposals, if enacted, will have a significant impact on private investment funds, such as hedge funds, private equity funds and venture capital funds, by requiring the registration of private investment fund advisers and by imposing informational and reporting requirements on the advisers and their funds.
In October 2008, we prepared an article entitled “A Look at TARP — What to do now?” Since the date of that article, more than 600 financial institutions, ranging in size from several billion dollars down to a few million dollars, have elected to participate in the Capital Purchase Program (“CPP”) established under the Department of the Treasury’s (the “Treasury”) Troubled Asset Relief Program (“TARP”). The Treasury has issued terms sheets for publicly traded financial institutions, privately held financial institutions and Subchapter S financial institutions. Since October 2008, several hundred financial institutions have elected to participate in the CPP.Continue Reading...
On Wednesday, June 17, 2009, President Obama set forth his administration’s blueprint for overhauling the financial system outlined in an 88-page white paper that touched everything from traditional banking regulation, such as capital ratios and liquidity, to nontraditional financial service firms, whose size alone impacts the overall economy. Traditional banking organizations will likely feel the greatest impact from the call for stronger capital and prudential standards for all financial firms and from the creation of the new office of the National Bank Supervisor, which will assume the duties of the Office of the Comptroller of the Currency and the ongoing duties of the Office of Thrift Supervision (“OTS”). The federal savings bank charter overseen by the OTS will be phased out under the proposal. The plan also proposes a new Consumer Financial Protection Agency with broad federal powers over consumer financial products and services, regardless of whether such products and services are offered through a bank. This article highlights aspects of the Financial Regulatory Reform white paper (the “white paper”) that are most applicable to traditional banks and their holding companies.Continue Reading...
The Obama Administration’s proposed regulatory reform has been called by the Wall Street Journal “the most sweeping overhaul of the way the U.S. government oversees financial markets since the 1930s.” Controversy surrounds a number of elements of the broad proposal, a copy of which may be found here, notably the proposal’s plan to increase the Federal Reserve Board’s role in regulating any large financial institution whose combination of size, leverage and intercon¬nectedness to other financial institutions could pose a threat to financial stability if it failed. This supervision would extend to foreign parents and subsidiaries regardless of whether those entities are currently subject to regulation by authorities in the United States. Another controversial provision of the proposal is the creation of the Consumer Financial Protection Agency, whose mission includes encouraging the offering of “plain vanilla” products and banning or restricting “yield spread premiums,” prepayment penalties and other practices thought to be unfair to unsophisticated consumers. For the most part, however, the elements of the proposal that touch on the securitization market incorporate concepts already being discussed among market participants, which suggests that the securitization market is moving in the right direction with those policies it proactively has taken under review.
On May 11, 2009, the U.S. Treasury released its General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals (the “Revenue Proposals”). The Revenue Proposals include several provisions affecting private investment funds, such as private equity funds, hedge funds and venture capital funds, and their managers.Continue Reading...
In these economic times, many hotel owners are focusing on very proactive asset management. One item worth investigating: How does your manager book hotel revenues generated from online travel agencies?
When a guest books a hotel room through an online travel agency or OTA, the OTA collects the room price from the guest, deducts its negotiated commission and transfers the balance to the hotel manager. We understand that some managers are including the room price paid by the guest to the OTA in their gross revenue calculations despite the fact that managers do not actually receive such amounts. Other gross revenue discrepancies can result from promotional incentives like free breakfasts, the value of which are also sometimes included in gross revenues.
On May 4, 2009, President Obama and Secretary Geithner announced four tax proposals relating to offshore investments that will be included in the Obama administration’s (the “Administration”) full budget, which will be released later in May. A general description of the proposals is presented below. The Administration indicated that additional international tax reforms also will be included in the full budget. The budget is also expected to provide for an additional 800 Internal Revenue Service employees devoted to international tax enforcement.Continue Reading...
The Obama Administration’s Homeowner Affordability and Stability Plan (“HASP”) has added a second lien modification program (the “Second Lien Program”) to the Home Affordable Modification Program (“HAMP”). HASP is a part of the Administration’s comprehensive Financial Stability Plan, designed to stabilize the U.S. housing market, which also includes the Public-Private Investment Program (“PPIP”). Residential mortgage loan servicers who want to participate in the PPIP must also participate in the new Second Lien Program, in addition to HAMP and the Hope for Homeowners (“H4H”) refinancing program.Continue Reading...
The Home Affordable Modification Program (“HAMP”) was created as part of the Administration’s Financial Stability Plan, announced on February 10, 2009. The initial details of HAMP were released on March 4, 2009. See here and here regarding these developments.
Fannie Mae and Freddie Mac have issued guidelines on how the loan modification program works for loans owned, securitized or guaranteed by them, and links to these guidelines can be found here and here. The IRS clarified some of the tax questions that were raised, as we described in our recent client alert, here. What remained were questions about how this program would apply to loans in securitizations sponsored by entities other than Fannie Mae and Freddie Mac.Continue Reading...
IRS Issues Notice and Revenue Procedure Regarding Mortgage Loan Modifications Under the Home Affordable Modification Program
On April 10, 2009, the Internal Revenue Service (“IRS”) issued Notice 2009-36 (the “Notice”) and Revenue Procedure 2009-23 (the “Revenue Procedure”) to provide guidance regarding the impact of loan modifications made pursuant to the Obama administration’s recently announced Home Affordable Modification Program (“HAMP”). The HAMP contains several incentives to encourage modifications, including payments to servicers, borrowers and lenders/investors, which would include securitization vehicles. The Notice and the Revenue Procedure provide issuers and servicers greater flexibility to implement loan modifications pursuant to the HAMP.Continue Reading...
On February 25, 2009, the UST announced the terms and conditions of the Capital Assistance Program (“CAP”). Under CAP, the federal banking regulators will conduct “stress tests” to evaluate the capital needs of banks with in excess of $100 billion in assets. These “stress tests” have been much discussed with regard to what approach UST will take if it determines that such institutions need additional capital and such capital is not forthcoming from private sources.
What has not been discussed is how the bank regulators will evaluate banks under $100 billion in assets on a going-forward basis. Stress testing of loan portfolios and liquidity sources that yield positive results will assist those facing regulatory pressures. For others, however, such testing will exacerbate regulatory presumptions of a financial institution’s problems. Unfortunately, there is becoming less choice here.
On March 23, 2009 the U.S. Department of Treasury (“Treasury”), in conjunction with the Federal Deposit Insurance Company (the “FDIC”) and the Federal Reserve (the “Fed”), announced the latest piece of its Financial Stability Plan: the Public-Private Partnership Investment Program for Legacy Assets (the “Program”). The Program consists of two separate plans, addressing two distinct asset groups: the Legacy Loan Program and the Legacy Securities Program. Treasury explained that the exact requirements and structure of the Loan Program will be subject to notice and comment rulemaking, but announced no timetable. On the other hand, the Securities Program requires any interested asset manager to submit by April 10th, an extensive application to serve as a Fund Manager under the Securities Program. Treasury is expected to select five Fund Managers by May 1st. In addition, Treasury expanded the Term Asset-Backed Securities Loan Facility (“TALF”) program to include Legacy Securities.Continue Reading...
On March 19, 2009, the Federal Reserve Bank of New York expanded the list of collateral eligible for pledge under its TALF program to include, among other things, servicing advance receivables. A funding under the TALF program is structured as a loan from the Federal Reserve Bank of New York to an eligible borrower — which includes any U.S. company that owns eligible collateral and maintains an account relationship with a primary dealer.Continue Reading...
The FDIC has revised its October 7, 2008 Notice of Proposed Rulemaking (“NPR”) to increase deposit assessment rates for all categories of institutions in a Final Rule adopted on February 27, 2009 (the “Final Rule”). The anticipated deposit assessment rate increase has grown materially and has attracted significantly more attention and outrage due to its concurrent release with an interim rule proposing a one-time 20 basis point emergency special assessment. The emergency assessment will be imposed on deposits as of June 30, 2009, which assessment will be collected on September 30, 2009, concurrent with the first assessment collected under the Final Rule.
The Obama Administration’s Financial Stability Plan, announced on February 10, 2009, promised to address the foreclosure crisis with a comprehensive plan to stem foreclosures and restructure troubled mortgage loans. That plan, announced on February 18 as the Homeowner Affordability and Stability Plan or “HASP,” included access to low-cost refinancing for qualifying borrowers with conforming loans owned or guaranteed by Fannie Mae and Freddie Mac and a $75 billion homeowner stability initiative to prevent foreclosures. The details of the homeowner stability initiative, which would include a plan to encourage servicers to modify loans of homeowners who are delinquent on their loans or who are in danger of becoming delinquent, were to be released in early March.Continue Reading...
In the ’70s sitcom The Brady Bunch, Jan Brady had a preoccupation with her older sister, Marcia. Oftentimes she would exclaim in exasperation: “Marcia, Marcia, Marcia.” In this environment, bankers can be excused for a similar type of fixation; only in this case it is with capital.
Even banks that by all reasonable prior metrics were not leveraging their capital enough (as recently as 2007, they were called “overcapitalized”) are now focused on building up their capital base. Capital provides many benefits in the current environment.Continue Reading...
For over a decade, up through 2007, bank failures were few and far between. There were more than enough buyers for even troubled banks. A couple of years ago, I represented a CAMELS-5 rated bank that was sold when the FDIC Division of Resolutions was in the process of putting together bid packages. Even that bank sold for two times book value. Now the environment is different. The market for troubled banks is much more limited. Bailout capital is scarce and regulatory pressure is more extreme. As a result, the number of bank failures in this “crisis” seems to be heading inexorably toward 100. Bankers need to understand what the regulatory ramifications are if the bank begins to experience problems.
On February 3, 2009, the FDIC published a Notice of Proposed Rulemaking (“Proposed Rule”) to implement new interest rate restrictions on depository institutions that are not well-capitalized. The Proposed Rule would limit the interest rate paid by such institutions to a national rate, as derived from the interest rate average of all institutions. If an institution could provide evidence that its local rate is higher, it would be permitted to offer the higher local rate plus 75 basis points. However, the ability of an institution to succeed in establishing evidence of a higher local rate appears to be very difficult under the Proposed Rule.Continue Reading...
The "Missing Link" in Financial Stability Plan: President Obama Announces Homeowner Affordability and Stability Plan
Yesterday President Barack Obama announced his long-awaited foreclosure prevention and loan modification plan, referred to by many as the “missing link” in the Financial Stability Plan unveiled by Treasury Secretary Geithner last week. To address the problems of homeowners unable to refinance their loans or struggling to meet their mortgage obligations, the Homeowner Affordability and Stability Plan (“HASP”) seeks to help by providing the following: (1) access for borrowers to low-cost refinancing on conforming loans owned or guaranteed by Fannie Mae and Freddie Mac, (2) a $75 billion homeowner stability initiative to prevent foreclosures and (3) additional commitments allowing the Treasury to purchase up to an additional $200 billion of preferred stock of Fannie Mae and Freddie Mac and allowing Fannie Mae and Freddie Mac to increase the size of their retained mortgage portfolios by $50 billion. The $75 billion homeowner stability initiative includes financial incentives to borrowers and servicers in connection with loan modifications, a partial guarantee of losses resulting from declines in the home price index following loan modifications, the development of “national standards” for loan modifications (to be announced by March 4, 2009) and support for the modification of bankruptcy laws to allow bankruptcy judges to modify residential mortgage loans. The White House’s description of HASP was short on details and raises a number of interesting questions about how HASP could affect mortgage loans held by private label securitization trusts.Continue Reading...
The American Recovery and Reinvestment Act of 2009 (the “Act”) was signed into law by President Barack Obama on February 17, 2009. Known informally as the “Stimulus Bill,” the Act is intended to preserve and create jobs, stimulate investment in infrastructure and assist the unemployed. The main tax provisions of the Act that are expected to have the greatest impact on corporations and closely held businesses, excluding the energy incentives, are summarized below.Continue Reading...
This past Friday, February 6, 2009, the Federal Reserve Board released the terms and conditions of the Term Asset-Backed Securities Loan Facility (TALF), which was first announced on November 25, 2008. Through the TALF, the Fed intends to increase credit availability for consumers and small businesses, generate liquidity for banks, stimulate an otherwise anemic asset-backed securities (ABS) market and reduce interest rate spreads on AAA-rated tranches to more normal levels. Another benefit of the TALF is that it will assist entities that have received TARP funds to meet political and regulatory pressures to demonstrate new lending even if they are struggling with liquidity concerns.Continue Reading...
As we reported in a previous alert, the FDIC published an interim rule in July of last year that addressed the treatment of deposit accounts, including sweep accounts, in bank failures. That rule has now been made final. It establishes the FDIC’s practices for determining deposit account balances for insurance coverage purposes at a failed financial institution. The rule also requires banks and thrifts to notify their sweep account customers of the nature of their swept funds and how they would be treated if the institution were to fail. The rule will be effective 30 days after publication in the Federal Register, except for the disclosure to sweep account customers requirement, which will be effective July 1, 2009.
On January 14, 2009, the United States Department of Treasury (“Treasury”) issued its much anticipated Summary Term Sheet detailing the terms for participation in Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (“CPP”) by bank and bank holding companies that have elected to be taxed under Subchapter S of Chapter 1 of the U. S. Internal Revenue Code (the “Code”). Subchapter S banks and bank holding companies interested in participating in the CPP must file their applications by February 13, 2009. Similar to the private (non-Subchapter S) and public company programs, Treasury will determine eligibility and allocation for applicants after consultation with their appropriate federal banking agency. As of January 14, 2009, Treasury has invested a total $189 billion in 257 banks in 42 states and Puerto Rico. The largest investment was $25 billion and the smallest investment was $1 million.Continue Reading...
On January 9, 2009, Congressman Barney Frank introduced legislation entitled the “TARP Reform and Accountability Act of 2009” (the “Accountability Act”). The use of the word “accountability” speaks volumes regarding Congressman Frank’s view that financial institutions should now answer for the enduring economic problems. Washington’s favorite sport, searching for villains, has begun.Continue Reading...
Over the last 15 years, the relatively high valuations in banking, coupled with leverage limitations and other regulatory restrictions, discouraged private equity investments in financial institutions. The credit crunch and subsequent recession have marked a new era. The resulting decline in bank stock prices has sparked new interest in financials by private equity funds. The challenge is to make such investments while avoiding regulatory land mines.
Most private equity firms’ investments across industries have been made to acquire control of the target. In banking, however, most transactions involve the acquisition of a minority interest to avoid the ramifications of “control” of a financial institution. Set forth below are the regulatory issues that must be addressed if a company is in “control” of a financial institution, the definitions of control, and then some circumstances that have allowed ownership and influence without a finding of control for regulatory purposes.Continue Reading...
The Congressional Oversight Panel issued its first report to Congress today on the Treasury Department's use of funds under TARP (click here for the full report). Among the report's questions is whether the Treasury Department has received the same terms under the Capital Purchase Program when investing in financial institutions as Warren Buffett and the Abu Dhabi Investment Authority. The Panel, created when Congress passed the Emergency Economic Stabilization Act, testified before the House Financial Services Committee today along with Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari, who focused his remarks on oversight and measuring TARP's results (click here for Mr. Kashkari's remarks).
Meanwhile, the FDIC reiterated its guarantee of Federal Deposit Insurance for accounts in federally insured financial institutions up to $250,000 per account. The previously raised limit of $250,000 does not return to $100,000 until January 1, 2010. The FDIC issued its assurance after a CNBC/Portfolio.com survey showed that about a third of those questioned about their confidence level as to the safety of money held in federally insured bank accounts answered only somewhat confident, or not confident (click here for the FDIC's press release).
The Treasury Department has released the latest transaction report for the Capital Purchase Program under TARP. Over $165 billion has now been spent providing financial institutions liquidity in exchange for shares held by the Treasury Department since the first purchases on October 28, 2008. The report provides an update to the transactions detailed to Congress by the Treasury Department this past Friday, December 5, 2008. The latest purchases range from $935 million for shares in Popular, Inc., in San Juan, Puerto Rico to $1.7 million for shares in Manhattan Bancorp in El Segundo, California, according to today's Treasury Department report.
Click here for the latest Capital Purchase Program transaction report.
Click here for Hunton & William's prior posting on the Treasury Department's TARP Report to Congress.
Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari today addressed the TARP oversight concerns outlined by the GAO last week. Today's speech addressed the Treasury Department's actions taken since the inception of TARP to bring the program and program participants into compliance (Click here to read the entire speech). Specifically, the Emergency Economic Stabilization Act requires the Treasury Department to provide Congress with a detailed report within 60 days of the Treasury Department's first action under TARP. The report was delivered to Congress on Friday, December 5, 2008, and you can click here to read it. The report includes a complete list of transactions under the Capital Purchase Program, which provides financial institutions liquidity in exchange for shares held by the Treasury Department, from October 28, 2008 through November 25, 2008.
Click here for Hunton & William's prior posting on the GAO Report.
Interim Assistant Treasury Secretary for Financial Stability Neel Kashkari today cited the role played by the Capital Purchase Program under TARP in preventing the collapse of the U.S. financial system. The Capital Purchase Program, which provides financial institutions liquidity in exchange for shares held by the Treasury Department, has disbursed $151 billion since the end of October, according to the Treasury Department.
Mr. Kashkari said, "People often ask: how do we know our program is working? First, we did not allow the financial system to collapse. That is the most direct, important information. Second, we know the system is more stable than it was when Congress passed the legislation. While it is difficult to isolate one program's effects given regulators' numerous actions, one indicator that has pointed to reduced risk in the system is the average credit default swap spread for the eight largest U.S. banks, which has declined almost 207 basis points since before Congress passed the EESA. Another key indicator of perceived risk that we are tracking is LIBOR: 1 month LIBOR has declined 217 basis points and 3 month LIBOR 202 basis points."
Click here for Mr. Kashkari's complete remarks.
The GAO has released a report calling for more TARP oversight. Although the GAO acknowledged that TARP is less than 60 days old, it singled out the Capital Purchase Program as lacking the necessary mechanisms to monitor compliance on such issues as executive compensation and dividend payments. The GAO released both a full report and a two page summary, which contains a useful timeline detailing key Treasury activities related to TARP. See below for links to both the GAO summary, including the timeline, and the full report.
The FDIC altered significantly the specifications for holding company participation in the Temporary Liquidity Guarantee Program. The main impetus for the change was the strong support the Federal Reserve Board gave to expanding the FDIC guarantee of holding company leverage as a means to increase bank liquidity.Continue Reading...
With the number of banks failing in the U.S. rising sharply this year, the Federal Deposit Insurance Corporation (FDIC) is once again building its approved “bidder’s list.” This list is the tool used by the FDIC to contact potential buyers when a bank will soon fail. If your name is not on the list, you probably won’t be contacted by the FDIC to bid on a failed bank.Continue Reading...
The Treasury Department and Federal Reserve announced two significant initiatives today to bolster lending in the financial markets.
First, the Treasury Department announced it will use $20 billion in TARP funds to assist the Federal Reserve in establishing a $200 billion lending facility for consumer assets and related asset-backed securities. The program's goal, known as the Term Asset Backed Securities Loan Facility, or TALF, is intended to increase liquidity for financial institutions providing small business loans, credit cards, as well as automobile and student loans. Click here for the Federal Reserve's TALF term sheet.
Separately, the Federal Reserve announced it would purchase up to $100 billion in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Federal Reserve would also purchase up to $500 billion in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities. Click here for more information.
The Treasury Department, Federal Reserve and the FDIC released a joint statement today on the government's agreement to provide guarantees with respect to an asset pool owned by Citigroup consisting of residential and commercial mortgage loans and mortgaged-backed securities. Click here to read the joint statement.
In other news, the Treasury Department extended the Temporary Guarantee Program for Money Market Funds until April 30, 2009. The guarantee protects shareholders in participating money market funds for the amounts held as of the close of business on September 19, 2008. However, funds must both file for an extension and pay an extension fee by December 5, 2008. Click here for the details.
The FDIC has taken the final step necessary to implement the Temporary Liquidity Guarantee Program in order to bolster bank lending. The Program is a two pronged approach consisting of both a debt guarantee program (a guarantee of newly issued senior unsecured debt of banks, thrifts and certain holding companies) and a transaction account guarantee program (providing coverage for non-interest bearing deposit transaction accounts such as payroll accounts). Click here for all the details.
The FDIC issued its final rule on the Temporary Liquidity Guarantee Program on Friday, November 21, 2008. Details follow...Continue Reading...
The Emergency Economic Stabilization Act of 2008 (the “Act”) contains many provisions and law changes that directly affect financial institutions. Among other provisions, the Act would (i) establish a Financial Stability Oversight Board to review and make recommendations regarding the exercise of authority under the Act, (ii) authorize a study on and restate the Securities and Exchange Commission’s authority to suspend application of mark-to-market accounting standards and (iii) temporarily increase FDIC deposit insurance coverage from $100,000 per account to $250,000 per account (until December 31, 2009).Continue Reading...
On November 17, 2008, the United States Department of the Treasury (“Treasury”) issued its much-anticipated Summary Term Sheet detailing the terms for participation by nonpublicly traded banks and bank holding companies in the Treasury’s Troubled Asset Relief Program’s Capital Purchase Program (“CPP”). In addition, the Treasury also issued a related Private Bank Program Q&A (“Q&A”). Privately held banks and bank holding companies interested in participating in the CPP must file their applications by December 8, 2008. The Treasury will determine eligibility and allocation for applicants after consultation with their appropriate federal banking agency.Continue Reading...
The Treasury Department released today the term sheet for privately held financial institutions wishing to apply to the Capital Purchase Program as part of the Government's $700 billion economic rescue package. The application deadline for interested privately held financial institutions is December 8, 2008. Click here for the Treasury Department's term sheet, and click here for the Treasury Department's answers to frequently asked questions.
Effect of Emergency Economic Stabilization Act of 2008 on Executive Compensation
Congress recently passed the Emergency Economic Stabilization Act of 2008 (the “EESA”). This legislation authorizes the Treasury Department to purchase “troubled assets” from financial institutions under a new Troubled Asset Relief Program. Included in the EESA are a number of important provisions affecting executive compensation arrangements of participating financial institutions. These provisions include limits on the ability of participating financial institutions to deduct compensation paid to certain executives, excise taxes, mandatory “clawback” provisions for certain types of executive bonus arrangements, and absolute prohibitions on certain compensation. The Treasury Department’s guidance provides for three primary programs in which financial institutions may, depending on their circumstances, participate — the Capital Purchase Program, the Troubled Asset Auction Program and the Program for Systemically Significant Failing Institutions. The specific applicable executive compensation provisions/limitations will depend on the program under which the financial institution participates. This alert gives an overview of the methods of participation provided in the legislation and the applicable executive compensation provisions. Implementation of, and guidance regarding, the legislation is rapidly evolving. We understand, for example, that the government may limit direct asset purchasing under these programs.
The FDIC's proposed mortgage modification plan targets both home owners and mortgage servicers. Mortgage servicers would be paid $1,000 per modified loan and, if the modified loan later defaults, the FDIC would cover up to 50% of the losses. The modification plan only applies to mortgages for owner-occupied properties, but those home owners could have their mortgage payments modified to 31% of their monthly income. Click here for all the details of the FDIC's new proposal.
The Treasury Department announced today the government's $700 billion economic rescue package will continue to focus on capital purchase programs in the near term, rather than buying and selling distressed assets, which was the plan's original aim. The Treasury Department revealed that it is considering both broadening the Capital Purchase Program to include smaller specialty finance firms and to require newcomers to the program to raise matching funds. For further details click here to read Treasury Secretary Henry Paulson's entire statement.
Meanwhile, financial regulators released an interagency statement encouraging lenders to meet the needs of creditworthy borrowers, both business and consumers. The interagency statement warned against tightening underwriting standards "excessively." Click here for the entire statement.
The Treasury Department, HOPE NOW, and the Federal Housing Finance Agency (FHFA) announced today a new fast-track approach for homeowners behind in their mortgage payments. Specifically, the program streamlines the modification process for homeowners who are: 1) three or more monthly payments behind, 2) own and occupy their home as their primary residence, and 3) have not filed for bankruptcy. The program attempts to move such homeowners to monthly payments of not more than 38% of their household gross monthly income. For more information, click here to read FHFA Director James Lockhart's statement and related questions and answers relevant to homeowners and mortgage servicers, which follow his remarks.
The Treasury Department will purchase $40 billion in American International Group's senior preferred stock as part of its $700 billion authorization under the Stabilization Act, explaining that the investment will enable AIG to pay down a Federal Reserve credit line.
Click here for the press release, and continue to monitor this web page for the latest updates on TARP and all other news on the Act.
In July 2008, the FDIC published an interim rule that generally was effective upon publication. This rule primarily addressed the treatment of sweep accounts in connection with bank failures.
Just a few short months ago it seemed that the FDIC was confident that it could address the number of problem banks without any rash of bank failures. Instead, economic conditions deteriorated. As a result, the U.S. Department of the Treasury promulgated the capital purchase program under the Troubled Assets Relief Program and the FDIC Temporary Liquidity Guarantee Program. What has seemed to escape notice by many bankers is the interrelationship between the FDIC’s process for closure of a failed bank and the Liquidity Guarantee Program.Continue Reading...
Thrift holding companies are not subject to any quantitative capital guidelines or leverage limitations. Accordingly, such companies do not calculate risk-based assets on a consolidated basis at the holding company level. There are a number of thrift holding companies that have considerable financial services activities at the holding company level.
The Capital Purchase Program ("CPP") provides that a financial institution can receive senior preferred securities equal to no less than 1% or more than 3% of risk-weighted assets (subject to an overall cap of $25 billion).
The Office of Thrift Supervision ("OTS"), the federal regulator of holding companies over federal savings banks and state savings banks that have made a 10(l) election, has been concerned that thrift holding companies may be overstating their risk-weighted assets. When a thrift holding company's consolidated risk-weighted assets significantly exceed the risk-weighted assets of the subsidiary financial institution, the OTS is requiring more information in order to deem the CPP application to be informationally complete. Specifically, the holding company must detail how it "risk weights" its assets and that it is using a methodology that is consistent with the thrift financial report instructions. The OTS is considering whether to require an independent third-party verification in such circumstances (the OTS has not required such a verification to date).
When the FDIC is concerned with the asset quality of an applicant under the Capital Purchase Program, it is asking the applicant to complete the attached spreadsheet indicating a bank's current and pro forma condition on certain key ratios. Click here to view.
Treasury Department Issues Further Guidance and Necessary Documents for the Capital Purchase Program
The Treasury Department has released the necessary forms and documents for a financial institution wishing to take part in the Capital Purchase Program as part of the $700 billion Troubled Asset Relief Program ("TARP") under the Emergency Economic Stabilization Act of 2008 (the "Act"). Click here for the new documents just provided by the Treasury Department.
House Financial Services Committee Schedules Oversight Hearings to Examine the Emergency Economic Stabilization Act's Troubled Asset Relief Program
On Wednesday, November 12 and Tuesday, November 18 the House Financial Services Committee will examine the $700 billion Troubled Asset Relief Program ("TARP") under the Emergency Economic Stabilization Act of 2008 (the "Act"). Although the Committee has not yet released a witness list, the hearings will look closely at how the Treasury Department is coordinating with both the Federal Reserve and the FDIC under TARP and the Act. Specifically, the hearings will focus on bank recapitalization, market volatility and foreclosure reduction.
Click here for the Committee's press release, and continue to monitor this web page for the latest updates on the Committee's witnesses and all other news on the Act.
Treasury Department Releases Amount To Be Invested In Bank Capital Purchases - Which Banks And How Much
The Treasury Department has revealed the amount currently authorized to be invested in bank capital purchases for each financial institution taking part in the $700 billion Troubled Asset Relief Program ("TARP") under the Emergency Economic Stabilization Act of 2008 (the "Act"). The amounts authorized to be invested in senior preferred shares and warrants range from $25 billion each for Citigroup, JPMorgan Chase and Wells Fargo to $2 billion for State Street. Meanwhile, Bank of America, Bank of New York, Goldman Sachs, Morgan Stanley and Merrill Lynch all fall between the $15 billion to $3 billion range.
The Treasury Department has previously announced that under TARP it would place up to $250 billion into certain U.S. financial institutions and their holding companies. Click here for today's report, which is sure to be followed by others given Treasury's commitment to transparency and disclosure under the Act. Bookmark this website for all the latest news regarding both the Act and TARP.
Upon first blush, the application for the Treasury Capital Purchase Program (CPP) under the Troubled Assets Relief Program (TARP) looks straightforward. The form itself is only two pages. Moreover, companies in addition to the first nine applicants have been receiving funding. Is the process really a slam-dunk?Continue Reading...
FDIC Issues Interim Rule for its Temporary Liquidity Guarantee Program -- Short Comment Period Commences
As described in our earlier Client Alert, on October 14, 2008 the FDIC adopted the Temporary Liquidity Guarantee Program. On October 23, 2008 the FDIC issued its interim rule for the program and requested comment on the rule. This alert fleshes out additional details regarding this program that are addressed by the interim rule but were not included in the earlier FDIC press releases. We encourage you to consider commenting on any aspect of the rule that you believe needs reformation. Comments are due no later than 15 days after the interim rule is published in the Federal Register. Accordingly, comments may be due as early as November 7, 2008.
The two elements of the program are the senior unsecured debt guarantee and the additional insurance on noninterest-bearing transaction deposit accounts. This Client Alert summarizes the interim rule and focuses on the additional details and clarifications presented by the rule. The two most significant developments presented by the interim rule both relate to the debt guarantee program.Continue Reading...
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program. The program has two elements. The first consists of an FDIC guarantee of certain new senior unsecured debt issued by participating institutions on or after October 14, 2008 through June 30, 2009. The second part provides for an unlimited guarantee by the FDIC of funds held by an insured depository institution in non-interest-bearing transaction deposit accounts through December 31, 2009.
All FDIC-insured financial institutions and domestic bank holding companies, financial holding companies and savings and loan holding companies that engage only in activities that are permissible for financial holding companies under section 4(k) of the Bank Holding Company Act (this would exclude “unitary thrift holding companies”) are eligible to participate in the senior unsecured debt guarantee program. All FDIC-insured financial institutions are eligible for continued participation in the transaction account guarantee part of the program.
All eligible entities will be covered under the program for the first 30 days at no cost. Prior to the end of this period, institutions may opt out of one or both parts of the program; otherwise fees will apply for future participation. Eligible entities may not opt out after November 12, 2008. There will be a form made available on the FDIC website (see below) for opting out of either part of the program. The form will also be available through FDICconnect.
The FDIC has strongly urged all eligible entities to participate in the program. If an insured depository institution does not continue to participate, the name of the institution will be posted on the FDIC’s website as having opted out of the program.Continue Reading...
It is tempting to look at Treasury’s Troubled Assets Relief Program (“TARP”) only as a positive event. Obviously, 5% is cheap capital compared to current market alternatives. There are certain pre-conditions of TARP, however, that are worth considering.
Treasury announced on October 13, 2008, that it would place up to $250 billion into U.S. financial institutions and their holding companies. Each investment would be no less than 1% nor more than 3% of risk-weighted assets subject to a cap of $25 billion. The investment would be in the form of preferred stock (“Senior Preferred”). The Senior Preferred will be deemed to count as Tier I capital.
Terms of the Preferred Stock
The Senior Preferred will have a priority greater than common stock and equal to or greater than any other preferred stock other than preferred stock that by its terms currently are junior to existing preferred stock.
The Senior Preferred would pay cumulative dividends of 5% per year until the fifth year, at which point the dividend rate would increase to 9%. For financial institutions without holding companies, the dividends would be noncumulative. The preferred stock may not be redeemed for three years absent a “Qualified Equity Offering” (an issuance of noncumulative perpetual preferred stock or common stock). There are other qualifications on the redemption.Continue Reading...
Treasury Department Continues Rapid Response Amidst Global Shift Toward Recapitalization ( by Neel Kashkari)
This morning, before the Institute of International Bankers, the Treasury Department announced its schedule for naming three financial institutions as managers that will implement the Treasury Department’s $700 billion Troubled Asset Relief Program (“TARP”).
Hunton & Williams attended the morning session with Interim Assistant Secretary for Financial Stability, Neel Kashkari, and can report that he plans to make key announcements in the next few days, including one in the next 24 hours.
Schedule of Appointments
In the next 24 hours, the Treasury Department will reveal a “Master Custodian Firm,” essentially a prime contractor for the TARP, that will provide infrastructure services related to the holding and tracking of assets purchased by the Treasury and to the management of, and reporting on, the auction mechanisms employed by the Treasury.
In the next few days the Treasury will also announce a “Securities Asset Manager” that will oversee and sell the mortgage-backed securities bought by the Treasury.
The Treasury further expects to name a “Whole Loan Asset Manager” in the next few days, that will both manage and sell the whole mortgage loans purchased by the Treasury.
For your convenience we have provided a link to Mr. Kashkari’s remarks.
The Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”) was signed into law on Friday, October 3, 2008, in substantially the same form as discussed in our prior alert, with the most notable addition being an increase until December 31, 2009 of the cap on federal deposit insurance coverage from $100,000 to $250,000 per depositor. Our focus now turns to how the Treasury Department will implement its powers under the Stabilization Act.
Rapid Treasury Implementation
On Monday, October 6, 2008, Treasury Secretary Henry Paulson took an initial step toward implementing his powers under the Stabilization Act by appointing Neel Kashkari Interim Assistant Secretary of the Treasury for Financial Stability to direct the Troubled Asset Relief Program (“TARP”). Mr. Kashkari will oversee a portfolio of up to $700 billion worth of mortgage-related and other financial assets under TARP. Several questions will need to be addressed promptly, including the Treasury’s method for selection of assets for purchase and the means and timing of valuation and disposition of those assets.
Late Sunday afternoon, Congressional leaders circulated the Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”), compromise legislation to enact with substantial modification Treasury Secretary Henry Paulson’s original proposal for intervention into the United States financial system. The Stabilization Act now includes both elements of Senator Christopher Dodd’s counterproposal to the Paulson plan (which we addressed in a Client Alert last Tuesday) and additional taxpayer protections that emerged from the House of Representatives over the weekend. The Stabilization Act not only proposes a modified version of Treasury’s mortgage-related and other financial asset purchase plan (the “Asset Purchase Program”), but also limits executive compensation, allows for the modification of accounting standards and bank reserve ratios, mandates foreclosure mitigation and provides taxpayers additional relief from tax on cancellation of indebtedness income.
Asset Purchase Program/Insurance Program
The Stabilization Act would authorize the Secretary to borrow and spend up to $700 billion purchasing, managing, and reselling the mortgage-related and other financial assets described therein (“Troubled Assets”); however, the fundamental structure of the Paulson plan has been altered significantly to provide for Congressional constraint, oversight and protection for the taxpayers’ investment. The Stabilization Act would constrain Treasury by granting graduated spending authority: The Secretary would be authorized (i) immediately to purchase $250 billion of Troubled Assets, (ii) to purchase an additional $100 billion of Troubled Assets only after Presidential certification of need to Congress and (iii) to purchase up to an additional $350 billion of Troubled Assets only after receipt by Congress of a report from the President that details the plan to exercise the remaining authority (which final tranche Congress may vote to disapprove). The Asset Purchase Program would be overseen by Congress, the Comptroller General, an oversight board and an independent Inspector General. In order to provide taxpayers with a greater potential recovery of their investment, the Stabilization Act would require Treasury to take an equity or senior debt position in all direct purchase-participating financial institutions.
The Current Situation
On Monday evening, leaders in Congress emerged from a briefing by some of the nation’s leading economists convinced that the United States faces economic peril grave enough to justify an unprecedented intervention in the nation’s financial system, which is consistent with the position advanced by the Administration over the weekend. At the same time, many in Congress stand opposed to any such intervention. At this time a wide gap remains between Treasury Secretary Henry Paulson’s plan and a competing proposal based upon a draft circulated Monday morning by Senator Christopher Dodd. Below is a brief summary of the current key features of each proposal. Additional Client Alerts will follow as the proposals evolve and consensus emerges.
Today at 9:30am, Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke appear before the Senate Banking Committee. Wednesday at 2:30pm, the two will appear before the House Committee on Financial Services.
At present, despite the speed urged by Treasury, it is unclear whether a bill will pass this week. Some in Congressional leadership have indicated they recognize the need to move as quickly as possible without sacrificing due diligence. The situation on Capitol Hill is extremely fluid and dependent on financial market conditions; consequently, no reliable forecast of Congressional action can be made at this time.
On October 3, 2008, the House passed H.R. 1424, the “Emergency Economic Stabilization Act of 2008” (the “Bill”) by a vote of 263-171. A copy of the Bill is available here. The Senate previously passed the Bill on October 1, 2008, by a vote of 74-25. Thus, the Bill will now be sent to the President for signature and the White House has issued two Statements of Administration Policy indicating that the President will sign the Bill. Statements of Administration Policies are available here, October 1 and October 3, 2008.
The energy tax provisions are contained in the “Energy Improvement and Extension Act of 2008” division of the Bill that is referenced as Division B. These provisions are identical to those contained in the Senate-passed version of H.R. 6049, and were described in detail in a prior alert.