Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

In a more subdued response to the AIG bonus brouhaha than last week, the House Financial Services Committee yesterday approved legislation that would amend the Emergency Economic Stabilization Act to prohibit companies receiving TARP money from paying “unreasonable and excessive compensation and compensation not based on performance standards.” Two Republicans, Reps. Ed Royce (CA) and Walter B. Jones (NC), broke ranks to vote with the committee’s Democrats in favor of the bill (H.R. 1664). Some of our Congressional sources have said the full House may vote on H.R. 1664 as early as next week. The Senate, however, is almost certain not to address executive compensation until after it returns on April 20th from the spring Congressional recess. Democratic leaders from both sides of the Capitol have greatly dialed down the executive compensation rhetoric since last week.

Under H.R. 1664, the Treasury Secretary, with the members of the Financial Institutions Examination Council, would have a month to define “unreasonable and excessive compensation” and set performance based standards that companies would use to determine circumstances under which a bonus or retention payment would be allowed. Examples of the standards Treasury is to include are the stability of the financial institution; its ability to repay the government; individual performance; employees’ adherence to risk management requirements; and any others that would provide greater accountability to shareholders and taxpayers.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

At last Treasury has come forward with its Public Private Investment Program for dealing with toxic assets, only now that there is a plan, the proper term is “troubled legacy assets.” Stocks have rallied since Treasury announced the plan this morning, and legislators on Capitol Hill have halted their rush to claw back the AIG bonus money, some say partly in order to study the new plan. The Treasury Secretary is scheduled to testify before the House Financial Services Committee on Thursday. Will the positive momentum continue up to and following his hearing performance? Secretary Geithner has a lot riding on this week.

The plan, which will use $100 billion of TARP funds, has two parts intended to revive the anemic financial system—the Public Private Investment Fund (PPIF) for Legacy Loans and the PPIF for Legacy Securities. Both are aimed at residential and commercial real estate-related assets. Banks tend to hold the assets as loans and entities such as insurers, pension funds, mutual funds and individual retirement accounts tend to hold the assets as securities backed by loans. The Federal Deposit Insurance Corporation with Treasury will work to create PPIFs that will purchase “loans and other asset pools” from participating banks, and the FDIC will determine eligibility criteria. The FDIC will also be using contractors to help it analyze loan pools and determine the level of debt to be issued by the PPIFs (with leverage not exceeding a 6 to 1 debt-to-equity ratio). The FDIC will then auction off each loan pool to the highest bidder. Treasury will provide 50 percent of equity financing and the private sector auction winner will provide the other 50 percent. The private sector winner can obtain financing by issuing new debt, which the FDIC will guarantee, that is collateralized by the purchase.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

The Treasury Department yesterday afternoon began to release some much anticipated details of the Obama Administration’s Financial Stability Plan first announced on February 10th—TARP re-branded. Yesterday was all about the Capital Assistance Program (CAP) and the related "stress test" that regulators will perform on the 19 largest banks, those with consolidated assets in excess of $100 billion. Treasury announced,

"The purpose of the CAP is to restore confidence throughout the financial system that the nation’s largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers."

If the stress test shows that a bank needs a larger capital buffer, then the bank has six months to raise the necessary amount of private capital or access the CAP, which Treasury describes as "a bridge to private capital in the future." The CAP funds would be available to the bank immediately.

The administration stressed it wants to keep government ownership temporary and will encourage replacing the government’s stake with private capital. Additionally, the Treasury announced it would set up a separate trust "to manage the government’s investments in US financial institutions."  There were no further details about the trust, but Financial Reform Watch will continue to monitor this.

Treasury:  The Capital Assistance Program and its role in the Financial Stability Plan (PDF)

Treasury: Capital Assistance Program FAQs (PDF)

Treasury: Capital Assistance Program Term Sheet (PDF)

Federal Reserve/FDIC: Supervisory Capital Assistance Program FAQs (PDF)

• Email This
• Print
• Comments
• Trackbacks
• Share Link

While the results of the G7 meeting in Rome may have been disappointing to some, due to a communiqué light on substance, it can be argued it made a step in the right direction in combating protectionism. The communiqué included this statement:

"An open system of global trade and investment is indispensable for global prosperity. The G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers and to working towards a quick and ambitious conclusion of the Doha Round.”

 Another development at the meeting was the apparent softening of the German government's attitude about "bailouts" of euro-bloc nations needing to refinance debt. Whereas German Finance Minister Peter Steinbreuck said before the G7 meeting that Austria would have to solve its own problems, Steinbreuck's post-G7 statements appear to open the door for assistance to Austria as well as Ireland and Greece, who may also soon need help.

The EU states are now working hard to find a solution that would essentially be a preemptive de facto bailout, bearing in mind the legal limitations of the EU Treaty which has a "no bailout" clause. A common EU policy on state and bank bailouts would constitute a huge leap forward for EU integration.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

U.S. Treasury Secretary Tim Geithner today announced the administration’s new “Financial Stability Plan” but revealed few details beyond the plan’s overarching principles. The new plan aims to provide more capital for banks while holding them to higher lending and accountability standards, establish a public-private investment fund to deal with “troubled” assets, provide more assistance to homeowners and small businesses, and increase the transparency of the program in order to protect taxpayers.

After an unusual introduction by Senate Banking Committee Chairman Chris Dodd—presumably intended to underscore the administration’s dual commitment to the economic stimulus legislation intended to jump start the economy and fixing the financial system—Geithner described the current situation. He said credit markets are not working, which has led to serious business cut backs and resulted in a financial system “working against recovery.” Geithner criticized the government’s efforts thus far as “absolutely essential, but they were inadequate.”

Following the Treasury announcement, the stock market nose-dived all afternoon, with the Dow Jones industrial average dropping 4.6 percent and the Standard and Poor’s 500-stock index slipping 4.9 percent. Several financial analysts directly linked the market’s poor performance to the plan’s lack of detail, especially regarding the Public Private Investment Fund intended to leverage private capital with government financing. Some analysts contend that today’s announcement exacerbated the uncertainty plaguing the markets. When reporters questioned Geithner about filling in the blanks around the public private partnership, he responded that the administration does not want to release details until they are fully confident they have the right structure. He said they are very committed to bringing in private capital.

Here is a brief overview of the Financial Stability Plan:

• Email This
• Print
• Comments
• Trackbacks
• Share Link