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

The House of Representatives approved yesterday, by a vote of 247 to 171, the “Pay for Performance” bill (H.R. 1664), which would prohibit TARP recipients from paying “unreasonable or excessive compensation” to its employees. The legislation tasks the Treasury Department with defining exactly what is “unreasonable or excessive.” The bill also repeals the controversial amendment in the American Recovery and Reinvestment Act that exempted bonuses based on employment contracts dated prior to February 11, 2009. While this is a far cry from the AIG-targeted bill the House passed earlier— imposing a 90 percent excise tax on AIG bonuses—H.R. 1664 is one more example of government treading into traditionally private sector turf.

The legislation applies to companies that have outstanding capital investments from the TARP or through the Housing and Economic Recovery Act, which covers Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition to prohibiting unreasonable or excessive compensation, affected companies could not pay bonuses or other supplemental payments not directly based on performance standards set by Treasury. The Treasury Secretary has the authority to exempt community investment institutions and institutions receiving less than $250 million from the TARP. The legislation also directs Treasury to establish a payback process for those institutions that would prefer to return the government’s money rather than be subject to the new compensation rules. For those institutions subject to the rules, the bill requires them to submit an annual report to Treasury with the number of employees whose compensation falls into each of these categories: over $500,000; over $1 million; over $2 million; over $3 million; and over $5 million.

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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.

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Congress took the first major step yesterday in levying heavy taxes on bonuses paid to executives of AIG and to institutions who have been recipients of significant (more that $ 5 billion) assistance from the Troubled Asset Relief Program (TARP) in recent months. In a move best described as spasmodic, the House voted 323-93 to place a 90 percent tax on the bonuses of TARP-recipient executives with adjusted gross incomes over $250,000.

Senate Majority Leader Harry Reid (D-NV) moved to bring the legislation to the floor yesterday, but Sen. Kyl (R-AZ) blocked the attempt, saying the Senate needs more time to consider the ramifications. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) introduced a bill late yesterday that would impose a 70 percent excise tax—35 percent on the TARP recipient companies and 35 percent on their executives—on excessive bonuses, defined as anything exceeding $50,000 in a calendar year.

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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)

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Congress was out of town when President Obama unveiled his “Homeowner Affordability and Stability Plan” this week, but that has not stopped key Members of Congress from weighing in on the plan and handicappers from starting to take odds on how reaction to the plan will affect other issues at play in the Capital.

Unsurprisingly, Speaker of the House Nancy Pelosi (D-CA) applauded the Obama plan and promised more relief, saying,

“Congress stands ready to complement the Administration’s efforts by acting on Judiciary Committee Chairman John Conyers’ legislation to reform our bankruptcy laws, so that judges can modify mortgages and responsible homeowners can stay in their homes.”

The Conyers’ legislation would alter bankruptcy laws so that judges could reduce or “cram-down” the mortgage principal and/or payments on a borrower’s primary residence.

Just as unsurprising was the reaction of Pelosi’s counterpart, House Minority Leader John Boehner (R-OH) who, along with House Minority Whip Eric Cantor (R-VA), sent a letter to the president with a list of  “key questions” about the plan. Their questions are compelling regardless of where people stand on the plan.

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Buried in the American Recovery and Reinvestment Act (ARRA), which is making its final march through Congress on its way to the president’s desk, is a section imposing limits on executive compensation for Troubled Asset Relief Program (TARP) recipients. The White House and the Treasury Department announced new executive compensation restrictions last week, but Congressional leadership obviously believed there was a need to codify some of those rules and strengthen others.

Here is an overview of the legislative provisions that, when enacted, will apply to companies until they repay their TARP money.

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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:

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Next week President Obama and Treasury Secretary Geithner will unveil the administration’s broad financial reform agenda—a strategy to get credit moving again—but yesterday offered a preview as they unveiled new restrictions on executive compensation. The announcement was in direct response to public outrage over the use of taxpayer funds to subsidize “excessive compensation packages on Wall Street.” The president railed against “lavish bonuses” and a “culture of narrow self-interest and short-term gain at the expense of everything else.” It will be interesting to see if this policy, which could affect compensation policies at industry-leading institutions, will result in a reduction and/or restructuring of executive compensation throughout the financial services industry. Even though the new policy appears intended to have just such a leavening effect on compensation, President Obama tried to reassure free-marketers by saying: “This is America. We don’t disparage wealth…and we believe success should be rewarded.”  But he went on to say that executives being rewarded for failure, especially with taxpayer money, is wrong.

The Treasury executive compensation reform guidelines fall into three categories covering:

• all TARP recipients;
• participants in a “generally available capital access program,” such as the Capital Purchase Program; and
• institutions that receive “exceptional assistance,” such as Citigroup, Bank of America, and AIG. 

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Lest anyone think Congress was not giving the financial crisis enough time and attention, the House Financial Services and Senate Banking Committees are holding no less than six hearings on financial regulatory reform and oversight this week. Down the avenue, the Treasury Department is hard at work crafting plans to release the second half of the Troubled Asset Relief Program (TARP), also known as TARP II. Rumors have it that TARP II will require recipients to dedicate a percentage of the federal funds received to consumer, auto, student, and small business loans. The good “bad bank” or aggregator bank proposal also still seems to be in the works, and the Beltway buzz is that it will not emerge until next week. Perhaps the administration is waiting to see what this week’s Congressional hearings yield.

The General Accountability Office (GAO) just issued its second TARP status report and concluded that while Treasury is making limited progress implementing the recommendations of the last GAO report, there is much work to be done. GAO’s major criticism is that Treasury has no overarching TARP strategy, which is the source of most of the TARP’s other problems. Specifically, the report concluded: “While GAO does not question the need for swift responses in the current economic environment, the lack of a clearly articulated vision has complicated Treasury’s ability to effectively communicate to Congress, the financial markets, and the public on the benefits of TARP and has limited its ability to identify personnel needs.” The Office of Financial Stability (OFS), which oversees TARP, has hired only 38 of the approximately 131 staff members needed.

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There is a new team in town, and in one of his first public acts as Treasury Secretary, Tim Geithner established a policy aimed at increasing the transparency and accountability of the Troubled Asset Relief Program (TARP). Treasury will now post all TARP contracts on the Internet. New contracts will go on Treasury’s website within five to ten business days, and the department will post existing agreements on a rolling basis. At the time of the Secretary’s announcement, Treasury had already posted the agreements of the major nine institutions that first partook in the Capital Purchase Program; the Citigroup contract under the Targeted Investment Program; the AIG deal under the Systemically Significant Failing Institutions Program; and the GM, GMAC, and Chrysler contracts under the Automotive Industry Financing Program. At the request of individual institutions, the department will redact confidential and proprietary information.

The Secretary also met today with the individuals tasked with TARP oversight – the head of the General Accounting Office, the TARP Special Inspector General at Treasury, and the TARP Congressional Oversight Panel. Geithner promised to unveil more reforms in the coming weeks.

U.S. Department of Treasury, EESA Contracts

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The TARP may soon come full circle as the notion of a “bad bank” for taking control of toxic assets gains momentum on Capitol Hill. The bad bank, sometimes referred to as an “aggregator bank,” would purchase bad securities from healthy banks and from those unhealthy institutions requiring major restructuring or more drastic measures. The theory is that moving the bad assets off of bank balance sheets would enable them to lend money again while still maintaining their capital requirements. Under the TARP model developed under Secretary Paulson, the federal government became the banks’ preferred shareholder, and some argue that hindered banks’ lending capacity because of the expectation that those shares would be bought back and, in effect, repaying the government. The bad bank model removes that burden but is likely to have stringent lending requirements to get loans flowing again on Main Street.

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The U.S. Treasury today announced a $1.5 billion, five-year loan to Chrysler Financial to help fund Chrysler auto loans made on or after January 1, 2009. This is a new loan made through the TARP’s Automotive Industry Financing Program, which was established as part of the December auto bailout. News outlets reported that shortly following Treasury’s announcement, Chrysler began offering zero percent interest financing for up to 60 months on several of its vehicles.

According to Treasury, the Automotive Industry Financing Program is intended to “prevent a significant disruption of the American automotive industry that poses a systemic risk to financial market stability and will have a negative effect on the real economy of the United States.” Treasury evaluates each application on a case-by-case basis and requires participants to conform to executive compensation standards, expenditure limitations, and other corporate governance requirements deemed necessary to protect taxpayers’ interests. The terms of the Chrysler loan are attached.

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President-elect Obama and his economic team can celebrate an unusual pre-inaugural, legislative victory tonight. This afternoon, the Senate voted 42 to 52 to reject a “resolution of disapproval” aimed at blocking the release of the second tranche of the Troubled Asset Relief Program (TARP) funds. Obama made the right call in waging the battle in the Senate rather than the House where the vote count was less certain.

While the Senate vote was largely along party lines, there were nine Democrats who opposed and six Republicans who supported releasing the remaining $350 billion of TARP funds. Sen. Tester (D-MT) and Sen. Hatch (R-UT) each voted “present.” Three Senators—Brown (D-OH), Bunning (R-KY), and Kennedy (D-MA)—did not vote.

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At the request of President-elect Obama, President Bush today agreed to ask Congress for the remaining $350 billion of the Troubled Asset Relief Program (TARP) funds. Steps taken by the Obama economic team over the weekend appear to have smoothed the path for the release of the funds. Congressional posturing began late last week and into this weekend in anticipation of the request. The funds are released unless Congress passes a resolution of disapproval within 15 days. If Congress wants to take formal action to put strings on the money, they would need to enact a resolution detailing them within that time frame.

Congressional Democrats are divided over whether or not to release the remaining funds and what strings to attach. Despite the fact that the Obama Treasury Department will oversee the funds, House and Senate Democrats want to ensure the release of the remaining TARP money has strict conditions attached. They are struggling with how to impose new conditions outside of passing legislation, which requires too much time. Both House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Chris Dodd (D-CT) indicated over the weekend that a written pledge of reform by the incoming administration would give them enough assurances to release the second half of the TARP.

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As President-elect Obama made the case yesterday for an expensive economic recovery plan, Democrats on Capitol Hill announced a renewed effort to empower bankruptcy judges to restructure home mortgages. This change to bankruptcy law could be attached to the economic recovery package as it moves through Congress.

The Obama announcement yesterday was designed to state the need for a large package of tax cuts and investment in order to halt the momentum of the recession and to save and create jobs. He offered few specifics. Because he has yet to specify how he plans to spend the funds, more and more advocates for different programs are coming forward to seek inclusion in the plan. In just the last week, a group of governors initiated a push for an education block grant and other education advocates stepped-up a push for Head Start funding for early childhood education. This kind of pressure will continue to build until the President-elect outlines his own plans. The only part of the plan on which the Obama team has committed itself is $300 billion in tax cuts and incentives. The overall size of the program—widely rumored to be $ 775 billion—has yet to be confirmed.

As we indicated in Financial Reform Watch on Monday, there are several connections from a policy and political standpoint between the economic recovery plan in formation and the financial industry rescue program already underway. However, the connection between the two issues became even more concrete yesterday with the announcement by Senators Dick Durbin (D-IL) and Chuck Schumer (D-NY) of their intention to include the bankruptcy law changes relating to mortgages—referred to as "cramdown"— in the economic recovery bill (S.1) that Congress will take up in the next few weeks.
 

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The 111th Congress convenes tomorrow and repairing the damage left by the financial crisis of 2008 will be at the top of the agenda. The early talk and action will center on what President-elect Obama has dubbed the "American Recovery and Reinvestment Plan (ARRP). Even the pronounciation of the acronym tends to draw a connection to "TARP"—the $700 billion package Congress passed and the Treasury reinvented in the fall and early winter of 2008.

The two packages are tied beyond just their rhyming acronyms. Discussions within the Obama transition team—and between the team and Congressional leaders—over the size of the recovery package are pivoting on the question: "Can the recovery plan for Main Street be smaller than the bailout plan for Wall Street?" House Speaker Nancy Pelosi (D-CA) has indicated she is pointed at a $600 billion program, smaller than the TARP. However, the Obama transition team appears to be aiming at a target of $775 billion and the nation's Governors have been pushing for a number above the TARP number. Our sense is the ultimate proposal from the Obama team and Democratic Congressional leaders will be closer to the $775 billion number, so more for Main Street than for Wall Street...at least for now.

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Just in time for the holidays and for their survival, General Motors and Chrysler will get $13.4 billion in short-term (three year) financing from the Troubled Asset Relief Program (TARP) as announced by President Bush this morning. Another $4 billion in loans will be available for the companies in February, if necessary. By March 31, 2009, the companies must demonstrate they are financially viable or else immediately repay the loans. Treasury Secretary Hank Paulson issued a statement asserting that, "As a result of this decision, Treasury has effectively allocated the first $350 billion from the TARP." He went on to urge Congress to release the "remainder of the TARP to support financial market stability." News outlets are reporting the automakers will sign the loan agreements later this morning. The term sheets can be downloaded here (Chrysler, General Motors).

The money comes with several conditions:

• warrants for non-voting stock;
• executive compensation limits;
• no dividend distribution until TARP loans are repaid;
• government approval required for transactions over $100 million;
• labor agreement modifications; and
• debt reduction by two-thirds.

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When the General Accountability Office (GAO) reports, Congress listens. The GAO is the non-partisan investigating and auditing arm of Congress, and in its first bi-monthly TARP oversight report, it provides a comprehensive overview of the financial crisis and Treasury’s response to it. As the subtitle conveys, the GAO recommends “Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency.” There is no scandal or surprise in the 60-plus page report. While GAO acknowledges that Treasury’s Office of Financial Stability (OFS), which is charged with executing the TARP, has only existed for 60 days, the report points to critical areas for improvement. In its analysis, the GAO said that the Treasury Department generally agrees with eight of the nine GAO recommendations.

Despite the lack of drama, however, the report is an important guide for the OFS. Upcoming congressional hearings are likely to focus intensely on the following nine recommendations and how (quickly) Treasury can implement them. The GAO recommends that Treasury should:

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In another indication of the knock-on effects of the financial crisis, the auto industry's number one supporter in Congress suffered a preliminary defeat today in his effort to retain a powerful House committee chairmanship. House Energy and Commerce Committee Chairman John Dingell (D-MI) failed to get enough Democratic leadership votes today to retain his chairmanship over challenger Rep. Henry Waxman (D-CA). The Democratic Steering Committee, a leadership organization responsible for determining Democratic committee assignments, voted for Waxman by a vote of 25-22. Waxman is one of the most liberal members of Congress and a champion of environmental issues. Many environmental activists believe that Dingell has spent too long protecting the auto industry, which has resulted in a weakened industry that has failed to produce the cleaner, more efficient cars that consumers want.

The good news for Dingell is he gets a do-over with the full Democratic Caucus which is likely to vote tomorrow to accept or reject the steering committee decision. Dingell believes he has enough votes to prevail over Waxman. The two-dozen incoming Democratic freshmen will participate in that vote, and some believe that Waxman, who endorsed Barack Obama in the Democratic primary, will have more sway with the freshman class. Dingell, who endorsed Hillary Clinton, is expected to draw support from politically moderate members and older members, who are committed to preserving the seniority system.

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Treasury Secretary Hank Paulson today announced the Treasury Department will assist nonbank financial institutions with Troubled Asset Relief Program (TARP) funds and that the department will not use any funds for the original stated purpose of the program—the purchase of troubled assets from banks. The announcement of his intention to provide assistance to nonbank institutions represents a new step for Paulson. In making the announcement, the Secretary acknowledged that Treasury has not worked through the issue of funding organizations that are not federally regulated, however they are “designing further strategies for building capital in financial institutions,” and he said, “We will also consider capital needs of non-bank financial institutions not eligible for the current Capital Purchase Program.” He focused his remarks on the importance of shoring up the asset-backed securitization market by working with the Federal Reserve to develop a liquidity facility for AAA securities. Paulson acknowledged the need to “get lending going again,” and said, “While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.”

The accompanying announcement that Treasury does not intend to use TARP funds to purchase troubled assets as originally planned was a surprise to most observers. Paulson said he would seek to address the liquidity issues in the mortgage finance market by making additional capital available to banks if those funds were matched with private capital.

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On Wednesday, just one day after Senator Barack Obama won the presidency, the Treasury Department detailed how it planned to borrow a record $550 billion before the end of this year to back the bailout. Treasury said it would sell $55 billion in bonds next week, including a reintroduction of the three-year note—all part of a massive borrowing effort required because of the cost of the bailout and a budget deficit that some believe could hit nearly $1 trillion next year.
The government's surging financing needs are a stark reminder of the challenges awaiting the Obama Administration even as the current administration moves to implement its rescue program and the Fed fine-tunes its approach to the crisis. Treasury Secretary Paulson has pledged to work with incoming administration to ensure a smooth transition.

Treasury gave Congress its first report on the operation of the bailout fund, detailing the $125 billion the government spent last week to buy stakes in nine of the country's largest banks. The bailout legislation requires Treasury to issue reports each time its spending passes a $50 billion marker.

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