Hope for Second Mortgage Holders

The Treasury Department yesterday released its new improved “Making Home Affordable” (MHA) program that will now offer assistance for second mortgages, such as home equity loans, in addition to assistance with first mortgages. The administration announced the MHA in February and released the details in early March. Tuesday’s announcement addressed the expansion of MHA as well as more support for the Hope for Homeowners program. Treasury estimates that 50 percent of “at risk” mortgages also have second liens. Under the new program, both first and second mortgages would be modified “in tandem.” Interest rates on second loans would be reduced to one percent, unless they are interest-only loans, in which cases the rate would be two percent. The term of the modified second loan would be extended to match the term of the modified first mortgage. After five years, the interest rate on the second would be adjusted to the same rate as the modified first mortgage, and the second mortgage would be re-amortized over the remaining term at the higher rate. The MHA also includes “pay for success” incentives for servicers and borrowers similar to those announced for first mortgage relief.

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EU Proposes New Rules for Hedge Funds, Private Equity While Debate on "Too-big-to-fail" Continues

The EC Commission on Wednesday proposed new binding legislation on “Alternative Investment Fund Managers” (AIFM), which includes the managers of hedge funds and private equity funds. This is, according to the Commission, the first attempt in any jurisdiction to create a comprehensive framework for the direct regulation and supervision in the alternative fund industry. The proposal now passes to the European Parliament and Council for consideration.

 The proposed AIFM Directive would:

  • Adopt an 'all encompassing' approach so as to ensure that no significant AIFM escapes effective regulation and oversight. The Directive will only apply to those AIFM managing a portfolio of more than 100 million euros. A higher threshold of 500 million euros applies to AIFM not using leverage (and having a five year lock-in period for their investors) as they are not regarded as posing systemic risks. A threshold of 100 million euros implies that roughly 30 percent of hedge fund managers, managing almost 90 percent of EU-domiciled hedge fund assets, would be covered by the Directive.
  • Regulate all major sources of risks in the alternative investment value chain by ensuring that AIFM are authorized and subject to ongoing regulation and that key service providers, including depositaries and administrators, are subject to robust regulatory standards.
  • Enhance the transparency of AIFM and the funds they manage for supervisors, investors, and other key stakeholders.
  • Ensure that all regulated entities are subject to appropriate governance standards and have robust systems in place for the management of risks, liquidity, and conflicts of interest.
  • Permit AIFM to market funds to professional investors throughout the EU subject to compliance with demanding regulatory standards.
  • Grant access to the European market to third country funds after a transitional period of three years. This should allow the EU to determine whether the necessary guarantees are in place in the countries where the funds are domiciled (e.g. the equivalence of regulatory and supervisory standards and the exchange of information on tax matters).
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Examining the Stress Test

This afternoon, the Federal Reserve released its white paper explaining the “design and implementation” of the Supervisory Capital Assessment Program (SCAP), more popularly known as the stress tests applied to the nation’s largest banks. The Fed said most banks have capital “well in excess of the amounts required to be well capitalized.” That said, it found that the nation’s 19 largest banks, including the banks they acquired, have together lost approximately $400 billion in the six quarters leading up to the end of 2008.

The SCAP required the banks to submit data and projections to their financial regulators in early March. The bank supervising agencies assigned over 150 of their supervisors, examiners, analysts, and economists working in teams to “conduct a comprehensive and consistent assessment simultaneously across the 19 largest BHCs [bank holding companies] using a common set of macroeconomic scenarios, and a common forward-looking conceptual framework.”

The goal of the SCAP is to determine how much capital these systemically significant banks should hold in order to “absorb losses should the economic downturn be longer and deeper than now expected.” Firms that will be required to “augment” their capital to create a buffer, will have the options of tapping the Treasury’s Capital Assistance Program; applying “to Treasury to exchange their existing Capital Purchase Program Preferred stock to help meet their buffer requirement;” and/or raising private capital. The Fed stressed that SCAP results requiring a bank to build a buffer should not be viewed as “a measure of the current solvency or viability of the firm.”

The SCAP results will not be made public until May 4th.

Federal Reserve: The Supervisory Capital Assessment Program - Design and Implementation (PDF)

Advances on the Road to Financial Reform

The United States and EU Member States are steadily chipping away at the iceberg that is the global financial crisis. The European Parliament on Wednesday approved the so-called “Solvency II” Directive, which, if also approved by the Council of Ministers, constitutes a significant change in EU insurance and reinsurance law. Solvency II is designed to improve consumer protection, modernize supervision, and deepen market integration. Insurance groups would have a dedicated “group supervisor” that would enable better monitoring of the group as a whole.

Commission President José Manual Barroso said:

"Solvency II will help protect policy holders from bad practice. It will help shield our economies against a repeat of the disastrous excessive risk taking by financial institutions, including certain insurance operators, that has contributed to the global crisis."

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In the Rumble Seat

Media outlets report this afternoon the rumblings of an impending bankruptcy for Chrysler -- with a filing as early as next week. This is not unexpected news, but some of the early discussion of the potential terms of the package are of interest for what they portend for a potential General Motors bankruptcy down the road.

It appears as if the Obama Administration is steering this plan towards a tough work-out plan for lenders to Chrysler. Reports say they may get as little as 22-cents on the dollar and a five percent equity stake.  A committee of lenders has proposed significantly more on both sides of that scale, as one might imagine. The federal government would offer financing to bridge the company through the bankruptcy process while its partnership with Fiat is finalized. Reports are that Fiat's continued interest is essential to this arrangement and that they do remain in the picture.

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CPP for Mutual Holding Companies and Banks

The Treasury Department this week released the terms for mutual holding companies and mutual banks to apply for TARP Capital Purchase Program funds. The application deadline is May 7, 2009 for mutual holding companies and May 14th for mutual banks. Links to the detailed documents are below.

Treasury Releases Capital Purchase Program Term Sheets for Mutual Holding Companies

Treasury Releases Capital Purchase Program Term Sheet for Mutual Banks

Stressed Out?

The Treasury Department is working to complete stress tests on 19 top U.S. banks. Reports are circulating that all the banks will receive a passing grade, but there is going to be some differentiation in the results between those that are particularly strong and those that are not. Several media outlets today are citing "senior Administration officials" as saying Treasury plans to release—or to encourage the banks to release—the results of the stress tests. The purpose for this, according to these officials, is to prevent rumors about "weak" institutions from causing investors, creditors, borrowers, and depositors to lose confidence in certain institutions. The release of the results will not occur before the end of the "earnings season"— April 24.

It does appear to us that the stress test results will be a contributing factor to a sorting of the banking industry into the healthy and the less healthy—to look at it in the most charitable light. Some banks are contributing to that sorting process by touting early their first quarter results and by openly discussing paying back the TARP funding they have received.

So faced with this developing story, we here at Financial Reform Watch have some questions we are pondering:

  • Will Treasury actually sort the banks into categories of strength?
  • What information will Treasury release and what information will the banks release?
  • Will the markets react as Treasury hopes to the release of information, or will they focus only on the less good results as a reason to drive down the values of certain institutions' stocks?

If this sorting process develops through the spring and the summer, talk of consolidation in the industry is likely to increase. So that supposition leads to questions as to whether or not Secretary Geithner will become an advocate for consolidation as Secretary Paulson before him did in suggesting through the capital injection process that certain banks—usually smaller ones—should be taken over by others.

In any case, the release of stress test results and information compiled in conducting the test could just as easily roil the markets as calm them in our view.


Participation by insurance companies in the TARP program appears to be back on the front burner at Treasury. However, eligibility standards for receiving assistance and the requirements that come along with it are very much under discussion.

Back in the fall , several big-name insurance companies rushed to make the November 14 deadline to apply for assistance from the TARP program. A few were in the news for buying small banks or thrifts in order to qualify for TARP funds, since only federally regulated deposit institutions are eligible for the TARP’s Capital Purchase Program. (AIG has its own special category for TARP assistance—Systemically Significant Failing Institutions.) But as November turned to December it became clear the Bush Administration was not going to move on assistance to insurers.

Now, almost five months later, some life insurance stocks are seeing significant gains on rumors that Treasury is about to provide billions of bailout dollars to their companies.

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Driving Toward Protest or Prosperity?

As President Obama returns from his trip to Europe and Iraq, he will be dealing with ongoing questions about the steps he took last week to address the troubles in the U.S. auto industry. Did his actions represent an overstepping? Are people tired of or reassured by government intervention in private companies? Has the administration’s treatment of Wall Street firms been more favorable than its dealings with the more “Main Street” automakers? Whatever the answers to the above questions, the administration’s latest efforts on the auto front elicited a mixture of praise, befuddlement, and opposition on Capitol Hill.

The administration’s Auto Task Force made headlines after panning the GM and Chrysler restructuring plans and forcing out GM CEO Rick Wagoner. They also gave Chrysler thirty days to pull off a shot-gun wedding with Italian carmaker Fiat, asserting that Chrysler “is not viable as a stand alone company.” The administration even entered into the car warranty business, setting up a program to reassure prospective buyers of new GM and Chrysler automobiles that their warranties will be honored regardless of the automakers’ futures.

While Speaker of the House Nancy Pelosi (D-CA) issued a statement supporting the administration, it was very generic. Even the Michigan delegation, which generally praised the warranty program, grumbled about Wagoner’s ouster, the automakers’ treatment compared to the banks, and the tight timelines with the government giving Chrysler 30 days and GM 60 days worth of working capital before facing the prospect of bankruptcy.

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IMF Funding and Hedge Fund Regulation

The G20 meeting has slipped quietly below the water line as a news story in the United States—replaced by Michelle Obama's star power, the North Korean rocket, and the NCAA basketball championships. However, there are still some ripples from it moving across the seascape of U.S. politics.

In Europe, on the other hand, policy proposals are being drafted and, sometimes leaked, to gauge the views of constituents. The EC Commission’s proposal (though it has yet to be formally adopted) concerning regulation of private equity and hedge funds, an issue also hotly debated at G20, found its way into the media today—managers of hedge funds and private equity funds need to be registered while their funds must hold a minimum level of capital and also disclose information on borrowing to regulators.

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An Agreement and a Commitment to Deliver

International summits are frequently more about atmospherics than they are about substance. The G20 meeting just concluded in London was no different from the norm. On a substantive level, the most consequential outcomes were the $750 billion in IMF capitalization ($500 billion in loans and guarantees and $250 billion in Special Drawing Rights) to aid emerging nations, $250 billion in trade credits from the IMF, and $100 billion in loans from other multilateral institutions. Certainly a substantial allocation of resources, but hardly a package that required heads of government for approval.

What did require the presence of the leaders of these nations was the display of common purpose that emerged from the meetings. While no concrete steps were agreed to, the mutual commitments to expand trade, tighten financial regulation, establish global monitoring systems and support greater transparency in executive compensation demonstrate a recognition of many of the key elements that led to the current crisis. The communiqué issued at the conclusion of the meeting touches on all these issues.

While not a crucial issue in the discussions, the matter of regulation of tax havens came into focus in the American media because of President Obama's reported role in bridging a divide between French President Nicholas Sarkozy and Chinese Premier Hu Jintao. According to an account from the White House that was corroborated by French and German government sources, Obama pulled the two leaders aside, first separately and then together, to negotiate a language change that papered over the differences that had emerged between the two during the group discussions. American media have reported widely on this sideshow because it is viewed as reflective of the difference in style between this U.S. President and his predecessor.

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Executive Compensation Take Two - "Pay for Performance"

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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Pre-G20 Stress

On Monday's post, we pointed out the potential for posturing at the G20 due to the high stakes and the short-meeting format. On Tuesday, French President Nicholas Sarkozy threatened to walk out of the meeting if there was not agreement on strong international regulation of financial markets.

The draft communiqué for the meeting, which has been circulating for several days, includes a call for broader regulation of hedge funds and other financial firms and products but leaves unclear how strong international regulatory bodies would be in relation to national ones. President Obama is certain to resist any effort to include language that would suggest placing an international body in a superior position to US agencies. If Sarkozy were to make good on his threat, it is difficult to predict who would be injured.

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