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

Based on conversations with sources on Capitol Hill and administration officials, it now seems somewhat less likely the Treasury Department will expand its Capital Purchase Program (CPP) to include the insurance industry. Some life insurers may have publicly overstated their discussions with Treasury, leading to press accounts and misperceptions that the issue had been resolved.
Likewise, sources say Treasury is unlikely to assist the auto industry with funds from the $700 billion financial rescue package unless Congress makes legislative changes.

However, there is one scenario under which two leading auto makers might be able to get some Treasury assistance. GMAC LLC, which is the lending arm of General Motors, is owned 51 percent by Cerberus Capital Management and 49 percent by GM. Cerberus could become a bank holding company in order to qualify for EESA assistance. According to the Wall Street Journal, the federal rules for this would require GM to transfer much of its GMAC holdings to Cerberus so that GM would own less than 24.9 percent of the voting shares and would have no controlling interest in GMAC. Transforming into a bank holding company would enable GMAC to participate in Treasury’s Capital Purchase Program. Additionally, since Cerberus owns 80.1 percent of Chrysler, which is in merger talks with GM, the companies may be able to structure a deal in which Cerberus would exchange Chrysler shares for GMAC shares.

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Developments surrounding the Treasury's Capital Purchase Program (CPP) in recent days are causing the Department to take a hard look at the justifications for federal investment in industries beyond those federally regulated. Appeals from the insurance and the auto industry are both being reviewed.

It appears the insurance industry proposals are getting the strongest consideration at present, but there are clearly some cross-currents at work that are complicating the decision about whether or not to include them in the CPP. Reflecting that duality, Treasury’s assistant secretary for financial institutions, David Nason, appeared on CNBC’s "Squawk Box" this morning and indicated that there is some difficulty for Treasury to assess the capital needs of an industry that does not fall under federal regulation. He noted that while for the banking industry Treasury is relying on federal regulatory agencies, there is no such federal role in the insurance industry. On the other hand, he noted that it may be important for the stability of the financial sector to expand the CPP to cover insurance. Treasury is evaluating that question as well.

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October 23 was a busy day for Federal Deposit Insurance Corporation Chairman Sheila Bair. In the morning, she testified before the Senate Banking Committee and made headlines about what the FDIC is doing to assist homeowners avoid foreclosures. In the afternoon, she presided over an FDIC Board of Directors meeting wherein the board adopted an interim rule for implementing the Temporary Liquidity Guarantee Program.

Under the Emergency Economic Stabilization Act of 2008 (EESA), the Treasury Secretary has authority to modify mortgage loans in order to prevent foreclosures. Senate Banking Committee Chairman Chris Dodd claims authorship of those provisions in the bill. However, in recent days, Congressional Democrats have complained the Bush Administration is putting too much emphasis on shoring up banks and not enough on helping homeowners directly. In fact, earlier in the week, House Financial Services Committee Chairman Barney Frank (D-MA) and Rep. Maxine Waters (D-CA) wrote a joint letter to President Bush urging him to appoint Bair “to head a government-wide effort to supervise and coordinate” a foreclosure reduction program.

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Events of yesterday continued to demonstrate how major elements of the current financial crisis are interrelated. First, with the world waiting to see how a new administration in Washington will approach the financial crisis, President Bush's announcement of a November 15 summit of international leaders puts the discussion of a new regulatory regime for the financial sector squarely in the middle of the U.S. presidential transition. While both Sens. John McCain and Barack Obama praised the summit, it will present the winner of the November 4 election with an interesting quandary—how to participate in and/or react to the event. It may also force the hand of the President-Elect to name his economic team before the summit takes place. Doing so will allow the administration-in-waiting to have a more organized response to the events of the summit.

Second, the impacts of the financial crisis on the U.S. auto industry may be putting additional pressure on the $700 billion rescue package enacted on October 3. As potential car buyers continue to face a credit crunch, bipartisan leaders of the Michigan congressional delegation yesterday urged the Treasury to make a portion of the funds available to back auto loans. The request came from House Energy and Commerce Committee Chair John Dingell (D-MI) and Rep. Fred Upton (R-MI). If Treasury takes up that suggestion, funds available to supply capital to community banks or purchased troubled mortgages would be reduced.

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Testimony from academics and industry during today’s House Financial Services Committee hearing produced broad bipartisan consensus that the current regulatory structure is outdated. Testifying on behalf of industry were leaders from the Independent Community Bankers Association (ICBA), the Financial Services Roundtable, the American Bankers Association (ABA), and the Securities Industry and Financial Markets Association. As the committee’s first major hearing following the federal financial rescue efforts, it covered a wide swath of issues outlined below. 

• Creation of a Select Committee on Financial Reform—Chairman Barney Frank and several members supported this idea. In addition to Financial Services Committee members, a select committee would include members from the House Committees on Oversight and Government Reform, Agriculture, and Ways and Means. One of the academic witnesses, University of Rochester President Joel Seligman, suggested a commission modeled after the 9-11 Commission. 
• Derivatives—What role did credit default swaps play in the financial crisis? Should there be increased capitalization requirements for derivatives’ issuers? The questions remain, but most agreed on the need for increased oversight of complex financial derivatives. 

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Reports in the media today indicate that the Treasury Department is considering using part of the $250 billion from the initial tranche of financial rescue money to support acquisitions by stronger banks of weaker ones. In retrospect, there was a foretelling of this strategy in the announcement of the initial round of recapitalization transactions with the "big 9" institutions. At that time, Treasury announced that of the $25 billion given both to Bank of America and Wells Fargo, a $5 billion portion in each case was to support their recent acquisitions.

This new emphasis on restructuring the banking system raises some important questions about how deep the Treasury Department plans to go in assisting banks farther down the food chain. On Monday, Secretary Paulson indicated that all "qualifying" regional and community banks would receive capital under the recapitalization program—implying that assistance would not be limited due to a lack of available funds. At the same time, however, Treasury has made it clear that not all applications for capital infusion will be accepted.

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A short time ago, Treasury Secretary Hank Paulson announced some much-awaited details about the Department’s Capital Purchase Program (CPP). The Treasury will invest $250 billion of capital to U.S. financial institutions in the form of preferred stock. Nine of the largest banks have already agreed to participate in the CPP, which leaves $125 billion remaining. Paulson stressed that the program will not be implemented on a first-come-first-served basis, stating, "Sufficient capital has been allocated so that all qualifying banks can participate."

The Department has developed a single application form for qualified, interested banks to submit to their primary federal regulator—the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, or the Office of Thrift Supervision. Once a bank’s primary regulator reviews the application, the regulator will forward the bank’s application to Treasury’s Office of Financial Stability for approval. Paulson said Treasury will "give considerable weight" to the recommendations of the federal regulators. The terms will be the same for all applicants, and regulators will use a standardized review process. Treasury will announce all transactions within 48 hours of execution; however, the Treasury will not publicly reveal any applications that are withdrawn or denied. The application deadline remains November 14, 2008.

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Many unresolved issues continue to surround the financial relief program as evidenced by a flurry of diverse actions today. The nation’s banking regulators—the Federal Reserve, the Federal Deposit Insurance Agency, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—issued a joint release about tax relief for banking organizations that have suffered losses on their Fannie Mae and Freddie Mac holdings. The regulators will allow banking organizations “to recognize the effect of the tax change enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (EESA) in their third quarter 2008 regulatory capital calculations.” Without today’s decision, banking institutions would not have seen any tax benefit until the fourth quarter of 2008.

Also today, leaders of the Independent Community Bankers Association (ICBA) met with President Bush and Secretary Paulson to discuss the Treasury’s capital purchase program. The FDIC will be the main overseer of that program; however, institutions’ primary regulators (e.g., OCC or OTS) will assist the FDIC. The Treasury has released some details of the program, but according to an ICBA press release, more details are needed. Association leaders urged Treasury to provide “details on how mutual, Subchapter S corporation, privately held and non-publicly traded community banks can participate.”

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As the stock market continues its seesaw sessions this week, the Treasury Department is focusing on implementation of the programs that flow from the financial rescue package assembled in recent weeks.

After Monday's announcement of the capital infusion to the nine largest US banks, attention is turning to the thousands of community and regional banks nationwide that may be eligible for assistance from the capital purchase program. The Treasury Department has announced that November 14 is the deadline for institutions to get their applications in for assistance under the program. Our report on Tuesday, October 14 included the details of the capital purchase program.

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Treasury Department officials confirmed overnight their plan to allocate the first $250 billion of the $700 billion financial rescue package not for the purchase of troubled assets, as originally contemplated, but to inject capital into nine of the nation's largest banks in exchange for preferred shares. Calling it the TARP Capital Purchase Program, President Bush is expected to certify today that the next $100 million of the plan is required for release per the provisions of the Emergency Economic Stabilization Act of 2008.

Here is how the funds will be distributed:

Citigroup $25 billion
JP Morgan Chase $25 billion
Bank of America $25 billion (including $5 billion for its Merrill Lynch acquisition)
Wells Fargo $25 billion (including $5 billion for its Wachovia acquisition)
Goldman Sachs $10 billion
Morgan Stanley $10 billion
Bank of New York $2-3 billion
Mellon Bank $2-3 billion
State Street Bank $2-3 billion
TOTAL $126 - 129 billion.

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World stock markets responded well this morning to the emerging consensus among European and U.S. officials to focus on capitalizing banks with government funds in exchange for an ownership stake in them. Wednesday's announcement from U.K. Prime Minister Gordon Brown that he plans to inject capital directly into banks and to guarantee interbank lending accelerated momentum for similar moves by the United States and European central bankers. Meetings on Friday and over the weekend among the G7 finance ministers and at the International Monetary Fund in Washington helped to bring these key players into alignment.

Meanwhile, the Treasury Department took further steps to implement the Troubled Asset Relief Program (TARP). In a speech this morning before the Institute of International Bankers, acting assistant secretary of the Office of Financial Stability (OFS) Neel Kashkari outlined progress and the seven internal policy teams established to execute the TARP: 

1. Mortgage-backed Securities Purchase Program—will examine which assets to purchase, from whom, and how
2. Whole Loan Purchase Program—will work with bank regulators to determine which loans to purchase first, how to value them, and how to purchase them
3. Insurance Program—on Friday, Treasury solicited public comments on how to insure troubled assets; comments are due within 14 days, at which point OFS will develop the program
4. Equity Purchase Program—will establish a standardized program to buy equity in a broad array of financial institutions; program will be voluntary with attractive terms so healthy institutions will participate and also raise private capital to complement public capital
5. Homeownership Preservation—will work with the Department of Housing and Urban Development to help homeowners when the Treasury purchases mortgages and mortgage-backed securities
6. Executive Compensation Program—will define firms’ participation requirements for three scenarios: auction purchase of troubled assets, broad equity or direct purchase program, and an intervention to prevent the failure of a systemically significant firm
7. Compliance Program—will set up the Oversight Board, the on-site participation of the General Accounting Office, the selection of a special inspector general, and all the reporting mechanisms

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The House of Representatives just passed the financial rescue package (H.R. 1424) by a vote of 263 to 171. The breakdown of Democrats and Republicans supporting the bill was 172 and 91 respectively. The Democrats picked up 32 votes and the Republicans picked up 26.

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As implementation of the financial rescue package accelerates, Treasury Secretary Hank Paulson today outlined at a press conference steps underway to implement the Troubled Asset Relief Program (TARP). Among those steps is the appointment of Neel Kashkari, a 35-year-old aerospace engineer whose resume includes a Wharton MBA and investment banking for Goldman Sachs, to be the interim head of the new Office of Financial Stability. The process for selecting firms to manage assets and assist in administering the TARP is underway. While it is moving quickly, we anticipate there will be additional opportunities in the near future for asset management firms and other service providers to be involved.

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The president signed the Emergency Economic Stabilization Act of 2008 within hours of the House passing the bill on October 3rd. As the administration begins the important work of implementing the Troubled Asset Relief Program (TARP), we thought it would be instructive to explore the reasons why House Democrats and Republicans shifted their votes so that Monday’s defeat became Friday’s victory.

Although one Democrat switched from a yes to no (Rep. Jim McDermott, D-WA), 33 House Democrats switched their votes to support the rescue plan on Friday. The fiscally conservative Blue Dog Caucus, which had been almost evenly split on Monday added five more to the yes column on Friday. A large number of freshman Democrats and Congressional Black Caucus (CBC) members, many of whom had been skeptical of the bailout plan on Monday, shifted in support of the final package. The 31 of 39 CBC members who voted yes said they did so based on the promises of Sen. Barack Obama, who said he would deliver economic stimulus legislation, a change in bankruptcy laws, and more regulation of Wall Street early in an Obama Administration. Democrats also picked up seven California members due to the escalation of financial problems in their state.

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The Dow Jones Industrial Average is inching up while the House completes the final hours of debate on the financial rescue package. Earlier today, the House agreed to a closed rule for H.R. 1424, which contains the Emergency Economic Stabilization Act along with tax extenders, and mental health parity provisions. The rule for H.R. 1424 does not allow members to amend the legislation in any way, and it also permits the leaders to call for a second vote today, if the first fails.

We are told leadership is planning for a vote at 1 p.m., unless the votes are not yet secured to pass the plan. Momentum appears to be swinging in the direction of passage. Some of our sources are saying as many as 20 members on the GOP side alone may now be switching from "no" to "yes." Only 12 members need to switch to put the measure over the top. On the Democratic side, concerns are ebbing that votes will be lost from the members of the fiscally conservative "Blue Dog" caucus who opposed adding tax breaks that are not "paid for" with corresponding revenue increases.

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Wall Street is still on pins and needles due to the increase in jobless claims, the decline in factory orders, and the uncertainty surrounding tomorrow’s House vote on the financial rescue plan. The Dow Jones Industrial Average lost nearly 350 points today.

The House Rules Committee is meeting as we write. Our contacts on the Hill are telling us to expect a "closed rule," which means the House would not be able to amend the Senate-passed legislation. The House is scheduled to convene at 9 a.m. tomorrow for a yet-undetermined amount of debate followed by the vote.

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Last night's Senate vote on the financial rescue plan, a 74-25 victory, followed the pattern of Monday's House vote. The more conservative and liberal Senators voted against it as well as Senators in tight races. Since only one-third of the Senate must stand for re-election, the third category had much less impact than in the House.

On the House side, there are signs of positive movement on both sides of the aisle. Based on conversations with our contacts on the Hill, we believe as many as 20-25 members who voted against the package on Monday may now support the plan.

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The Senate passed the financial reform package tonight by a vote of 74 to 25. We'll have more analysis in the morning and a look ahead to House action.

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With confidence in Senate passage running high, Washington's attention -- and Wall Street's -- is turning back to the House. House Majority Whip James Clyburn (D-SC) told reporters this afternoon that he expects the House to vote on the Senate rescue package on Friday. On Thursday, the House will likely debate the "rule" for the package, which dictates whether and how members can amend the legislation.

Discussion today has focused on the impact in the House of the items the Senate is adding to the legislative package. The calculus involved is illustrated by looking at one of the "add-ons," the one-year fix for the alternative minimum tax (AMT). If Congress does not alter the AMT, as many as 22 million additional taxpayers, including many middle income taxpayers, could confront it in April. The House recently voted on a stand-alone AMT relief bill on September 24, and 393 members voted for it – 200 Democrats and 193 Republicans.

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Senate leaders this morning assembled the legislative package that contains the financial rescue plan on which the Senate will vote today.  Senate Banking Committee Chairman Chris Dodd (D-CT) only added one new provision to the Economic Stabilization and Recovery Act of 2008.  The new Section 136 amends the Federal Deposit Insurance Act and the Federal Credit Union Act to increase temporarily deposit and share insurance respectively to $250,000 from the current $100,000.  This authority only runs through December 31, 2009.
 
The financial rescue legislation has exploded from the 109 page bill considered by the House to a 451 page amalgam, thanks to the additions of the tax extender package – H.R. 6049, which the Senate passed on September 23rd by a vote of 93 to 2 – and the Paul Wellstone Mental Health and Addiction Equity Act, H.R. 1424.  The mental health bill is the actual vehicle, and if the Senate passes the bill tonight as expected, the House will vote on the new H.R. 1424 tomorrow, most likely. 

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Last night Senate leadership announced that the Senate will vote today on the financial rescue plan. The only substantive change announced to the previous package was the lifting to $250,000 of the cap for FDIC insurance coverage of deposit accounts.

Sen. Chris Dodd (D-CT), Chair of the Senate Banking Committee, said he will offer an additional amendment, but that it will only include "agreed upon" items.

In a move that may complicate things somewhat, the Senate has also attached to the package a tax break extender bill covering a number of provisions. This legislation has been "ping-ponging" around the Capitol for months, with the House and Senate leaders differing over the approach.
 

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