October 2008

New Legislation Authorizing the Troubled Asset Relief Program (TARP) Becomes Law

Holland & Knight Newsletter
Michael Galano

On October 1, 2008, the Senate approved H.R. 1424 by a vote of 74-25. This measure, among other things, authorizes the federal government to purchase so-called “toxic assets” blamed for the freezing credit markets. On October 3, the House approved the Senate-amended version of H.R. 1424 by a vote of 263-171. The legislation was immediately signed by President Bush (Pub. L. 110-343). Highlights include the following:

  • Phased-in Federal Funds. The new law requires the Department of Treasury to establish an office to manage the Troubled Asset Relief Program (TARP) and gives the department broad authority over how to purchase, price, manage and sell the assets. Proceeds from resales will be deposited into the general fund. The bill provides $700 billion for the program in three installments. Treasury will have access to $250 billion immediately, and $100 billion will be available upon certification of the President. The remaining $350 billion will be subject to a Congressional vote. The department may buy assets until December 31, 2009. The bill broadly defines the types of firms that will be eligible to sell their mortgage-related assets to Treasury, including any bank, savings association, credit union, security broker or dealer, or insurance company established and regulated under U.S. laws. In addition, foreign banks that receive troubled assets as collateral from a credit line they gave to a U.S. bank that fails will be able to participate. The bill excludes participation by foreign central banks and institutions owned by foreign governments.
  • Homeowner Assistance. The new law requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC and the Federal Reserve, to develop plans to minimize foreclosures. It also requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.
  • Tax Provisions. The package includes numerous tax extensions that will renew tax breaks scheduled to expire, including renewable energy incentives and relief from the Alternative Minimum Tax. The bill also provides a one-year extension of an existing tax deduction that gives $1,000 to families and $500 to individual homeowners who do not itemize on their tax returns.
  • Deposit Insurance. The new law raises the FDIC and the National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000 until December 31, 2009.
  • Accounting Rules. The new law gives the SEC the authority to suspend the application of fair-value accounting rules if the agency determines that such action is in the public interest and protects investors. The bill calls for the SEC, in consultation with the Federal Reserve and the Treasury Department, to conduct a study looking into whether fair market accounting rules contributed to the credit crisis.
  • Safeguards. The bill directs the President to propose legislation requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. The bill stipulates that Treasury set up an insurance program, to be funded with risk-based premiums paid by the industry, to guarantee companies’ troubled assets, including mortgage-backed securities, purchased before March 14, 2008.
  • Executive Pay. Treasury must promulgate executive compensation rules governing financial institutions that sell it troubled assets. Where Treasury buys assets directly, the institution must observe standards limiting incentives and prohibit “golden parachutes.” When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to
    additional taxes, including a 20 percent excise tax on golden parachute payments triggered by events other than retirement and tax deduction limits for compensation limits above $500,000.
  • Oversight. The new law establishes two oversight committees. A Financial Stability Oversight Board will include the Federal Reserve chairman, the SEC chairman, the Federal Home Finance Agency director, the HUD secretary and the Treasury secretary. A congressional oversight panel, to which the Financial Stability Oversight Board will report, will have five members appointed by House and Senate leadership from both parties.
  • Cost. The tax provisions of the new law may reduce federal tax revenue by $110 billion over 10 years, according to estimates from the Joint Committee on Taxation. More than half of that is due to the one-year extension of AMT relief. The Congressional Budget Office (CBO) said it cannot estimate the net budget effects of the TARP program because of the unknowns with that piece of the bill. According to CBO, the “lack of specificity regarding how the authority would be implemented and even what types of assets would be purchased makes it impossible at this point to provide a meaningful estimate of the ultimate impact on the federal budget from enacting this legislation.” CBO noted that while it expects the program “would entail some net budget cost,” the cost will be “substantially smaller than $700 billion.”

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