- Member Services
- Member Search
- TBA Member Benefits
- Cert Search
- Law Practice Management
- Legal Links
- Legislative Updates
- Local Rules of Court
- Opinion Search
- Tennessee Rules of Professional Conduct
- Update Information
- Celebrate Pro Bono
- Corporate Counsel Pro Bono Initiative
- Diversity Job Fair
- Law Student Outreach
- Leadership Law
- Public Education Programs
- TBA Academy
- Tennessee High School Mock Trial
- Youth Courts
- 2013 TBA Annual Convention
- TBA Groups
- TBALL Class of 2013
- Leadership Law Alumni
- Mentoring Task Force
- Tennessee Legal Organizations
- YLD Fellows
- Access to Justice
- The TBA
Just Throw a TARP Over the Problem
The Troubled Assets Relief Program
Government loves acronyms. From ERISA to the EPA, agency-speak sets apart practitioners who understand the language of their particular expertise. The popular media have made much of the United States Treasury's "bail out" of financial institutions and the rescue of the Big Three automakers, and with this effort has come a new set of acronyms to be misunderstood by those who are not involved in their interpretation.
The Emergency Economic Stabilization Act of 2008 (EESA), hastily enacted by Congress on Oct. 3, 2008, after the failure or near failure of major financial institutions, provides up to $700 billion to the Secretary of the Treasury to purchase troubled mortgages and other assets that have languished on the balance sheets of financial institutions, hampering those banks' ability to make credit available to families, businesses, and each other. EESA is the umbrella law that created the Troubled Assets Relief Program (TARP), which, among other powers, gives the Secretary of the Treasury the authority to acquire troubled assets through Dec. 31, 2009, with the ability to extend that period through Oct. 3, 2010, if the Secretary of the Treasury certifies to Congress the need for the extension and its anticipated cost to taxpayers.
One of the purposes of EESA is to provide liquidity to the financial markets. EESA also requires the Treasury (whenever possible) to modify trouble loans, particularly loans that were predatory in nature, to help families keep their homes. The new law directs other federal agencies to modify loans that they own or control and expands the "HOPE for Homeowners" program by expanding eligibility and increasing the ability of the Department of Housing and Urban Development (HUD) to help more families keep their homes.
ecause the $700 billion bail out is taxpayer money, EESA requires companies that take the bail-out money to provide warrants to taxpayers (through the Treasury) that will help insure that the American taxpayer will benefit from any future growth that these banking companies may experience as a result of participation in the program. The law also seeks to prohibit banking executives who may have made bad decisions with respect to running their companies from walking away with millions of dollars in bonuses, so banks that participate in the program will lose certain tax benefits and must limit executive pay and "golden parachutes."
Congress was unwilling to give the Secretary of the Treasury the entire $700 billion in one blank check but rather allocated $250 billion immediately, requiring the president to certify that additional funds are needed before the remainder of the funds are authorized. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary fashion and provides for a special inspector general to protect against waste, fraud and abuse.
Only time will tell whether EESA will have the intended salutary effect on the economy. Supporters of the legislation argued that this kind of intervention in the financial markets was required to prevent further erosion of confidence in the system, both nationally and internationally. Polls showed that there was little public support for the rescue plan because the perception was that it was intended to bail out the Wall Street investment banks, viewed by the public as the epitome of a "greed is good" mentality.
To date, three TARP programs have been initiated. Under the Capital Purchase Plan (CPP), the Treasury purchases preferred stock in financial institutions. Initially, the CPP was designed only for financial institutions whose stock was publicly traded, but the outcry from the non-publicly traded community banks sent the Treasury back to the drafting board to craft a term sheet that did not rely on the publicly traded nature of a company's stock. At this writing, the Treasury has yet to figure out how banks that have elected subchapter S tax treatment can participate in the CPP. When the CPP was first announced, many bankers wondered whether their shareholders and their customers would criticize them for taking the TARP money. Bankers theorized that shareholders and customers might believe that their retail, commercial banks were in trouble and needed this capital to survive like the investment banks that helped create the crisis. The banking regulators tried to dispel this notion by encouraging all banks to apply for the TARP funds, telling bankers that only the strongest companies would be eligible. The sentiment among bankers shifted then to the idea that if they did not take the money, their shareholders and customers might think the banks were not strong enough to be considered. The guessing game about public perception continues, but most community banks in Tennessee ultimately decided to apply for the CPP's TARP money. Ironically, the banks that probably did need the additional capital the most probably will not receive any of it.
The second TARP program is the Troubled Assets Auction Program (TAAP). This program was designed to apply to auction purchases of troubled assets by the Treasury. To date, the Treasury has not figured out how to make this work, and it is unlikely that the original purpose of EESA (the purchase of troubled assets) will ever be realized. Treasury Secretary Henry Paulson, who initially philosophically favored TAAP over the CPP, changed course and announced that rather than trying to craft an auction process for the purchase of troubled assets (primarily mortgages), the CPP was the better plan for deploying capital more efficiently. Finally, the Program for Systemically Significant Failing Institutions (PSSFI) is a program outside of CPP but directed to financial institutions with whom Treasury may negotiate individual arrangements for purchasing assets and/or providing funding, including purchases of preferred stock.
For most community banks that have applied for TARP funds, the EESA limitations on executive compensation are not a significant factor because community bankers do not pull down multi-million dollar salaries and bonuses. However, Congress wanted to be sure that executives whose companies do receive TARP funds don't walk away with Wall Street salaries and bonuses that would shock Main Street. Financial institutions that participate in the CPP must agree to exclude incentives for senior executive officers that present "unnecessary and excessive risks that threaten the value of the financial institution during the period that the secretary [of the Treasury] holds an equity or debt position in the financial institution." §111(b)(1)(A). The compensation committee of the financial institution must certify that the incentive compensation for these officers does not encourage unnecessary and excessive risk. However, the CPP gives interpretive discretion to the financial institution's compensation committee, so time will tell how these companies decide to define "unnecessary and excessive risk."
EESA further provides that a CPP-participating financial institution must recover any bonus or incentive compensation paid to a senior executive officer "based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate." §111(b)(2)(B). Golden parachutes are also prohibited during the period the Secretary of the Treasury holds an equity or debt position in the financial institution. §111(b)(2)(C). However, the golden parachute rule does not appear to prevent deferred compensation per se even if that compensation exceeds 2.99 times the executive's base amount and is paid out upon any termination. A financial institution participating in CPP must agree not to claim a federal tax deduction for compensation of a covered executive in excess of $500,000 during taxable years that fall within the period the Treasury holds equity or debt or other assets acquired pursuant to CPP. This article is not intended as a full discussion of the highly complex executive compensation issues raised by EESA. Benefits counsel for large financial institutions will enjoy the bonus of full employment created by the new legislation because the ultimate effect of EESA and CPP on executive compensation is difficult to predict. Some believe that there may be a trickle-down effect to lower-level executives at participating companies, which may ultimately include more than banks because of the broad definition of "financial institution" under EESA.
The EESA saga is evolving, so nothing written about this important legislation will be completely accurate on its publication date. Attorneys interested in up-to-date information about the rescue plan(s) du jour can read all about it on the Treasury's Web site: www.ustreas.gov.
KATHRYN REED EDGE is a member of Miller & Martin PLLC, a regional law firm with offices in Nashville, Chattanooga, and Atlanta. She heads the firm’s Commercial Department and concentrates her practice in representing financial institutions. She is a past president of the Tennessee Bar Association and is a member of the editorial board for the Tennessee Bar Journal.