This article was originally published 3 October, 2008
On October 3, 2008 the House of Representatives voted to approve the Senate version of the Emergency Economic Stabilization Act of 2008 (the "Act"), a statute designed to create a "troubled asset relief program" ("TARP") administered by the U.S. Department of Treasury in response to the recent financial crisis. The President is expected to sign the Act quickly.
The Act will have far-reaching implications for financial markets and financial institutions in the United States. While many aspects of the TARP remain to be defined through regulation and agency implementation, a number of issues for asset sellers, potential servicers and others are apparent on the face of the statute. Assuming the Act is signed by the President, the following is an attempt to briefly summarize some of the key aspects of the Act that would have the broadest and most direct impact on the financial industry.
I. Covered Assets And Institutions
At its most fundamental level, the Act provides $700 billion to the Secretary of the Treasury (the "Secretary") in order to purchase, and to make and fund commitments to purchase, "troubled assets" from "financial institutions." For this purpose, "financial institutions" eligible to participate in the TARP must be established and regulated under federal or state law (or the law of any territory or possession of the United States) and have significant operations in the United States. "Financial institutions" include, but are not limited to, banks, savings associations, credit unions, broker-dealers, and insurance companies. The language "not limited to" leaves open the possibility that the Secretary could determine that other entities, such as certain hedge funds and securitization vehicles, could qualify to participate in the TARP. Branches and agencies of foreign banks arguably are "established and regulated" under United States law for purposes of this definition. Central banks of, and institutions owned by, a foreign government are not eligible to be financial institutions. However, to the extent such central banks or foreign institutions hold troubled assets as a result of the default or failure of a financial institution to which such entity extended credit, such assets may be purchased under the TARP.
"Troubled assets" initially include residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, in each case originating on or before March 14, 2008, that the Secretary determines would promote financial market stability if purchased. The term also means any other financial instrument, the purchase of which the Secretary, in consultation with the Chairman of the Board of the Federal Reserve System ("Fed Chairman"), determines is necessary to promote financial market stability, but only after transmittal of such determination to Congress. Thus, while the TARP clearly is targeted at residential and commercial loans and instruments based on such assets, such as mortgage-backed securities, the Secretary has extremely broad authority to expand the scope of the covered asset classes as necessary to promote market stability.
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