• Update Regarding Economic Recovery Plans
  • January 8, 2009 | Author: Kenneth G. Lore
  • Law Firm: Bingham McCutchen LLP - Washington Office
  • On Monday, December 1st, Treasury Secretary Paulson provided an update on the U.S. economy and plans for the remaining Troubled Assets Relief Program (“TARP”) funds. Although he expressed confidence that the U.S. economy will recover from the current economic crisis, he warned that the government must remain ready to respond quickly to the continuing economic crisis and that no one action by itself on the part of the government will end the current crisis. 

    These comments came on the heels of an announcement last week that the Federal Reserve and Treasury are creating two new programs aimed at helping the economic recovery. The first new program is the Term Asset-Backed Securities Loan Facility (“TALF”) under which the Federal Reserve will lend up to $200 billion to holders of certain AAA-rated asset-backed securities on a non-recourse basis. TALF is designed to make it easier for consumers to get credit to purchase cars, new appliances and for student loans. In October, the asset-backed credit market basically froze as the U.S. economy worsened. When this happened, the availability of affordable consumer credit diminished dramatically. To support TALF, Treasury will provide $20 billion of TARP funds as credit protection to the Federal Reserve.

    Under the second new program, the Federal Reserve will purchase up to $100 billion of direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and up to $500 billion of mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. Although the Federal Reserve has indicated that it plans to start making these purchases before the end of the year, it warned that the purchases will continue to take place over the next several quarters. Secretary Paulson indicated during his public remarks on December 1st that these steps “should have a positive impact” by making home buying more affordable for families and by helping existing homeowners who want to refinance their homes with more affordable mortgages. Secretary Paulson also indicated that Treasury will continue to consider new ideas for additional TARP programs that can assist in the ongoing economic recovery. 

    As Treasury and the Federal Reserve have been working on these new programs and other methods for dealing with the economic downturn, the SEC has also been working on guidance for financial institutions that must file proxy statements in order to participate in the Capital Purchase Program (“CPP”) created under the Emergency Economic Stabilization Act of 2008. Under CPP, financial institutions must agree to issue securities to the Treasury and certain financial institutions must file a proxy statement to obtain shareholder approval to authorize these securities. In order to assist financial institutions that are required to file proxy statements for this purpose, on November 24th the SEC provided examples of comments they have already issued for preliminary proxy statements filed by some financial institutions seeking to participate in CPP. These comments include suggestions for what each financial institution should disclose in the proxy statements such as whether the financial institution has applied for CPP, the status of the CPP application, and the impact participation in CPP will have existing shareholders.