• Financial Markets Rescue Package Q&A: Asset Eligibility (1 of 10)
  • October 26, 2008
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The federal government's Troubled Asset Relief Program (TARP)--created by The Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008--gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions.

    What assets are eligible for purchase and from whom?

    Q: Who can sell?

    A: The Treasury can purchase assets from any "financial institution" as defined in the EESA. Financial institutions are defined broadly to include essentially any entity holding qualifying assets, as long as the institution has a sufficient connection to the United States: "The term ‘financial institution' means any institution, including but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory or possession of the United States . . . and having significant operations in the United States, but excluding the central bank of, or institution owned by, a foreign government." (§ 3(5).)

    The requirements for being "established and regulated . . and having significant operations" are phrased in the conjunctive, indicating that foreign financial institutions will not qualify, even if they have significant operations in the United States. U.S.-based affiliates and subsidiaries of foreign institutions, however, should qualify.

    Q: What can be sold?

    A: Any "troubled assets." Initially, "troubled assets are any residential or commercial mortgages, and any securities that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary [of the Treasury] determines promotes financial market stability." (§ 3(9).) The Secretary of the Treasury can expand this definition, however, by certifying to Congress that he has determined that the purchase of "any other financial instrument . . . is necessary to promote financial market stability." (Id.)

    Q: Will the Treasury Department be purchasing equity in financial institutions as well as troubled assets?

    A: The Treasury Department has announced that it also intends to directly purchase equity stakes in financial institutions.  The department has not announced the specifics of this equity purchase program.  It has stated that it will be a voluntary program, which will be "designed with attractive terms to encourage participation from healthy institutions."