• Financial Markets Rescue Package Q&A: Program Operations (2 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.

    How will the program be run?

    Q: Who decides what to buy and from whom? Who is running the program?

    A: The Secretary of the Treasury has broad discretion to decide what to buy and from whom. (§ 101(a)(1).) The EESA establishes an Office of Financial Stability within the Treasury Department, headed by an Assistant Secretary who will be a presidential appointee subject to Senate approval. (§ 101(a)(3).) Treasury Secretary Paulson has appointed Neel Kashkari as the Interim Assistant Secretary. Interim Secretary Kashkari was previously the Assistant Secretary of the Treasury for International Economics and Development. Before joining the Treasury Department, Interim Secretary Kashkari was a vice president at Goldman, Sachs & Co. in San Francisco.

    The Treasury Secretary is also instructed to consult with the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and the Secretary of Housing and Urban Development in exercising his authority. (§ 101(b).) The Treasury Secretary is also authorized to hire financial institutions to serve as financial agents of the federal government for purposes of implementing the TARP. (§ 101(c)(3).) Shortly after passage of the EESA, the Treasury Department requested proposals for institutions to serve in three capacities: (1) custodian, accounting, auction management and other infrastructure services; (2) securities asset management services; and (3) whole loan asset management services. The solicitation period for these positions is closed, and the Treasury Department anticipates announcing the initial selections next week.

    The EESA also creates a Financial Stability Oversight Board comprised of the Chair of the Federal Reserve Board, the Treasury Secretary, the Director of the Federal Housing Finance Agency, the Chair of the Securities and Exchange Commission, and the U.S. Secretary of Housing and Urban Development to review the Treasury Secretary's exercise of authority under the TARP. (§104.) This board also may appoint a credit review committee to evaluate purchases. (§ 104(f).) The EESA states that this board "shall have the authority to ensure" that the Secretary's policies are consistent with the purposes of the EESA, in the economic interests of the United States, and consistent with protecting taxpayers. (§ 104(e).) The EESA, however, contains no provision under which the board could exercise any such authority. Instead, the board is required to make a quarterly report to Congress, make recommendations to the Secretary, and refer suspected fraud or malfeasance to the Special Inspector General for the TARP. (§ 104(a) & (g).)

    Q: What are the criteria for determining the sellers and assets to be chosen? How does the government pick the sellers? The assets?

    A: The EESA provides no specific criteria for determining the sellers and assets. The Treasury Secretary is required to publish "program guidelines" that contain criteria for identifying troubled assets for purchase. (§ 101(d).) Those guidelines must be published within 45 days of passage or 2 days of the first purchase of troubled assets under the TARP. (Id.)

    The EESA contains a very broad list of considerations the Secretary must consider in exercising his authority under the EESA, including: protecting the return to taxpayers, providing stability to financial markets, the need to help families keep their homes, the long-term viability of particular financial institutions, ensuring that all financial institutions are eligible to participate regardless of size, providing financial assistance to financial institutions that serve low- and moderate-income populations and other underserved communities and have assets less than $1 billion and that have lost capitalization because of devaluation of preferred stock in government-sponsored enterprises, the need to ensure stability for public bodies, protecting retirement investments, and the utility of purchasing real estate and instruments backed by mortgages on multifamily properties. (§ 103.) The Secretary is also required to use his authority to "minimize the potential long-term negative impact on the taxpayer" including considering long-term returns on assets and the overall economic benefits of the program. (§ 113(a)(1).) None of these provisions provides much substantive guidance to the Treasury Secretary. The Treasury Department has submitted a public request for comment to solicit ideas for structuring the insurance program.

    Q: How does the purchase work and how does the price get set? What is the timing for purchases?

    A: The EESA also provides little guidance on the sales mechanism, setting of prices, or timing.

    For the sales mechanism, the guidelines are supposed to establish "[m]echanisms for purchasing troubled assets." (§ 101(d)(1).) The EESA states that the Treasury Secretary should use "market mechanisms, including auctions or reverse auctions, where appropriate" to maximize efficiency. (§ 113(b).) However, the Secretary may also purchase assets directly from individual financial institutions. (§ 113(c).)

    The price is subject to the discretion of the Secretary of the Treasury. Again, his published guidelines are required to establish "methods for pricing and valuing troubled assets." (§ 101(d)(2).) If the Secretary does not use an auction or reverse auction, he should pursue unspecified "measures to ensure that prices paid for assets are reasonable and reflect the underlying value of the asset." (§ 113(c).) The only specific pricing provision is designed to prevent "unjust enrichment" by not purchasing assets at higher prices than they were acquired by the selling institution, unless they were acquired through merger or acquisition, or from conservatorship, receivership, or bankruptcy. (§ 101(e).)

    As for timing, purchases can begin immediately; the EESA specifically states that the requirement for guidelines is "not intended to delay the commencement of the TARP." (§ 101(2).) The guidelines do not need to be published until two days after the first purchase. (§ 101(d).) $250 billion is authorized for the TARP immediately. (§ 115.) The TARP program sunsets on December 31, 2009, with a possible one-year extension. (§ 120.)

    The Treasury Secretary is required to disclose to the public, in electronic form, information regarding assets purchases within two days of purchase. The information must include a description of the asset, the amount purchased, and the price. (§ 114(a).)