• Treasury Secretary Receives Broad but Not Unlimited Authority under TARP
  • December 18, 2008 | Author: Richard J. Firfer
  • Law Firm: Much Shelist Denenberg Ament & Rubenstein, P.C. - Chicago Office
  • Although the Secretary of the Treasury is given broad authority with respect to hiring the staff needed to administer the Troubled Asset Relief Program (TARP), EESA requires that the program be implemented in consultation with the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Department of Housing and Urban Development. The Secretary may create such vehicles as he sees fit to purchase, hold and sell troubled assets and issue related obligations that, presumably, would be backed by the full faith and credit of the federal government. EESA further admonishes the Secretary to make certain that no financial institution is unjustly enriched when it sells troubled assets to the government under TARP. With only certain limited exceptions, no troubled assets may be sold to the government at prices higher than those originally paid for them by the selling institutions.

    The Secretary is also granted the authority to establish a program of government guaranties (i.e., insurance) for troubled assets that financial institutions decide not to sell to the government. Thus, if a financial institution prefers to retain ownership of its troubled assets but reduce its risk, it can pay a premium to the government in exchange for a guaranty of repayment. All premiums and fees collected by the Secretary under the guaranty program must be deposited in a new government insurance fund called the Troubled Assets Insurance Financing Fund.

    To the extent that the government acquires mortgages, mortgage-backed securities or other assets secured by residential real estate, EESA requires the Secretary to implement a plan to maximize assistance for homeowners and encourage mortgage servicers to take advantage of government programs that minimize foreclosures. In addition, the Secretary is permitted to use loan guaranties and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. EESA also hones in on protecting renters from eviction when their landlords face foreclosure problems.

    More broadly, EESA encourages loan modifications that, in the end, are likely to cause all parties, including lenders, to share in the downside that will be necessary to fix the housing market. In that regard, EESA contains provisions that seek to protect mortgage servicers from any liability to investors when the servicers agree to modify individual mortgages in a manner that would reduce the anticipated payout to the investors. Thus, EESA tries to spread the pain of loss to all involved parties, so that no one has to bear it all.

    In conjunction with the authorization to establish various stabilizing programs under EESA, the Secretary is also given the authority to manage any troubled assets acquired by the government under such programs. That includes managing the revenues and portfolio risks emanating from such ownership, which could put the government in competition with many of the financial institutions it is charged with overseeing. Presumably, however, most financial institutions will avoid the subprime marketplace in the future, so the amount of competition is not likely to be severe. EESA also authorizes the Secretary to waive various provisions of the Federal Acquisition Regulation that would otherwise inhibit the government's ability to move quickly, and to issue any regulations or guidelines necessary to address conflicts of interest that may arise, for example, in the hiring of consultants or the purchase of specific assets.

    When the Secretary decides he wants to purchase any troubled assets under EESA, he must receive certain concurrent benefits mandated by the act. In the case of a financial institution whose securities are traded on a national securities exchange, the Secretary must receive a warrant giving him the right to receive non-voting common or preferred stock in the institution, or voting stock where the Secretary agrees not to exercise voting power. In the case of all other types of financial institutions, the Secretary must receive a warrant to acquire common or preferred stock (allowing taxpayers to participate in any future equity appreciation of these institutions) or a senior debt instrument (allowing taxpayers to receive a reasonable interest rate premium). Although EESA does not require this stock to be non-voting, the Secretary has already announced that, at least for now, all stock acquired by the government from any financial institution will be non-voting.


    EESA provides protections for the Secretary in case certain events occur that could impair the value of any warrants received by him. Those protections include anti-dilution provisions, as well as the right to unilaterally set the exercise price for any such warrants. EESA also gives to the Secretary very broad authority to create exceptions to the foregoing rules in order to deal with corporate limitations on the ability of various financial institutions to comply with the requirements of EESA.

    Another key provision provides that any financial institution that sells troubled assets to the Secretary under EESA will have to curtail the amount of compensation that it thereafter pays to its senior-level executives, including amounts that may become payable under golden parachute arrangements. EESA provides some symmetry in regard to these restrictions by amending the Internal Revenue Code to restrict the deductibility of compensation paid to executives of employers who participate in TARP.

    Those institutions in which the Secretary takes an equity or debt position will also have to meet the foregoing compensation standards. They will also have to comply with appropriate corporate governance standards intended to prevent overaggressive, negligent or possibly fraudulent behavior. These corporate governance standards must remain in effect for as long as the government holds its equity or debt position in the particular institution.

    Spending Restrictions

    The Secretary will have the authority to spend enormous amounts of government money to operate the programs he establishes under EESA, but there are some limits. The Secretary can spend up to $250 billion on his own authority. For additional expenditures that would increase the latter amount to $350 billion, he must ask the President to certify the need for those expenditures to Congress. In order to exert the maximum spending authority of $700 billion, the President must submit a written report to Congress detailing the Secretary's programs. Congress, however, can disapprove the latter authority by a joint resolution adopted within 15 days after receiving the President's report.

    In order to provide maximum market transparency, the Secretary must make the terms of all purchases under EESA public within two days after making such purchases. EESA also requires the Secretary to coordinate his activities, as appropriate, with any actions taken by foreign financial authorities and central banks to establish similar programs to deal with their own economic challenges. In addition, the Secretary must encourage private-sector investors to participate in purchases of troubled assets and invest in financial institutions.

    Although the Treasury Department is the government agency most directly affected by the provisions of EESA, the Federal Reserve Board, the FDIC and the Federal Housing Finance Agency (in its capacity as conservator of Fannie Mae and Freddie Mac) are also given a role in stabilizing the housing market. These agencies are required to create their own plan—which could include the reduction of interest rates, as well as reductions in loan principal payments—to encourage mortgage servicers to modify troubled home loans in order to minimize foreclosures.