Dpw Legis Reg Action 0904
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Dpw Legis Reg Action 0904 as PDF for free.
More details
- Words: 7,506
- Pages: 45
Financial Crisis Fallout: Legislative and Regulatory Action Prepared for the Third Circuit Judicial Conference
Donald S. Bernstein Davis Polk & Wardwell April 2009
Federal Assistance Initiatives Current Legislative Proposals On the Horizon: Possible Upcoming Initiatives
Approved by Congress in October 2008, the Emergency Economic Stabilization Act authorized Treasury access to $700 Bn §
The first $350 Bn of the funds (TARP I) were released to the Bush administration in October 2008
§
The remaining $350 Bn (TARP II) were released to the Obama administration in January 2009
TARP I programs included: §
The Capital Purchase Program (CPP)
§
The Systematically Significant Failing Institutions Program (SSFIP), used for AIG
§
The Targeted Investment Program (TIP), used for Citigroup and Bank of America
§
The Automotive Industry Financing Program, used for General Motors and Chrysler
§
The Term Asset-Backed Lending Facility (TALF), done in conjunction with the New York Federal Reserve
Thus far, TARP II programs include:
Capital Assistance Program (CAP) and associated stress testing
Preferred to common equity conversion for Citigroup
Public-Private Investment Program (PPIP)
Other Government Relief Programs
FDIC
Temporary increase in deposit insurance to $250,000 Temporary Liquidity Guarantee Program (TLGP) Transaction Account Guarantee Debt Guarantee Program
Federal Reserve
Primary Dealer Credit Facility (PDCF) Term Auction Facility (TAF) Temporary Securities Lending Facility (TSLF) Commercial Paper Funding Facility (CPFF) Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) Money Market Investor Funding Facility (MMIFF)
Total Spent: ~$2.5 trillion
Capital Assistance Program (CAP), with associated stress testing and balance sheet transparency initiatives §
Status: Several major banks have undergone mandatory stress testing and some are now contemplating repaying funds received under TARP I. Results of the tests will be released on May 4 - after first quarter earnings reports - and regulators will publish a report on April 24 detailing their testing methods. The Obama administration has said that strong banks may be able to repay funds “only if such a move passes a test to determine whether it is in the national economic interest.” (Financial Times, 4/20/2009)
Public-Private Investment Program (PPIP) §
Status: Treasury announced more details on PPIP on March 23, 2009, which includes a securities purchase program, designed to remedy the illiquidity in the secondary markets for certain mortgage-backed securities, and a loan purchase program, designed to create a market for troubled loans on bank and thrift balance sheets. The FDIC will administer “toxic asset” auctions and is expected to release details of the auction process soon. The Special Inspector General for TARP notes that there are fraud and money laundering concerns with the new programs that will need to be addressed (SIGTarp Quarterly Report to Congress, April 21, 2009)
“A New Era of Transparency, Accountability, Monitoring and Conditions” §
Status: Embedded in various proposals, including Treasury’s proposal for regulatory restructuring.
Consumer and Business Lending Initiative (CBLI)
Homeowner Affordability & Stability Plan
Status: As announced on March 3, 2009, the CBLI is being executed under the first stage of the Federal Reserve’s Term Asset-Backed Loan Facility (TALF). In the first round of TALF financing (March 17-19), $4.7 Bn of TALF loans were requested.
Status: President Obama announced the details of this $275 Bn plan on February 18, 2009, which includes $75 Bn to be spent on mortgage modifications according to guidelines announced on March 4, 2009, relaxed Fannie Mae and Freddie Mac restrictions on refinancing of “underwater” mortgages and an additional $200 Bn for Treasury’s existing GSE backstop.
Small Business & Community Lending Initiative
Status: As announced on March 16, 2009, the SBI will purchase up to $15 billion in securities backed by SBA loans.
Obama’s Plan for Regulatory Restructuring
§
Status: Recent proposal focuses first on systemic risk regulation with details on the remaining prongs to come.
§
Systemic Risk Regulation – A single independent regulator with responsibility over systematically important firms and critical payment and settlement systems, including a prompt corrective action regime – Higher standards on capital and risk management for systematically important firms – Resolution authority, separate from the Bankruptcy Code, to protect against the failure of financial institutions that may pose systemic risks – Regulation of hedge funds and other private funds, including mandatory registration with the SEC for advisers with assets under management over a certain threshold, disclosure to the SEC of investors and trading partners and confidential disclosures to the SEC to determine whether a fund is “systemically important” – Regulation of credit default swaps (CDS) and other over-the-counter (OTC) derivatives, including mandatory use of central counterparties for all “standardized” OTC derivatives, encouraging exchange trading and deeming all OTC dealers as “systemically important” and subjecting them to capital and other restrictions – New requirements for money market funds to reduce the risk of rapid withdrawals
§ § §
Protecting Consumers & Investors Eliminating Gaps in Our Regulatory Structure Fostering International Coordination
Treasury Proposal: Systemic Risk Regulator
Who will be regulated?
Consolidated supervision of “systemically important” firms
Treasury does not provide any specific criteria, but only general factors to consider, including:
the financial system’s interdependence with the firm; firm’s size, leverage and degree of reliance on short-term funding; and the firm’s importance as a source of credit for households, businesses and governments and, of liquidity for the financial system
In particular, all dealers in OTC derivative markets are systemically important firms
“Broad and clear” authority over systemically important payment and settlement systems and activities
Who will be the regulator?
Treasury does not express a view on who ought to be the systemic regulator
Scope of the systemic risk regulator’s authority
“Appropriate checks and balances”: the systemic risk regulator should consult and coordinate with the existing federal regulators
Resolution authority over systemically important financial companies
Currently, there is no single uniform Federal law governing the restructuring or liquidation of diversified US financial groups such as AIG Would cover financial institutions that may pose systemic risks
Systemic risk determination
Positive recommendations by the Federal Reserve Board and the appropriate federal regulatory agency, such as the FDIC, the SEC or the CFTC Treasury, in consultation with the President, would make a triggering determination
The FDIC, with the approval of Treasury, may provide a covered financial company with various forms of financial assistance or put it into conservatorship or receivership Modeled on the statutory framework of the Federal Deposit Insurance Act, the FDIC, as conservator or receiver, has broad powers, including the power to:
sell or transfer assets or liabilities of the company;
renegotiate or repudiate the company’s “burdensome” contracts; and
replace the board of directors and senior officers of the company.
Funding mechanism
Bank or thrift holding companies, holding companies of an SEC-registered broker-dealer, an insurance company or a futures commission merchant or commodity pool operator and certain subsidiaries
Automatic appropriation to the FDIC from the general funds of Treasury and a scheme of special assessment on all financial companies to recoup the expenditures Status: Hearing before the House Financial Services Committee, Frank and Dodd promise action by end of 2009.
Status: Barney Frank has promised combined legislation creating the resolution authority
Treasury Initiatives: Glossary Automotive Industry Financing Program (Auto) §
The objective of this program is to prevent a significant disruption of the American automotive industry and auto supplier industry that pose a systemic risk to financial market stability and will have a negative effect on the real economy of the United States. The program required both General Motors and Chrysler to submit restructuring proposals in return for TARP funds.
Capital Assistance Program (CAP) §
A financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer”to help absorb losses and serve as a bridge to receiving increased private capital. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment.
§
Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Capital Purchase Program (CPP) §
Capital injection of up to $250 Bn in eligible institutions in exchange for preferred stock. The first $125 bn was earmarked for nine systemically important financial institutions whose participation was effectively mandatory.
§
To date, $197 Bn has been invested in 511 institutions (Wall Street Journal, March 23, 2009)
11
Treasury Initiatives: Glossary (cont.) Systematically Significant Failing Institutions Program (SSFIP) §
Unlike the broad-based Capital Purchase Program (CPP), financial Institutions (as defined in EESA) will be considered for participation in the SSFI Program on a case-by-case basis. The primary objective of this program is to provide stability and prevent disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings and retirement security from the failure of a systemically significant institution.
§
To date, only AIG has participated in this program.
Targeted Investment Program (TIP) §
Capital injections in important financial institutions to foster financial market stability.
§
To date, only Bank of America and Citigroup have participated in this program.
Federal Reserve Initiatives: Glossary Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) §
Under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Federal Reserve makes non-recourse loans to eligible institutions to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds.
Commercial Paper Funding Facility (CPFF) §
The Federal Reserve created the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households.
§
Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers.
Purchases from Government Sponsored Enterprises (GSE debt & GSE MBS) §
The Federal Reserve is purchasing up to $200 Bn in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to reduce the cost and increase the availability of credit for the purchase of houses and purchasing up to $1.25 trillion in
Federal Reserve Initiatives: Glossary (cont.) Primary Dealer Credit Facility (PDCF) §
The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that provides funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.
Term Asset-Backed Securities Loan Facility (TALF) §
The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF) to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration (SBA).
Term Auction Facility (TAF) §
The Term Auction Facility allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction for a term up to three months.
Term Securities Lending Facility (TSLF) §
Provides Treasury general collateral financing through the Term Securities Lending Facility (TSLF) and TSLF Options Program (TOP) to promote liquidity in Treasury and other collateral markets and thus foster the functioning of financial markets more generally.
Temporary Liquidity Guarantee Program (TLGP) §
Debt Guarantee. Guarantee of certain senior unsecured debt issued by participating institutions.
§
Transaction Account Guarantee. In addition to the increase in deposit insurance, the FDIC also introduced a transaction account guarantee under the Temporary Liquidity Guarantee Program to provide full deposit insurance coverage for certain deposit transaction accounts regardless of the dollar amount.
Coordinated Initiatives: Glossary AIG §
Non-recourse loan and other Fed assistance to fund purchase of residential mortgagebacked securities from Air's U.S. securities lending collateral portfolio and to fund the purchase of multi-sector collateralized debt obligations on which AIG has written credit default swap contracts.
Public-Private Investment Program (PPIP) §
Working together in partnership with the FDIC and the Federal Reserve, Treasury has initiated a Public-Private Investment Program that takes a new approach to removing toxic assetsfrom financial institutions’ balance sheets.
§
This new program is designed with a public-private financing component, which involves putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
Federal Assistance Initiatives Current Legislative Proposals On the Horizon: Possible Upcoming Initiatives
Housing / Foreclosure Relief Bankruptcy Cramdown § §
“Cramdown” = judicial modification of mortgage terms in bankruptcy court Key bill: H.R. 1106 (Helping Families Save Their Homes Act) – Amends Chapter 13 of the federal Bankruptcy Code (adjustment of debts of an individual with regular income) – Excludes from computation of debts the secured or unsecured portions of: (1) debts secured by the debtor's principal residence if the value of the residence as of the date of the order for relief is less than the applicable maximum amount of noncontingent, liquidated, secured debts; or (2) debts secured or formerly secured by the debtor's principal residence that was either sold in foreclosure or surrendered to the creditor, if the property's value as of the date of the order for relief was also less than the applicable maximum amount of noncontingent, liquidated, secured debts. – H.R. 1106 also contains language to codify other portions of President Obama’s Homeowner Affordability & Stability Plan.
§
Status: Passed the House on March 5, 2009, but currently stalled in the Senate. “Senate Democrats are scaling back legislation that would let bankruptcy judges alter mortgage terms because lawmakers don’t have enough votes for passage, a spokesman for Senate Majority Whip Richard Durbin said.” (Bloomberg, April 16, 2009)
§
Comments – President Obama endorsed bankruptcy cramdowns by including a provision for judicial modification of home mortgages during bankruptcy in his Homeowner Affordability & Stability Plan, but such a provision would require Congressional approval. – Senators Richard Durbin and Charles Schumer, key proponents of the legislation, are reportedly in discussions with industry representatives who are lobbying to limit the 18
Mortgage Modifications
Treasury released the guidelines for mortgage modifications contemplated under President Obama’s Homeowner Affordability & Stability Plan on March 4, 2009.
Guidelines include temporary reduction of interest rates, lengthened payment periods and other modifications designed to bring monthly payments down to a housing-to-income ratio of 31%, which may result from a combination of servicer modifications and government funding. The guidelines also include various financial incentives for servicers to participate and borrowers to make timely payments. Status: H.R. 1106(Helping Families Save Their Homes Act) attempts to codify aspects of the Obama plan, but is currently stalled in the Senate Banking Committee. Portions that do not require Congressional Approval are currently underway.
Servicer Safe Harbor?
A key concern for mortgage servicers is the potential for lawsuitsby securitization investors and banks arising from modification of mortgage terms according to Treasury guidelines. Although the Obama plan did not include such a provision, H.R. 1106 includes a servicer safe harbor in line with previously proposed legislation. The H.R. 1106 servicer safe harbor (i) insulates servicers from any liability they may otherwise have to securitization investors and (ii) invalidates contractual provisionsbetween a servicer and any securitization vehicle or investor that would limit the servicer’s ability to modify mortgages or require the servicer to repurchase loans or otherwise compensate the securitization vehicle on account of any modification, workout or loss mitigation plan.
Housing / Foreclosure Relief (cont.) Mortgage Modifications (cont.) §
The Congressional Oversight Panel claimed that because of inadequate data on mortgage modifications, “legislators, regulators and market participants are flying blind” – “The Obama housing plan and other programs designed to stem the foreclosure crisis will likely be impeded by a lack of hard data on rising mortgage defaults and why prior loan modifications have not been working…. No federal agency has the ability to track delinquencies, foreclosures and loan workout efforts for the entire U.S. mortgage market…. Existing data is plagued by inconsistent collection and reporting methodologies among government agencies and is often times simply unverifiable." (Congressional Oversight Panel, “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009)
Mortgage Lending Reform
Key Bill: H.R. 1728 (The Mortgage and Anti-Predatory Lending Act of 2009)
Status: Under debate – referred to the House Financial Services Committee. Hearing may be held before proceeding to mark-up and vote. The bill is co-sponsored by Representatives Barney Frank, Brad Miller and Mel Watt.
H.R. 1728 aims to amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loansand for other purposes, through various measures including: (i) requiring lenders to retain 5% of the credit risk on subprime loans that are securitized; (ii) addressing mortgage broker compensation issues by banning certain types of yield-spread premium (YSP) payments, i.e., compensation based on a loan’s interest rate and terms; (iii) requiring proof of net tangible benefit for any refinancing and (iv) subjecting licensed and registered mortgage originators to a federal duty of care, obligating them to only make loans the customer can afford.
H.R. 1728 is reportedly “a tougher version of the anti-predatory lending measure that passed the House in 2007, but stalled in the Senate.” (Banking Daily, 3/27/09) No relevant Senate version of the bill has been introduced to date.
State Legislators
The Washington Post reports “state legislators concerned with [unethical] behavior by mortgage brokers have approved regulations to crack down on the industry this year.”
Housing / Foreclosure Relief (cont .) Mortgage Lending Reform (cont.)
§
Comments – Comptroller of the Currency John Dugan“call[ed] for a national standard for all mortgages” and said “[r]ather than having 50 new state laws address mortgage lending practices, Congress should enact a single uniform standard that applies to all mortgages in the country, wherever they are originated. And that law should require effective and comparable enforcement by federal and state regulators, even where originators are not banks.” (New York Times Op-Ed, 3/15/09) – Sandra Braunstein, a representative of the Federal Reserve testifying before the House Financial Services Committee on March 11, 2009, supported mortgage lending reform but said “[t]he Fed…believes the establishment of clearly defined safe harbors may be appropriate in implementing the law and that the statute should clarify that the rule-writing agency has sufficient flexibility for this purpose.” She reportedly also “urged House lawmakers…to carefully tailor legislation to avoid redundancies with HOEPA [the Home Ownership and Equity Protection Act regulations scheduled to take effect in fall 2009].” (Banking Daily, 3/27/09) – The Congressional Oversight Panelstrongly recommended mortgage lending reform and claimed that “[f]airness should have been addressed though better regulation of consumer financial products. If the excesses in mortgage lending had been curbed by even the most minimal consumer protection laws, the loans that were fed into the mortgage backed securities would have been choked off at the source and there would have been no “toxic assets” to threaten the global economy.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) – Fed Governor Elizabeth Duke: “While the expansion of the subprime mortgage market over the past decade increased consumers' access to credit, too many
“Protecting Consumers and Investors” is one element of Treasury’s
proposal for regulatory reform
In the wake of escalating reports of subprime mortgage and credit card predatory abuse, consumer and investor protection is a key area of focus for regulators and the political climate supports significant regulatory reform in this arena Representative Barney Frank (Chairman of the House Financial Services Committee) – Determined to “bring back, strengthen and quickly pass through the House reforms that failed to reach enactment in the last Congress that would beef up consumer protections in areas like mortgage lending, credit cards and overdraft.” (American Banker, 3/6/09) SEC Commissioner Mary Schapiro – “[F]ocus on investor protection and securities regulation as part of a reconsideration of the financial regulatory regime is timely and critically important…. If there were ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, that time is now. Individual investors may not be the strongest political force…. These investors expect and deserve a strong and independent regulator dedicated to providing for fair financial dealings, timely and meaningful disclosure of information and protection from unscrupulous actors.” (Testimony before the Senate Banking Committee, 3/26/09) Other supporters of consumer protection reform include Federal Reserve Chairman Ben Bernanke, FDIC Chairman Sheila Bair, Senator Christopher Dodd and Michael Barr of the White House National Economic Council
Ongoing tension between federal and state regulators
The Congressional Oversight Panel recommended “eliminating federal pre-emption of application of state consumer laws to national banks.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) However, reportedly Solicitor General Elena Kagan recently filed a brief urging the Supreme Court “to bar…states from enforcing their fair-lending and other consumer-protection laws against federally chartered banks.” (Bloomberg, 3/26/09) 50 state attorneys general sent a letter to President Obama asking the administration to restore states’ authority to regulate national bank lending, credit cards and banking rules. (Banking Daily, 3/17/09) Comptroller of the Currency John Dugan has supported federal mortgage lending forms, “rather than having 50 new state laws.” (New York Times Op-Ed, 3/15/09) FDIC Chairman Sheila Bair has encouraged federal cooperation with state attorneys general, saying that “[i]f ever there were a time for the states and the ‘feds’ to work together, that time is right here, right now. The last thing we need is to preempt each other.” (Speech before the National Association of Attorneys General, 3/3/09)
Consumer Protection (cont.) Financial Product Safety Regulator §
Key Bill: S.566 (Financial Product Safety Commission Act) – Modeled after Consumer Safety Product Commission. Establishes the Financial Products Safety Commission to: (1) promulgate consumer financial product safety rules; (2) establish a best practices guide for all providers of consumer financial products; (3) conduct continuing studies and investigations of consumer financial products industry practices; (4) award grants or enter into contracts for the conduct of such studies and investigations; (5) assist public and private organizations or groups of consumer financial product providers, administratively and technically, in the development of safety standards or guidelines that would assist them in complying with any Commission rule; (6) comment on selected agency rulemakings affecting consumer financial products; and (7) establish a consumer financial product customer hotline.
§
Status: – Referred to Senate Banking Committee. Introduced by Senator Richard Durbin and co-sponsored by Senators Charles Schumer and Ted Kennedy. – Companion bill (H.R. 1705)referred to House Financial Services Committee. Introduced by Representative Bill Delahunt and co-sponsored by Representative Brad Miller.
§
Comments – When asked, Treasury Secretary Geithner said the concept of a financial product regulator was “interesting” but did not take a position in his Congressional testimony on regulatory restructuring. (Testimony before the House Financial Services Committee, 3/26/09) – The Congressional Oversight Panel recommended “creat[ing] a single federal regulator for consumer credit products,” arguing that “[w]ithout a uniform set of minimum standards, regulatory arbitrage among state—and federal—regulators will continue. and no regulator or agency will have the authority and responsibility to protect consumers.” The Panel suggested that such a regulator could be an 25
Credit Cards
Regulatory action by Federal Reserve, Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA)
On December 18, 2008, the agencies jointly released rules under the Federal Trade Commission (FTC) Act to prohibit unfair and deceptive practices in credit card lending, including a rule that bars credit card issuers from raising interest rates during the first year of the account unless the potential rate hike or the fact that the APR is tied to an index was disclosed when the account was opened, cardholder is 30 days delinquent or the cardholder fails to honor a workout arrangement. The rules would also define common practices such as double-billing and universal default as “unfair” or “deceptive.” The Federal Reserve also released a rule under the Truth in Lending Act (TILA) that requires greater disclosure by credit card issuers regarding the true terms and costs of the accounts. Status: Effective July 2010 and not retroactive in effect.
H.R. 627 (Credit Card Holders Bill of Rights Act of 2009)
Amends TILA to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, including various limits on marketing & billing practices. Status: Passed in the House Financial Services Committee (4/22). Proceeding to House
Credit Cards (cont.)
S.414 (Credit Card Accountability, Responsibility & Disclosure Act)
Amends the Consumer Credit Protection Act, to ban abusive credit practices, enhance consumer disclosures, protect underage consumers. Proposed protections include (i) protection of consumers from “any time, any reason” interest rate increases and account changes; (ii) prohibition of unfair application of card payments; (iii) protection of cardholders who pay on time; (iv) limitations on fees and penalties, including a ban on charging interest on fees, a prohibition on fees to pay bills and a restriction on over-thelimit charges; (v) ensuring that cardholders are informed of the terms of their account; and (vi) protects young consumers from credit card solicitations. Status: Passed in the Senate Banking Committee. Sponsored by Senator Christopher Dodd, with 18 co-sponsors.
Comments
Obama is scheduled to meet with the credit card divisions at 14 major banks to tell them to support the legislation to curb lending abuses and to crack down on such practices as arbitrarily raising interest rates on existing balances, charging late fees without enough time given and charging interest on debt that was paid on time. (Washington Post, April 21, 2009) Congressional Oversight Panel: “Although mortgage documents include a raft of legallyrequired disclosures, those disclosures are a long way from a meaningful understanding of the loan transaction—and a much longer distance from supporting competitive markets. Many of the same points can be made for credit cards and other consumer financial products. In all of these cases consumers have little access to the key information they need to make responsible decisions. The result is a market in which people fail to assess risks properly, over-pay and get into financial trouble.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System:
Consumer Protection (cont.) Other Consumer Protection Measures §
S.257 (Consumer Credit Fairness Act) – Amends Title 11 of the United States Code (the Bankruptcy Code) to disallow certain claims resulting from high cost credit debts. Offers Chapter 7 access to consumers forced into bankruptcy by high interest loans, exempts consumers with any debts that have excessive rates from the means test requirement and makes all such consumers eligible for discharge of their debt under Chapter 7. Targets a wide spectrum of abusive consumer loans, including credit card agreements, payday loans, car loans, overdraft loans and layaway plans. Sets a reasonable and selfadjusting definition of “high interest rate” as anything higher than 15% plus the current yield on the 30-year Treasury bond. Prevents lenders from instituting backdoor interest rates by including disclosure of an “applicable interest rate” that includes an annualized calculation of all penalty fees and charges. – Status: Referred to the Senate Committee on the Judiciary. Sponsored by Senator Sheldon Whitehouse and co-sponsored by Senators Richard Durbin and Bernard Sanders. – Comments: Senator Durbin: “Poor people have a life sentence [with credit card debt that] they can never get out from under…Credit card companies have gone way too far because we have not been watching.” (Banking Daily, 3/25/09) American Bankers Association: “The market response would be simply to restrict credit, raise interest and fees or both.” (Washington Post, 3/24/09)
§
H.R. 1214 (Payday Loan Reform Act of 2009) – Amends the Truth in Lending Act to establish additional payday loan disclosure requirements and other protections for consumers – Status: Referred to the House Financial Services Committee. Sponsored by
Other Consumer Protection Measures (cont.)
Proposed interest rate ceilings
S.582 (Interest Rate Reduction Act)
Status: Referred to Senate Banking Committee. Sponsored by Senator Sheldon Whitehouse with 5 co-sponsors.
S. 500 (Protecting Consumers from Unreasonable Credit Rates Act of 2009)
Amends TILA to protect consumers from usury, including a national annual percentage rate of interest ceiling applicable to any extension of credit not to exceed 15% on unpaid balances, inclusive of all finance charges. Imposes penalties for charging higher rates.
Amends TILA to establish a national usury rate for consumer credit transactions. Mandates that no creditor may make an extension of credit with respect to which the fee and interest rate exceeds 36%. Status: Referred to Senate Banking Committee. Sponsored by Senator Richard Durbin and co-sponsored by Senator Sheldon Whitehouse.
H.R. 1456 (Consumer Overdraft Protection Fair Practices Act)
Extends TILA protections to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees and for other purposes. Status:House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearings held. Sponsored by Representative Carolyn Maloney, with 7 co-sponsors including Representative Brad Miller.
Financial Fraud A focal point for legislators and regulators alike in light of the Madoff scandal and potential for TARP-related fraud
§
SEC: “We have a number of people who are now taking the certified fraud examiner program, as well as, enhancing dramatically our internal training programs. And we are actively seeking new skill sets, including in financial analysis fronts, like accounting, trading and other areas, so that we are better able to keep up with what's going on and what the fraudsters are up to.”
§
House Financial Services Committee Chairman Barney Frank: “Perhaps most importantly, the American public has the right to know what enforcement actions are contemplated against those irresponsible and, in some cases, criminal actions that lead to the current situation.” (Press Release, 3/5/09)
§
SIGTARP(Special Inspector General of TARP) Neil Barofsky: “We’re looking at a potential $300 billion in fraud [related to TARP], in these days not an unrealistic number...I do have subpoena authority if I need it.” (Banking Daily, 3/6/09)
§
Rita Glavin,Acting Attorney General for the Criminal Division of the Department of Justice: “The department is well aware that when large investments of taxpayer money are doled out over a short period of time, people will try to exploit the system and criminally profit.” (Testimony before the Financial Services Committee Hearing 3/20/09 as reported by Reuters)
S.386 (Fraud Enforcement and Recovery Act of 2009)
§
Improves enforcement of mortgage fraud, securities fraud, financial institution fraud and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds.
§
Status: Introduced to Senate Committee on the Judiciary. Sponsored by Senator
30
Mortgage Fraud
Mortgage fraud jumped by 26% in 2008, despite the fact fewer loans were issued (Mortgage Asset Research Institute) Coordinated Effort to Target Mortgage Loan Modification Fraud and Foreclosure Rescue Scams
Effort is supposed to coordinate information and resources to maximize targeting and efficiency in fraud investigations, alert financial institutions to emerging schemes, increase enforcement actions and educate consumers Initiative will encourage state and federal coordination in battling foreclosure scams and fraud through civil enforcement cases, state enforcement actions, and alerts to financial institutions
H.R. 1106 (“Helping Families Save Their Homes Act”)
Joint effort amongst Treasury, DoJ, HUD, Federal Trade Commission and Attorney General of Illinois, as well as state and local governments and private sector to protect homeowners seeking assistance
Included a provision for a “Nationwide Mortgage Fraud Taskforce,” to be staffed by the Attorney General. Status: Passed in the House, currently stalled in the Senate Banking Committee.
Financial Fraud (cont.) Mortgage Fraud (cont.) §
Responsible Homeowners Act – Reportedly will include a provision to “[d]irect the FBI, Department of Justice, FHA and other government housing agencies to step up efforts to combat mortgage fraud and authorize additional resources to investigate and prosecute such cases” (Press Release by Representative Eric Cantor) – Status: To be introduced to the House by House Minority Whip Eric Cantor.
§
H.R. 1105 (Omnibus Appropriations Act) – Section 626 of the Omnibus Appropriations Act directs the Federal Trade Commission (FTC) to initiate a rulemaking proceeding with respect to mortgage loans and grants state attorney generals new authority to enforce any FTC mortgage rules – Status: Signed into law.
§
Comments – FDIC chairman Sheila Bair said “[c]racking down on mortgage fraud in particular is a safety and soundness issue for both the banking industry and the housing markets… Mortgage fraud is now a very big priority for us.” She also said that “[a]s a bank regulator, I see each and every state attorneys general as an essential partner in answering the call.” (Speech before the National Association of Attorneys General, 3/3/09)
Executive Compensation The Congressional Oversight Panel listed as an action item “Regulators should consider requiring executive pay contracts to provide for clawbacks of bonus compensation for executives of failing institutions.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009)
H.R. 1664 (Grayson-Himes Pay for Performance Act of 2009) § Restrictions: – Prohibition on paying: – “unreasonable or excessive” compensation, or – non-performance-based bonus, retention or other supplemental payments. – Treasury to establish standards within 30 days of enactment.
§
Covered Institutions: – Institutions with outstanding TARP assistance. – Fannie Mae and Freddie Mac. – Federal home loan banks. – No standard for application to affiliates as yet.
§ §
Covered Individuals: Executives and employees. Status: Passed by the House on April 1, 2009. 33
Execut ive Com pensat ion (cont .) H.R. 1586 (To Impose an Additional Tax on Bonuses Received from Certain TARP recipients) – Imposes a 90% additional income tax on certain compensation paid to employees or former employees of “covered TARP recipients after December 31, 2008. – Status: Passed the House on March 19, 2009. Sponsored by Representative Charles Rangel. – Prospects: appear poor – Comments Harvard Law Professor Laurence Tribe was one of the first experts to go on record that H.R. 1586 would be constitutional, but later reversed his position saying “I have growing doubts about the constitutionality of H.R. 1586’s 90% AIG bonus clawback tax…The whole point of the Constitution’s various separation of power previsions – including the bill of attainder clause – is to make sure that…you don’t have trial by legislature.” (Tax Analysts, 3/24/09)
S. 651 (Compensation Fairness Act of 2009) §
Amends the Internal Revenue Code to impose an excise tax on excessive bonuses paid by federal emergency economic assistance recipients to their employees (including directors or officers). Sets the overall rate of such tax at 70% of the amount of such bonuses, 35% payable by federal emergency economic assistance recipients and 35% payable by the employees of such recipients.
§
Status: Placed on Senate Legislative Calendar under General Orders. Sponsored by
Execut ive Com pensat ion (cont .) Obama proposal § §
Status: Outlines expected to be unveiled this week. Restrictions: – May impose greater requirements on boards to tie compensation more closely to corporate performance. – May permit government to cancel outstanding bonus contracts.
§
Covered Institutions: – All financial institutions. – May also be applied to all publicly traded companies.
§ §
Covered Individuals: Unclear. Prospects: Unclear.
Other Legislation
Though no one can say for sure, executive compensation restrictions are less likely to follow the Rangel/Baucus approach of retroactively taxing bonuses and more likely to follow the Frank approach of prohibiting “unreasonable or excessive” compensation and nonperformance bonuses, with Treasury setting the standards. H.R. 1575 (End Government Reimbursement of Excessive Executive Disbursements (End GREED) Act)
Authorizes the Attorney General to limit or recover excessive compensation paid or payable by entities that have received Federal financial assistance on or after September 1, 2008. Status: Placed on the Union Calendar; introduced to the House Judiciary Committee. Sponsored by Representative John Conyers with 14 co-sponsors.
Comments
House Financial Services Committee Chairman Barney Frank: “Given the legislative process and the Administration’s desire to get this bill done before the recess to speed funds into the economy, Congress made a mistake. We have, fortunately, a process for correcting mistakes which is subsequent legislation. We have now acted very promptly and if this bill passes the House and the Senate then the mistake will have had no effect.” (HSFC Press Release, 3/26/09)
Merger of SEC and CFTC?
U.S. is the only country that splits the regulation of securities and commodities, despite market developments since the 1970s that make the distinction artificial
Concerns that Congressional and regulatory turf battles impede financial innovation
Key question: Will CFTC become more like SEC, or vice versa?
CFTC: small, nimble, “principles based,” “responsive” to industry
SEC: bureaucratic, “rules based,” enforcement-oriented
Unlikely to occur any time soon, due to continuing turf battles and other concerns
Merger of OCC and OTS?
Likely to occur
Thrift charter guarantees the industry has concentrated exposure to real estate OTS has lost credibility during this crisis, e.g. due to developments at AIG and Washington Mutual
Obstacle: turf battles and policy to “expand the American dream”
HR 1754 and S 664 both propose OTS/OCC merger
Hedge Fund & Investment Adviser Regulation
Treasury proposal for regulatory reform mandates SEC registration for hedge funds, private equity firms and venture capitalists with assets under management above a certain threshold and also subjects them to enhanced disclosure and reporting requirements
Treasury has left open the possibility that certain hedge fund advisers would be considered systemically important
SEC Chairman Mary Schapiro is “considering asking for legislation that would require registration of investment advisers and possibly the hedge funds themselves.” (Testimony before the Senate Banking Committee, 3/26/09) S.344 (Hedge Fund Transparency Act )
Requires hedge funds to register with the SEC. Status: Referred to Senate Banking Committee. Sponsored by Senator Chuck Grassley and co-sponsored by Senator Carl Levin.
Other Regulatory Restructuring Proposals (cont.) Glass-Steagall’s “Specter” §
Comment by Former Fed Chairman Paul Volcker sparked a debate over the potential return of Glass-Steagall – Volcker proposed a partial return to Glass-Steagall’s separation of commercial and investment banking, allowing commercial banks to engage in securities underwriting and M&A but not more risky activities, such as proprietary trading. (Bloomberg, 3/10/09)
§
Goldman CEO Lloyd Blankfein noted that a return to Glass-Steagall would be difficult to resurrect saying, “its hard to turn back the clock” (Bloomberg, 3/27/09)
GSE reform §
Potential bill from House Financial Services Committee Chairman Barney Frank – Frank said he hopes to introduce legislation later this year to restructure government-backed mortgage investors Fannie Mae and Freddie Mac. “The current model is broken” Frank said in an interview. One possibility, he said, is to separate the companies into entities serving two functions: one that would ensure adequate funding for the home-mortgage market as a whole and another that would provide government subsidies for housing low-income people. (WSJ, 3/18/09)
Municipal Bond Regulation
SEC Chairman Mary Schapiro may request authority to regulate municipal securities
Major House Bill reportedly in the works
“It is time for those who buy the municipal securities that are critical to state and local funding initiatives to have access to the same quality and quantity of information as those who buy corporate securities. I will lead the [SEC] to continue to focus efforts in this area in 2009.” (Testimony before the Senate Banking Committee, 3/26/09) Reportedly the House Financial Services Committee is drafting a three-pronged bill that would allow federal guarantees for new muni general obligation debt, create a reinsurance program to bolster monoline bond insurers underwriting new business and provide a liquidity backstop for variable-rate demand obligations. (Bond Buyer, 3/13/09) Reportedly “House Financial Services Committee chairman Barney Frank is exploring the idea of including a provision…that would require the federal regulation of financial or investment advisers in the municipal market that are not currently regulated.” (Bond Buyer, 3/18/09)
H.R. 1669 (Federal Municipal Bond Marketing Support and Securitization Act of 2009)
Requires the Secretary of the Treasury to establish a market for municipal securities, to require cooperation between the Secretary and the Chairman of the Board of Governors of the Federal Reserve System in addressing the municipal securities market situation including through the establishment of municipal securities funding facilities and for other purposes. Status: Referred to the House Financial Services Committee. Sponsored by Representative Gerry Connolly.
Other Hot Topics Credit Rating Agencies §
The SEC has pledged to reform the credit rating agencies. The SEC held a roundtable to examine the role of credit rating agencies on April 15, “where much of the attention was focused on ways to minimize potential conflicts of interest…some participants suggested all firms should switch to the investor-paid model, while at least one person suggested fees be paid out of the rated bonds’ interest payments.” (Wall Street Journal, 4/16/2009)
G-20 / International Cooperation §
Secretary Geithner noted, the need for a more effective “globally coordinated approach to the resolution of globally active firms” is an imperative. The risk of inaction is that, as Chairman Bair recently testified, “[i]n this environment, ring-fencing—also known as every man for himself—may simply be the only rational response.”
Capital requirements § §
Fed delays implementation of new capital rules Treasury regulatory reform proposals – Treasury’s proposal calls for more “conservative” and “robust” capital requirements for systemically important firms than for other financial firms, in order “to be effective in a wider range of deeply adverse economic scenarios than is typically required.” Treasury also suggested that the capital requirements be “less procyclical” so that systemically important firms build “substantial” capital buffers during economic upturns to “avoid deleveraging in cyclical downturns.”
§
Dynamic provisioning debate 41
Federal Assistance Initiatives Current Legislative Proposals On the Horizon: Possible Upcoming Initiatives
Future Bailouts?
Further Insurance Bailout?
Insurers holding federally chartered banks or thrifts were given access to TARP the Capital Purchase Program, and the deadline to apply has passed. No word on potential for future insurance bailout beyond those that qualified for the Capital Purchase Program.
Further auto bailout?
Pursuant to the Automotive Industry Financing Program (December 2008), General Motors and Chrysler were required to submit detailed restructuring plans to Treasury by February 17 President Obama has created a Presidential Task Force on Autos to oversee restructuring and has announced that a government-backed bankruptcy remains a viable option The Obama administration announced an “auto suppliers bailout” on March 17, 2009 Obama administration rejected Chrysler’s and GM’s restructuring plans on March 30, 2009. Chrysler was give one month, GM two months, to restructure or be forced into bankruptcy
Potential Shift from State Regulation to Federal Regulation?
Treasury proposal for “eliminating gaps in regulatory structure”
Federal Insurance Regulation?
Likelihood of federal insurance regulator? Optional federal charter?
Federal guarantee / insolvency regime?
If systemic regulator, Fed does not want to be full functional insurance regulator
AIG would be subject to 20 state solvency regimes – current process would create systemic risk State guarantee funds: unfunded / pay-as-you-go and limited coverage
Treasury Secretary Geithner said “there is a good case for introducing an optional federal charter for insurance companies” (Testimony before the House Financial Services Committee, 3/26/09)
Federal Mortgage Regulator?
The Mortgage Bankers Association sent a letter to House and Senate Banking Committee
Corporate Governance
Proxy access: permit shareholders to nominate directors through the company's own proxy statement Elimination of broker discretionary voting: disallow brokers from voting on election of directors without specific instructions from shareholders Expanded disclosure of directors' backgrounds in a company's proxy statement Advisory vote on executive compensation (say on pay): allow shareholders to vote on the disclosure of executive compensation
Donald S. Bernstein Davis Polk & Wardwell April 2009
Federal Assistance Initiatives Current Legislative Proposals On the Horizon: Possible Upcoming Initiatives
Approved by Congress in October 2008, the Emergency Economic Stabilization Act authorized Treasury access to $700 Bn §
The first $350 Bn of the funds (TARP I) were released to the Bush administration in October 2008
§
The remaining $350 Bn (TARP II) were released to the Obama administration in January 2009
TARP I programs included: §
The Capital Purchase Program (CPP)
§
The Systematically Significant Failing Institutions Program (SSFIP), used for AIG
§
The Targeted Investment Program (TIP), used for Citigroup and Bank of America
§
The Automotive Industry Financing Program, used for General Motors and Chrysler
§
The Term Asset-Backed Lending Facility (TALF), done in conjunction with the New York Federal Reserve
Thus far, TARP II programs include:
Capital Assistance Program (CAP) and associated stress testing
Preferred to common equity conversion for Citigroup
Public-Private Investment Program (PPIP)
Other Government Relief Programs
FDIC
Temporary increase in deposit insurance to $250,000 Temporary Liquidity Guarantee Program (TLGP) Transaction Account Guarantee Debt Guarantee Program
Federal Reserve
Primary Dealer Credit Facility (PDCF) Term Auction Facility (TAF) Temporary Securities Lending Facility (TSLF) Commercial Paper Funding Facility (CPFF) Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) Money Market Investor Funding Facility (MMIFF)
Total Spent: ~$2.5 trillion
Capital Assistance Program (CAP), with associated stress testing and balance sheet transparency initiatives §
Status: Several major banks have undergone mandatory stress testing and some are now contemplating repaying funds received under TARP I. Results of the tests will be released on May 4 - after first quarter earnings reports - and regulators will publish a report on April 24 detailing their testing methods. The Obama administration has said that strong banks may be able to repay funds “only if such a move passes a test to determine whether it is in the national economic interest.” (Financial Times, 4/20/2009)
Public-Private Investment Program (PPIP) §
Status: Treasury announced more details on PPIP on March 23, 2009, which includes a securities purchase program, designed to remedy the illiquidity in the secondary markets for certain mortgage-backed securities, and a loan purchase program, designed to create a market for troubled loans on bank and thrift balance sheets. The FDIC will administer “toxic asset” auctions and is expected to release details of the auction process soon. The Special Inspector General for TARP notes that there are fraud and money laundering concerns with the new programs that will need to be addressed (SIGTarp Quarterly Report to Congress, April 21, 2009)
“A New Era of Transparency, Accountability, Monitoring and Conditions” §
Status: Embedded in various proposals, including Treasury’s proposal for regulatory restructuring.
Consumer and Business Lending Initiative (CBLI)
Homeowner Affordability & Stability Plan
Status: As announced on March 3, 2009, the CBLI is being executed under the first stage of the Federal Reserve’s Term Asset-Backed Loan Facility (TALF). In the first round of TALF financing (March 17-19), $4.7 Bn of TALF loans were requested.
Status: President Obama announced the details of this $275 Bn plan on February 18, 2009, which includes $75 Bn to be spent on mortgage modifications according to guidelines announced on March 4, 2009, relaxed Fannie Mae and Freddie Mac restrictions on refinancing of “underwater” mortgages and an additional $200 Bn for Treasury’s existing GSE backstop.
Small Business & Community Lending Initiative
Status: As announced on March 16, 2009, the SBI will purchase up to $15 billion in securities backed by SBA loans.
Obama’s Plan for Regulatory Restructuring
§
Status: Recent proposal focuses first on systemic risk regulation with details on the remaining prongs to come.
§
Systemic Risk Regulation – A single independent regulator with responsibility over systematically important firms and critical payment and settlement systems, including a prompt corrective action regime – Higher standards on capital and risk management for systematically important firms – Resolution authority, separate from the Bankruptcy Code, to protect against the failure of financial institutions that may pose systemic risks – Regulation of hedge funds and other private funds, including mandatory registration with the SEC for advisers with assets under management over a certain threshold, disclosure to the SEC of investors and trading partners and confidential disclosures to the SEC to determine whether a fund is “systemically important” – Regulation of credit default swaps (CDS) and other over-the-counter (OTC) derivatives, including mandatory use of central counterparties for all “standardized” OTC derivatives, encouraging exchange trading and deeming all OTC dealers as “systemically important” and subjecting them to capital and other restrictions – New requirements for money market funds to reduce the risk of rapid withdrawals
§ § §
Protecting Consumers & Investors Eliminating Gaps in Our Regulatory Structure Fostering International Coordination
Treasury Proposal: Systemic Risk Regulator
Who will be regulated?
Consolidated supervision of “systemically important” firms
Treasury does not provide any specific criteria, but only general factors to consider, including:
the financial system’s interdependence with the firm; firm’s size, leverage and degree of reliance on short-term funding; and the firm’s importance as a source of credit for households, businesses and governments and, of liquidity for the financial system
In particular, all dealers in OTC derivative markets are systemically important firms
“Broad and clear” authority over systemically important payment and settlement systems and activities
Who will be the regulator?
Treasury does not express a view on who ought to be the systemic regulator
Scope of the systemic risk regulator’s authority
“Appropriate checks and balances”: the systemic risk regulator should consult and coordinate with the existing federal regulators
Resolution authority over systemically important financial companies
Currently, there is no single uniform Federal law governing the restructuring or liquidation of diversified US financial groups such as AIG Would cover financial institutions that may pose systemic risks
Systemic risk determination
Positive recommendations by the Federal Reserve Board and the appropriate federal regulatory agency, such as the FDIC, the SEC or the CFTC Treasury, in consultation with the President, would make a triggering determination
The FDIC, with the approval of Treasury, may provide a covered financial company with various forms of financial assistance or put it into conservatorship or receivership Modeled on the statutory framework of the Federal Deposit Insurance Act, the FDIC, as conservator or receiver, has broad powers, including the power to:
sell or transfer assets or liabilities of the company;
renegotiate or repudiate the company’s “burdensome” contracts; and
replace the board of directors and senior officers of the company.
Funding mechanism
Bank or thrift holding companies, holding companies of an SEC-registered broker-dealer, an insurance company or a futures commission merchant or commodity pool operator and certain subsidiaries
Automatic appropriation to the FDIC from the general funds of Treasury and a scheme of special assessment on all financial companies to recoup the expenditures Status: Hearing before the House Financial Services Committee, Frank and Dodd promise action by end of 2009.
Status: Barney Frank has promised combined legislation creating the resolution authority
Treasury Initiatives: Glossary Automotive Industry Financing Program (Auto) §
The objective of this program is to prevent a significant disruption of the American automotive industry and auto supplier industry that pose a systemic risk to financial market stability and will have a negative effect on the real economy of the United States. The program required both General Motors and Chrysler to submit restructuring proposals in return for TARP funds.
Capital Assistance Program (CAP) §
A financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer”to help absorb losses and serve as a bridge to receiving increased private capital. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment.
§
Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Capital Purchase Program (CPP) §
Capital injection of up to $250 Bn in eligible institutions in exchange for preferred stock. The first $125 bn was earmarked for nine systemically important financial institutions whose participation was effectively mandatory.
§
To date, $197 Bn has been invested in 511 institutions (Wall Street Journal, March 23, 2009)
11
Treasury Initiatives: Glossary (cont.) Systematically Significant Failing Institutions Program (SSFIP) §
Unlike the broad-based Capital Purchase Program (CPP), financial Institutions (as defined in EESA) will be considered for participation in the SSFI Program on a case-by-case basis. The primary objective of this program is to provide stability and prevent disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings and retirement security from the failure of a systemically significant institution.
§
To date, only AIG has participated in this program.
Targeted Investment Program (TIP) §
Capital injections in important financial institutions to foster financial market stability.
§
To date, only Bank of America and Citigroup have participated in this program.
Federal Reserve Initiatives: Glossary Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) §
Under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Federal Reserve makes non-recourse loans to eligible institutions to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds.
Commercial Paper Funding Facility (CPFF) §
The Federal Reserve created the Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households.
§
Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers.
Purchases from Government Sponsored Enterprises (GSE debt & GSE MBS) §
The Federal Reserve is purchasing up to $200 Bn in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to reduce the cost and increase the availability of credit for the purchase of houses and purchasing up to $1.25 trillion in
Federal Reserve Initiatives: Glossary (cont.) Primary Dealer Credit Facility (PDCF) §
The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that provides funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.
Term Asset-Backed Securities Loan Facility (TALF) §
The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF) to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration (SBA).
Term Auction Facility (TAF) §
The Term Auction Facility allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction for a term up to three months.
Term Securities Lending Facility (TSLF) §
Provides Treasury general collateral financing through the Term Securities Lending Facility (TSLF) and TSLF Options Program (TOP) to promote liquidity in Treasury and other collateral markets and thus foster the functioning of financial markets more generally.
Temporary Liquidity Guarantee Program (TLGP) §
Debt Guarantee. Guarantee of certain senior unsecured debt issued by participating institutions.
§
Transaction Account Guarantee. In addition to the increase in deposit insurance, the FDIC also introduced a transaction account guarantee under the Temporary Liquidity Guarantee Program to provide full deposit insurance coverage for certain deposit transaction accounts regardless of the dollar amount.
Coordinated Initiatives: Glossary AIG §
Non-recourse loan and other Fed assistance to fund purchase of residential mortgagebacked securities from Air's U.S. securities lending collateral portfolio and to fund the purchase of multi-sector collateralized debt obligations on which AIG has written credit default swap contracts.
Public-Private Investment Program (PPIP) §
Working together in partnership with the FDIC and the Federal Reserve, Treasury has initiated a Public-Private Investment Program that takes a new approach to removing toxic assetsfrom financial institutions’ balance sheets.
§
This new program is designed with a public-private financing component, which involves putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
Federal Assistance Initiatives Current Legislative Proposals On the Horizon: Possible Upcoming Initiatives
Housing / Foreclosure Relief Bankruptcy Cramdown § §
“Cramdown” = judicial modification of mortgage terms in bankruptcy court Key bill: H.R. 1106 (Helping Families Save Their Homes Act) – Amends Chapter 13 of the federal Bankruptcy Code (adjustment of debts of an individual with regular income) – Excludes from computation of debts the secured or unsecured portions of: (1) debts secured by the debtor's principal residence if the value of the residence as of the date of the order for relief is less than the applicable maximum amount of noncontingent, liquidated, secured debts; or (2) debts secured or formerly secured by the debtor's principal residence that was either sold in foreclosure or surrendered to the creditor, if the property's value as of the date of the order for relief was also less than the applicable maximum amount of noncontingent, liquidated, secured debts. – H.R. 1106 also contains language to codify other portions of President Obama’s Homeowner Affordability & Stability Plan.
§
Status: Passed the House on March 5, 2009, but currently stalled in the Senate. “Senate Democrats are scaling back legislation that would let bankruptcy judges alter mortgage terms because lawmakers don’t have enough votes for passage, a spokesman for Senate Majority Whip Richard Durbin said.” (Bloomberg, April 16, 2009)
§
Comments – President Obama endorsed bankruptcy cramdowns by including a provision for judicial modification of home mortgages during bankruptcy in his Homeowner Affordability & Stability Plan, but such a provision would require Congressional approval. – Senators Richard Durbin and Charles Schumer, key proponents of the legislation, are reportedly in discussions with industry representatives who are lobbying to limit the 18
Mortgage Modifications
Treasury released the guidelines for mortgage modifications contemplated under President Obama’s Homeowner Affordability & Stability Plan on March 4, 2009.
Guidelines include temporary reduction of interest rates, lengthened payment periods and other modifications designed to bring monthly payments down to a housing-to-income ratio of 31%, which may result from a combination of servicer modifications and government funding. The guidelines also include various financial incentives for servicers to participate and borrowers to make timely payments. Status: H.R. 1106(Helping Families Save Their Homes Act) attempts to codify aspects of the Obama plan, but is currently stalled in the Senate Banking Committee. Portions that do not require Congressional Approval are currently underway.
Servicer Safe Harbor?
A key concern for mortgage servicers is the potential for lawsuitsby securitization investors and banks arising from modification of mortgage terms according to Treasury guidelines. Although the Obama plan did not include such a provision, H.R. 1106 includes a servicer safe harbor in line with previously proposed legislation. The H.R. 1106 servicer safe harbor (i) insulates servicers from any liability they may otherwise have to securitization investors and (ii) invalidates contractual provisionsbetween a servicer and any securitization vehicle or investor that would limit the servicer’s ability to modify mortgages or require the servicer to repurchase loans or otherwise compensate the securitization vehicle on account of any modification, workout or loss mitigation plan.
Housing / Foreclosure Relief (cont.) Mortgage Modifications (cont.) §
The Congressional Oversight Panel claimed that because of inadequate data on mortgage modifications, “legislators, regulators and market participants are flying blind” – “The Obama housing plan and other programs designed to stem the foreclosure crisis will likely be impeded by a lack of hard data on rising mortgage defaults and why prior loan modifications have not been working…. No federal agency has the ability to track delinquencies, foreclosures and loan workout efforts for the entire U.S. mortgage market…. Existing data is plagued by inconsistent collection and reporting methodologies among government agencies and is often times simply unverifiable." (Congressional Oversight Panel, “Foreclosure Crisis: Working Toward a Solution,” March 6, 2009)
Mortgage Lending Reform
Key Bill: H.R. 1728 (The Mortgage and Anti-Predatory Lending Act of 2009)
Status: Under debate – referred to the House Financial Services Committee. Hearing may be held before proceeding to mark-up and vote. The bill is co-sponsored by Representatives Barney Frank, Brad Miller and Mel Watt.
H.R. 1728 aims to amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loansand for other purposes, through various measures including: (i) requiring lenders to retain 5% of the credit risk on subprime loans that are securitized; (ii) addressing mortgage broker compensation issues by banning certain types of yield-spread premium (YSP) payments, i.e., compensation based on a loan’s interest rate and terms; (iii) requiring proof of net tangible benefit for any refinancing and (iv) subjecting licensed and registered mortgage originators to a federal duty of care, obligating them to only make loans the customer can afford.
H.R. 1728 is reportedly “a tougher version of the anti-predatory lending measure that passed the House in 2007, but stalled in the Senate.” (Banking Daily, 3/27/09) No relevant Senate version of the bill has been introduced to date.
State Legislators
The Washington Post reports “state legislators concerned with [unethical] behavior by mortgage brokers have approved regulations to crack down on the industry this year.”
Housing / Foreclosure Relief (cont .) Mortgage Lending Reform (cont.)
§
Comments – Comptroller of the Currency John Dugan“call[ed] for a national standard for all mortgages” and said “[r]ather than having 50 new state laws address mortgage lending practices, Congress should enact a single uniform standard that applies to all mortgages in the country, wherever they are originated. And that law should require effective and comparable enforcement by federal and state regulators, even where originators are not banks.” (New York Times Op-Ed, 3/15/09) – Sandra Braunstein, a representative of the Federal Reserve testifying before the House Financial Services Committee on March 11, 2009, supported mortgage lending reform but said “[t]he Fed…believes the establishment of clearly defined safe harbors may be appropriate in implementing the law and that the statute should clarify that the rule-writing agency has sufficient flexibility for this purpose.” She reportedly also “urged House lawmakers…to carefully tailor legislation to avoid redundancies with HOEPA [the Home Ownership and Equity Protection Act regulations scheduled to take effect in fall 2009].” (Banking Daily, 3/27/09) – The Congressional Oversight Panelstrongly recommended mortgage lending reform and claimed that “[f]airness should have been addressed though better regulation of consumer financial products. If the excesses in mortgage lending had been curbed by even the most minimal consumer protection laws, the loans that were fed into the mortgage backed securities would have been choked off at the source and there would have been no “toxic assets” to threaten the global economy.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) – Fed Governor Elizabeth Duke: “While the expansion of the subprime mortgage market over the past decade increased consumers' access to credit, too many
“Protecting Consumers and Investors” is one element of Treasury’s
proposal for regulatory reform
In the wake of escalating reports of subprime mortgage and credit card predatory abuse, consumer and investor protection is a key area of focus for regulators and the political climate supports significant regulatory reform in this arena Representative Barney Frank (Chairman of the House Financial Services Committee) – Determined to “bring back, strengthen and quickly pass through the House reforms that failed to reach enactment in the last Congress that would beef up consumer protections in areas like mortgage lending, credit cards and overdraft.” (American Banker, 3/6/09) SEC Commissioner Mary Schapiro – “[F]ocus on investor protection and securities regulation as part of a reconsideration of the financial regulatory regime is timely and critically important…. If there were ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, that time is now. Individual investors may not be the strongest political force…. These investors expect and deserve a strong and independent regulator dedicated to providing for fair financial dealings, timely and meaningful disclosure of information and protection from unscrupulous actors.” (Testimony before the Senate Banking Committee, 3/26/09) Other supporters of consumer protection reform include Federal Reserve Chairman Ben Bernanke, FDIC Chairman Sheila Bair, Senator Christopher Dodd and Michael Barr of the White House National Economic Council
Ongoing tension between federal and state regulators
The Congressional Oversight Panel recommended “eliminating federal pre-emption of application of state consumer laws to national banks.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009) However, reportedly Solicitor General Elena Kagan recently filed a brief urging the Supreme Court “to bar…states from enforcing their fair-lending and other consumer-protection laws against federally chartered banks.” (Bloomberg, 3/26/09) 50 state attorneys general sent a letter to President Obama asking the administration to restore states’ authority to regulate national bank lending, credit cards and banking rules. (Banking Daily, 3/17/09) Comptroller of the Currency John Dugan has supported federal mortgage lending forms, “rather than having 50 new state laws.” (New York Times Op-Ed, 3/15/09) FDIC Chairman Sheila Bair has encouraged federal cooperation with state attorneys general, saying that “[i]f ever there were a time for the states and the ‘feds’ to work together, that time is right here, right now. The last thing we need is to preempt each other.” (Speech before the National Association of Attorneys General, 3/3/09)
Consumer Protection (cont.) Financial Product Safety Regulator §
Key Bill: S.566 (Financial Product Safety Commission Act) – Modeled after Consumer Safety Product Commission. Establishes the Financial Products Safety Commission to: (1) promulgate consumer financial product safety rules; (2) establish a best practices guide for all providers of consumer financial products; (3) conduct continuing studies and investigations of consumer financial products industry practices; (4) award grants or enter into contracts for the conduct of such studies and investigations; (5) assist public and private organizations or groups of consumer financial product providers, administratively and technically, in the development of safety standards or guidelines that would assist them in complying with any Commission rule; (6) comment on selected agency rulemakings affecting consumer financial products; and (7) establish a consumer financial product customer hotline.
§
Status: – Referred to Senate Banking Committee. Introduced by Senator Richard Durbin and co-sponsored by Senators Charles Schumer and Ted Kennedy. – Companion bill (H.R. 1705)referred to House Financial Services Committee. Introduced by Representative Bill Delahunt and co-sponsored by Representative Brad Miller.
§
Comments – When asked, Treasury Secretary Geithner said the concept of a financial product regulator was “interesting” but did not take a position in his Congressional testimony on regulatory restructuring. (Testimony before the House Financial Services Committee, 3/26/09) – The Congressional Oversight Panel recommended “creat[ing] a single federal regulator for consumer credit products,” arguing that “[w]ithout a uniform set of minimum standards, regulatory arbitrage among state—and federal—regulators will continue. and no regulator or agency will have the authority and responsibility to protect consumers.” The Panel suggested that such a regulator could be an 25
Credit Cards
Regulatory action by Federal Reserve, Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA)
On December 18, 2008, the agencies jointly released rules under the Federal Trade Commission (FTC) Act to prohibit unfair and deceptive practices in credit card lending, including a rule that bars credit card issuers from raising interest rates during the first year of the account unless the potential rate hike or the fact that the APR is tied to an index was disclosed when the account was opened, cardholder is 30 days delinquent or the cardholder fails to honor a workout arrangement. The rules would also define common practices such as double-billing and universal default as “unfair” or “deceptive.” The Federal Reserve also released a rule under the Truth in Lending Act (TILA) that requires greater disclosure by credit card issuers regarding the true terms and costs of the accounts. Status: Effective July 2010 and not retroactive in effect.
H.R. 627 (Credit Card Holders Bill of Rights Act of 2009)
Amends TILA to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, including various limits on marketing & billing practices. Status: Passed in the House Financial Services Committee (4/22). Proceeding to House
Credit Cards (cont.)
S.414 (Credit Card Accountability, Responsibility & Disclosure Act)
Amends the Consumer Credit Protection Act, to ban abusive credit practices, enhance consumer disclosures, protect underage consumers. Proposed protections include (i) protection of consumers from “any time, any reason” interest rate increases and account changes; (ii) prohibition of unfair application of card payments; (iii) protection of cardholders who pay on time; (iv) limitations on fees and penalties, including a ban on charging interest on fees, a prohibition on fees to pay bills and a restriction on over-thelimit charges; (v) ensuring that cardholders are informed of the terms of their account; and (vi) protects young consumers from credit card solicitations. Status: Passed in the Senate Banking Committee. Sponsored by Senator Christopher Dodd, with 18 co-sponsors.
Comments
Obama is scheduled to meet with the credit card divisions at 14 major banks to tell them to support the legislation to curb lending abuses and to crack down on such practices as arbitrarily raising interest rates on existing balances, charging late fees without enough time given and charging interest on debt that was paid on time. (Washington Post, April 21, 2009) Congressional Oversight Panel: “Although mortgage documents include a raft of legallyrequired disclosures, those disclosures are a long way from a meaningful understanding of the loan transaction—and a much longer distance from supporting competitive markets. Many of the same points can be made for credit cards and other consumer financial products. In all of these cases consumers have little access to the key information they need to make responsible decisions. The result is a market in which people fail to assess risks properly, over-pay and get into financial trouble.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System:
Consumer Protection (cont.) Other Consumer Protection Measures §
S.257 (Consumer Credit Fairness Act) – Amends Title 11 of the United States Code (the Bankruptcy Code) to disallow certain claims resulting from high cost credit debts. Offers Chapter 7 access to consumers forced into bankruptcy by high interest loans, exempts consumers with any debts that have excessive rates from the means test requirement and makes all such consumers eligible for discharge of their debt under Chapter 7. Targets a wide spectrum of abusive consumer loans, including credit card agreements, payday loans, car loans, overdraft loans and layaway plans. Sets a reasonable and selfadjusting definition of “high interest rate” as anything higher than 15% plus the current yield on the 30-year Treasury bond. Prevents lenders from instituting backdoor interest rates by including disclosure of an “applicable interest rate” that includes an annualized calculation of all penalty fees and charges. – Status: Referred to the Senate Committee on the Judiciary. Sponsored by Senator Sheldon Whitehouse and co-sponsored by Senators Richard Durbin and Bernard Sanders. – Comments: Senator Durbin: “Poor people have a life sentence [with credit card debt that] they can never get out from under…Credit card companies have gone way too far because we have not been watching.” (Banking Daily, 3/25/09) American Bankers Association: “The market response would be simply to restrict credit, raise interest and fees or both.” (Washington Post, 3/24/09)
§
H.R. 1214 (Payday Loan Reform Act of 2009) – Amends the Truth in Lending Act to establish additional payday loan disclosure requirements and other protections for consumers – Status: Referred to the House Financial Services Committee. Sponsored by
Other Consumer Protection Measures (cont.)
Proposed interest rate ceilings
S.582 (Interest Rate Reduction Act)
Status: Referred to Senate Banking Committee. Sponsored by Senator Sheldon Whitehouse with 5 co-sponsors.
S. 500 (Protecting Consumers from Unreasonable Credit Rates Act of 2009)
Amends TILA to protect consumers from usury, including a national annual percentage rate of interest ceiling applicable to any extension of credit not to exceed 15% on unpaid balances, inclusive of all finance charges. Imposes penalties for charging higher rates.
Amends TILA to establish a national usury rate for consumer credit transactions. Mandates that no creditor may make an extension of credit with respect to which the fee and interest rate exceeds 36%. Status: Referred to Senate Banking Committee. Sponsored by Senator Richard Durbin and co-sponsored by Senator Sheldon Whitehouse.
H.R. 1456 (Consumer Overdraft Protection Fair Practices Act)
Extends TILA protections to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees and for other purposes. Status:House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearings held. Sponsored by Representative Carolyn Maloney, with 7 co-sponsors including Representative Brad Miller.
Financial Fraud A focal point for legislators and regulators alike in light of the Madoff scandal and potential for TARP-related fraud
§
SEC: “We have a number of people who are now taking the certified fraud examiner program, as well as, enhancing dramatically our internal training programs. And we are actively seeking new skill sets, including in financial analysis fronts, like accounting, trading and other areas, so that we are better able to keep up with what's going on and what the fraudsters are up to.”
§
House Financial Services Committee Chairman Barney Frank: “Perhaps most importantly, the American public has the right to know what enforcement actions are contemplated against those irresponsible and, in some cases, criminal actions that lead to the current situation.” (Press Release, 3/5/09)
§
SIGTARP(Special Inspector General of TARP) Neil Barofsky: “We’re looking at a potential $300 billion in fraud [related to TARP], in these days not an unrealistic number...I do have subpoena authority if I need it.” (Banking Daily, 3/6/09)
§
Rita Glavin,Acting Attorney General for the Criminal Division of the Department of Justice: “The department is well aware that when large investments of taxpayer money are doled out over a short period of time, people will try to exploit the system and criminally profit.” (Testimony before the Financial Services Committee Hearing 3/20/09 as reported by Reuters)
S.386 (Fraud Enforcement and Recovery Act of 2009)
§
Improves enforcement of mortgage fraud, securities fraud, financial institution fraud and other frauds related to federal assistance and relief programs, for the recovery of funds lost to these frauds.
§
Status: Introduced to Senate Committee on the Judiciary. Sponsored by Senator
30
Mortgage Fraud
Mortgage fraud jumped by 26% in 2008, despite the fact fewer loans were issued (Mortgage Asset Research Institute) Coordinated Effort to Target Mortgage Loan Modification Fraud and Foreclosure Rescue Scams
Effort is supposed to coordinate information and resources to maximize targeting and efficiency in fraud investigations, alert financial institutions to emerging schemes, increase enforcement actions and educate consumers Initiative will encourage state and federal coordination in battling foreclosure scams and fraud through civil enforcement cases, state enforcement actions, and alerts to financial institutions
H.R. 1106 (“Helping Families Save Their Homes Act”)
Joint effort amongst Treasury, DoJ, HUD, Federal Trade Commission and Attorney General of Illinois, as well as state and local governments and private sector to protect homeowners seeking assistance
Included a provision for a “Nationwide Mortgage Fraud Taskforce,” to be staffed by the Attorney General. Status: Passed in the House, currently stalled in the Senate Banking Committee.
Financial Fraud (cont.) Mortgage Fraud (cont.) §
Responsible Homeowners Act – Reportedly will include a provision to “[d]irect the FBI, Department of Justice, FHA and other government housing agencies to step up efforts to combat mortgage fraud and authorize additional resources to investigate and prosecute such cases” (Press Release by Representative Eric Cantor) – Status: To be introduced to the House by House Minority Whip Eric Cantor.
§
H.R. 1105 (Omnibus Appropriations Act) – Section 626 of the Omnibus Appropriations Act directs the Federal Trade Commission (FTC) to initiate a rulemaking proceeding with respect to mortgage loans and grants state attorney generals new authority to enforce any FTC mortgage rules – Status: Signed into law.
§
Comments – FDIC chairman Sheila Bair said “[c]racking down on mortgage fraud in particular is a safety and soundness issue for both the banking industry and the housing markets… Mortgage fraud is now a very big priority for us.” She also said that “[a]s a bank regulator, I see each and every state attorneys general as an essential partner in answering the call.” (Speech before the National Association of Attorneys General, 3/3/09)
Executive Compensation The Congressional Oversight Panel listed as an action item “Regulators should consider requiring executive pay contracts to provide for clawbacks of bonus compensation for executives of failing institutions.” (Congressional Oversight Panel, “Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability,” January 2009)
H.R. 1664 (Grayson-Himes Pay for Performance Act of 2009) § Restrictions: – Prohibition on paying: – “unreasonable or excessive” compensation, or – non-performance-based bonus, retention or other supplemental payments. – Treasury to establish standards within 30 days of enactment.
§
Covered Institutions: – Institutions with outstanding TARP assistance. – Fannie Mae and Freddie Mac. – Federal home loan banks. – No standard for application to affiliates as yet.
§ §
Covered Individuals: Executives and employees. Status: Passed by the House on April 1, 2009. 33
Execut ive Com pensat ion (cont .) H.R. 1586 (To Impose an Additional Tax on Bonuses Received from Certain TARP recipients) – Imposes a 90% additional income tax on certain compensation paid to employees or former employees of “covered TARP recipients after December 31, 2008. – Status: Passed the House on March 19, 2009. Sponsored by Representative Charles Rangel. – Prospects: appear poor – Comments Harvard Law Professor Laurence Tribe was one of the first experts to go on record that H.R. 1586 would be constitutional, but later reversed his position saying “I have growing doubts about the constitutionality of H.R. 1586’s 90% AIG bonus clawback tax…The whole point of the Constitution’s various separation of power previsions – including the bill of attainder clause – is to make sure that…you don’t have trial by legislature.” (Tax Analysts, 3/24/09)
S. 651 (Compensation Fairness Act of 2009) §
Amends the Internal Revenue Code to impose an excise tax on excessive bonuses paid by federal emergency economic assistance recipients to their employees (including directors or officers). Sets the overall rate of such tax at 70% of the amount of such bonuses, 35% payable by federal emergency economic assistance recipients and 35% payable by the employees of such recipients.
§
Status: Placed on Senate Legislative Calendar under General Orders. Sponsored by
Execut ive Com pensat ion (cont .) Obama proposal § §
Status: Outlines expected to be unveiled this week. Restrictions: – May impose greater requirements on boards to tie compensation more closely to corporate performance. – May permit government to cancel outstanding bonus contracts.
§
Covered Institutions: – All financial institutions. – May also be applied to all publicly traded companies.
§ §
Covered Individuals: Unclear. Prospects: Unclear.
Other Legislation
Though no one can say for sure, executive compensation restrictions are less likely to follow the Rangel/Baucus approach of retroactively taxing bonuses and more likely to follow the Frank approach of prohibiting “unreasonable or excessive” compensation and nonperformance bonuses, with Treasury setting the standards. H.R. 1575 (End Government Reimbursement of Excessive Executive Disbursements (End GREED) Act)
Authorizes the Attorney General to limit or recover excessive compensation paid or payable by entities that have received Federal financial assistance on or after September 1, 2008. Status: Placed on the Union Calendar; introduced to the House Judiciary Committee. Sponsored by Representative John Conyers with 14 co-sponsors.
Comments
House Financial Services Committee Chairman Barney Frank: “Given the legislative process and the Administration’s desire to get this bill done before the recess to speed funds into the economy, Congress made a mistake. We have, fortunately, a process for correcting mistakes which is subsequent legislation. We have now acted very promptly and if this bill passes the House and the Senate then the mistake will have had no effect.” (HSFC Press Release, 3/26/09)
Merger of SEC and CFTC?
U.S. is the only country that splits the regulation of securities and commodities, despite market developments since the 1970s that make the distinction artificial
Concerns that Congressional and regulatory turf battles impede financial innovation
Key question: Will CFTC become more like SEC, or vice versa?
CFTC: small, nimble, “principles based,” “responsive” to industry
SEC: bureaucratic, “rules based,” enforcement-oriented
Unlikely to occur any time soon, due to continuing turf battles and other concerns
Merger of OCC and OTS?
Likely to occur
Thrift charter guarantees the industry has concentrated exposure to real estate OTS has lost credibility during this crisis, e.g. due to developments at AIG and Washington Mutual
Obstacle: turf battles and policy to “expand the American dream”
HR 1754 and S 664 both propose OTS/OCC merger
Hedge Fund & Investment Adviser Regulation
Treasury proposal for regulatory reform mandates SEC registration for hedge funds, private equity firms and venture capitalists with assets under management above a certain threshold and also subjects them to enhanced disclosure and reporting requirements
Treasury has left open the possibility that certain hedge fund advisers would be considered systemically important
SEC Chairman Mary Schapiro is “considering asking for legislation that would require registration of investment advisers and possibly the hedge funds themselves.” (Testimony before the Senate Banking Committee, 3/26/09) S.344 (Hedge Fund Transparency Act )
Requires hedge funds to register with the SEC. Status: Referred to Senate Banking Committee. Sponsored by Senator Chuck Grassley and co-sponsored by Senator Carl Levin.
Other Regulatory Restructuring Proposals (cont.) Glass-Steagall’s “Specter” §
Comment by Former Fed Chairman Paul Volcker sparked a debate over the potential return of Glass-Steagall – Volcker proposed a partial return to Glass-Steagall’s separation of commercial and investment banking, allowing commercial banks to engage in securities underwriting and M&A but not more risky activities, such as proprietary trading. (Bloomberg, 3/10/09)
§
Goldman CEO Lloyd Blankfein noted that a return to Glass-Steagall would be difficult to resurrect saying, “its hard to turn back the clock” (Bloomberg, 3/27/09)
GSE reform §
Potential bill from House Financial Services Committee Chairman Barney Frank – Frank said he hopes to introduce legislation later this year to restructure government-backed mortgage investors Fannie Mae and Freddie Mac. “The current model is broken” Frank said in an interview. One possibility, he said, is to separate the companies into entities serving two functions: one that would ensure adequate funding for the home-mortgage market as a whole and another that would provide government subsidies for housing low-income people. (WSJ, 3/18/09)
Municipal Bond Regulation
SEC Chairman Mary Schapiro may request authority to regulate municipal securities
Major House Bill reportedly in the works
“It is time for those who buy the municipal securities that are critical to state and local funding initiatives to have access to the same quality and quantity of information as those who buy corporate securities. I will lead the [SEC] to continue to focus efforts in this area in 2009.” (Testimony before the Senate Banking Committee, 3/26/09) Reportedly the House Financial Services Committee is drafting a three-pronged bill that would allow federal guarantees for new muni general obligation debt, create a reinsurance program to bolster monoline bond insurers underwriting new business and provide a liquidity backstop for variable-rate demand obligations. (Bond Buyer, 3/13/09) Reportedly “House Financial Services Committee chairman Barney Frank is exploring the idea of including a provision…that would require the federal regulation of financial or investment advisers in the municipal market that are not currently regulated.” (Bond Buyer, 3/18/09)
H.R. 1669 (Federal Municipal Bond Marketing Support and Securitization Act of 2009)
Requires the Secretary of the Treasury to establish a market for municipal securities, to require cooperation between the Secretary and the Chairman of the Board of Governors of the Federal Reserve System in addressing the municipal securities market situation including through the establishment of municipal securities funding facilities and for other purposes. Status: Referred to the House Financial Services Committee. Sponsored by Representative Gerry Connolly.
Other Hot Topics Credit Rating Agencies §
The SEC has pledged to reform the credit rating agencies. The SEC held a roundtable to examine the role of credit rating agencies on April 15, “where much of the attention was focused on ways to minimize potential conflicts of interest…some participants suggested all firms should switch to the investor-paid model, while at least one person suggested fees be paid out of the rated bonds’ interest payments.” (Wall Street Journal, 4/16/2009)
G-20 / International Cooperation §
Secretary Geithner noted, the need for a more effective “globally coordinated approach to the resolution of globally active firms” is an imperative. The risk of inaction is that, as Chairman Bair recently testified, “[i]n this environment, ring-fencing—also known as every man for himself—may simply be the only rational response.”
Capital requirements § §
Fed delays implementation of new capital rules Treasury regulatory reform proposals – Treasury’s proposal calls for more “conservative” and “robust” capital requirements for systemically important firms than for other financial firms, in order “to be effective in a wider range of deeply adverse economic scenarios than is typically required.” Treasury also suggested that the capital requirements be “less procyclical” so that systemically important firms build “substantial” capital buffers during economic upturns to “avoid deleveraging in cyclical downturns.”
§
Dynamic provisioning debate 41
Federal Assistance Initiatives Current Legislative Proposals On the Horizon: Possible Upcoming Initiatives
Future Bailouts?
Further Insurance Bailout?
Insurers holding federally chartered banks or thrifts were given access to TARP the Capital Purchase Program, and the deadline to apply has passed. No word on potential for future insurance bailout beyond those that qualified for the Capital Purchase Program.
Further auto bailout?
Pursuant to the Automotive Industry Financing Program (December 2008), General Motors and Chrysler were required to submit detailed restructuring plans to Treasury by February 17 President Obama has created a Presidential Task Force on Autos to oversee restructuring and has announced that a government-backed bankruptcy remains a viable option The Obama administration announced an “auto suppliers bailout” on March 17, 2009 Obama administration rejected Chrysler’s and GM’s restructuring plans on March 30, 2009. Chrysler was give one month, GM two months, to restructure or be forced into bankruptcy
Potential Shift from State Regulation to Federal Regulation?
Treasury proposal for “eliminating gaps in regulatory structure”
Federal Insurance Regulation?
Likelihood of federal insurance regulator? Optional federal charter?
Federal guarantee / insolvency regime?
If systemic regulator, Fed does not want to be full functional insurance regulator
AIG would be subject to 20 state solvency regimes – current process would create systemic risk State guarantee funds: unfunded / pay-as-you-go and limited coverage
Treasury Secretary Geithner said “there is a good case for introducing an optional federal charter for insurance companies” (Testimony before the House Financial Services Committee, 3/26/09)
Federal Mortgage Regulator?
The Mortgage Bankers Association sent a letter to House and Senate Banking Committee
Corporate Governance
Proxy access: permit shareholders to nominate directors through the company's own proxy statement Elimination of broker discretionary voting: disallow brokers from voting on election of directors without specific instructions from shareholders Expanded disclosure of directors' backgrounds in a company's proxy statement Advisory vote on executive compensation (say on pay): allow shareholders to vote on the disclosure of executive compensation
Related Documents
Dpw Legis Reg Action 0904
May 2020 7
Dpw Legis Reg Action 0904
May 2020 3
0904
May 2020 12
Legis
October 2019 13
Reg
October 2019 42
Reg
November 2019 37More Documents from ""
Pitchbook Private Equity Breakdown 4q 2009
June 2020 2
Annaly Capital
May 2020 5
Petition_signees July 16
May 2020 7
Profit Act
May 2020 9
Calsters
April 2020 5