september 22, 2008

UPDATE: THE GLOBAL CREDIT CRISIS
AND THE US GOVERNMENT’S RESPONSE

Since yesterday, we have witnessed the two remaining major independent investment banking firms obtain the expedited approval of the Federal Reserve Board to be regulated as bank holding companies, permitting them to establish affiliated depositary institutions that will enhance their funding capabilities. Today's update provides further information on issues discussed in our earlier Client Alert on the global credit crisis and the US government's response, analyzes a revised version of the legislative program proposed by the US Treasury, and also reviews far more extensive proposals for comparable legislation under consideration by the US Senate Banking Committee and the US House of Representatives Banking Committee.

Summary of Legislative Developments

Although the Treasury is urging prompt consideration and enactment of
its proposal with few significant modifications, this approach is meeting considerable resistance by Democratic majorities in the US Congress, whose members are concerned about appropriate oversight of the vast program, as well as mitigating the perception that Wall Street is being favored at the expense of Main Street by this rescue plan.

To this end, the proposals being considered by the Congressional Committees in question place limitations on the extent of executive compensation paid to officers of companies receiving assistance, as well as providing for additional relief to individual mortgage holders in the form
of bankruptcy relief and assistance to housing programs.

As compared to the initial Treasury proposal (made available on
September 20, 2008), the current version of the Treasury Proposal:

defines financial institutions to include banks, thrifts, credit unions, broker/dealers and insurance companies, and "any other institution [the Secretary of the Treasury, after consultation with the Chairman of the Federal Reserve Board] determines necessary to promote financial market stability";

extends the applicability of the purchase program to financial institutions that have "significant operations in the United States," rather than, as was true in the earlier version, to those entities that have "headquarters" in the United States; and

authorizes the purchase by Treasury of "Troubled Assets," which include residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, if originated or issued on or before September 17, 2008, and also includes, "any other financial instrument, as [the Secretary of the Treasury, after consultation with the Chairman of the Federal Reserve Board] determines necessary to promote financial market stability."

The legislative proposals proposed for consideration by the Banking Committees of the US Senate and of the US House of Representatives start from these definitional revisions to the Treasury proposal, but then incorporate a series of additional elements:

Requirement that the mortgages in question have been issued or originated on or before March 14, 2008 (in the Senate version);

Authorization for bankruptcy judges to restructure the underlying mortgages;

Requirement that Treasury acquire options on stock in the companies being assisted through the purchase program, with the option amounts being set based on the extent of loss realized by Treasury as a result of the sale of the Troubled Assets regarding such company (in the Senate version);

Requirement that Treasury return a significant portion of any gain it realizes on any particular transaction to the HOPE for Homeowners housing relief program (in the Senate version);

Limitation on executive compensation, and introduction of "claw back" provisions, pertaining to the salaries of officers of entities that receive assistance through the purchase program;

Establishment of numerous oversight boards, reporting requirements and an inspector general to oversee the operations of the Treasury under the purchase program, the retention of outside advisors, the handling of conflicts and the establishment of terms of purchase and sale of the securities in question; and

Provision for the legislative authority pertaining to the program to expire on December 31, 2009, one year earlier than under the Treasury Proposal (in the Senate version).

Other Regulatory Actions

As noted in our earlier Client Alert, the Securities and Exchange Commission issued a temporary emergency order prohibiting short-sale transactions. By interpretive relief issued over the weekend, the Commission has provided exemptions from this prohibition in the context of hedging transactions and settlements of certain over-the-counter transactions. Please see the attached web-link for the text of the exemptive relief issued. In addition, the Federal Reserve Board today announced a modification to its regulations on passive investments for purposes of bank holding company regulation, permitting increased ownership interests (up to 33 percent of equity) and the holding of two board seats.

To read the SEC's Amendment to Emergency Order of today, please
click here.

To read our Alert of September 21, 2008 on this subject, please
click here.