On October 3, 2008, President Bush signed into law the “Emergency Economic Stabilization Act of 2008,” far-reaching legislation that provides the Secretary of the Treasury with wide authority to act in a manner designed to stabilize the U.S. financial system and which entails great changes for financial institutions and the regulatory agencies that oversee them, consumer lending and corporate governance, and government contracts and executive compensation.
Despite the historic nature of this legislation, Congressional leaders expect further legislative action in the weeks and months ahead. For example, The Wall Street Journal noted on October 4, 2008: “Democratic lawmakers are planning to revamp financial system regulations, with hedge funds, private equity funds and investment banks all likely to come in for tighter scrutiny.”
The Emergency Economic Stabilization Act (H.R. 1424), among other things:
- Authorizes the Treasury Secretary to establish a new program (the Troubled Asset Relief Program) to purchase, manage and sell troubled assets from any financial institution on terms and conditions to be determined by the Secretary.
- Authorizes Treasury to purchase up to $700 billion of troubled assets from financial institutions through December 31, 2009.
- Creates a new Treasury Office of Financial Stability.
- Contemplates comprehensive reform of the U.S. financial system, establishing a bipartisan oversight panel within Congress that is required to submit to Congress—not later than January 20, 2009—a report containing regulatory reform proposals.
- Directs Treasury to purchase troubled assets using market mechanisms, including reverse auctions.
- Authorizes the Secretary to designate financial institutions as financial agents of the government and to establish vehicles to purchase, manage and sell troubled assets.
- Permits the Secretary to waive provisions of the Federal Acquisitions Regulations.
- Requires Treasury to modify troubled loans it controls and to direct other federal agencies to modify loans they own to minimize foreclosures.
- Allows most banks holding Fannie Mae or Freddie Mac preferred stock on September 6, 2008, or which sold such stock on or after January 1, 2008, and before September 7, 2008, to recognize an ordinary rather than capital tax loss.
- Includes limits on executive compensation for Troubled Asset Relief Program (TARP) participants.
- Includes changes to tax return preparer standards, energy incentives, Alternative Minimum Tax (AMT) relief and tax extenders.
- Includes a mental health parity provision, requiring private insurance plans that offer mental health benefits to offer such benefits on par with medical-surgical benefits.
This new law raises a host of serious legal questions for corporate clients and others across a range of areas, including the following:
What will the restructuring of the financial regulatory scheme mean for financial institutions, private investment funds, institutional investors and other market participants moving forward? And what can financial services companies with legal counsel do to affect the outcome of the federal government’s efforts?
How will the various tax provisions in this legislation impact corporate clients, particularly energy companies? And, how will the new Congress approach changes in the corporate and personal income tax laws in light of massive federal budget deficits and a growing national debt?
Offshore Deferred Compensation Plans
The new law contains a provision designed to prevent hedge fund managers and others from deferring taxes on compensation plans by an offshore corporation organized in a tax haven. How will this new law affect existing and future deferrals, and what is the prospect for Congress enacting exemptions to this law?
The Treasury Secretary is permitted, if he determines that “urgent and compelling circumstances” exist, to waive specific provisions of the Federal Acquisitions Regulations—and his determination and justification must be submitted to Congress. What does this potential waiver mean for companies that regularly do business with the government?
The new Congress that convenes in January is likely to ramp up its legislative oversight efforts on the financial system and to continue to probe through investigative hearings into the steps that led to the current crisis. What will this mean for those who are called to testify?
White-Collar Criminal Defense
Investors are expected to chase down officers and principals in hedge funds claiming fraud and misrepresentation. Two dozen hedge funds have been ordered by the Securities & Exchange Commission to turn over trading records. What can financial services companies, as well as investors, do to protect their rights?
Will restraints on executive pay resurface in the new Congress? What will this mean for incentive plans? What will executives and employers be allowed to do?
Will the continuing credit crisis make funding for bankruptcy exit plans more difficult to secure and thereby intensify the liquidation of companies or consolidation within industry groups? What bankruptcy law changes, if any, does Congress and the incoming Administration envision in 2009?