Download Senate Passes Amended Version of Emergency Economic

Global Financial Restructuring
Client Alert
Global
October 2, 2008
This information is intended to provide clients with
information on recent legal developments and issues
of significant interest. It should not be regarded as
legal advice or opinion.
Our Global Financial Restructuring Team brings
together an interdisciplinary team of lawyers with the
combined experience needed to address and resolve
the complex issues currently confronting clients.
Through our extensive network of 70 offices worldwide,
we provide expertise and seamless service to clients
across multiple jurisdictions and practice areas
including Financial Restructuring and Creditor’s
Rights, Purchase and Sale of Distressed Assets,
Distressed Debt Trading, Derivatives, Structured
Finance, Real Estate, Dispute Resolution, M&A,
Post Acquisition Integration and Tax.
Our experienced lawyers have guided clients through
the turbulent times over the last three decades,
including the 1980s debt crisis in Latin America,
the early 1990s debt crisis in the US and Europe
and the 1997 Asian financial crisis.
For further information please contact the current
Baker & McKenzie LLP attorney with whom you
work, or any of the individuals listed below
Barry Metzger
North America
Banking and Finance
Tel: +1 212 626 4812
[email protected]
Richard D. Rudder
North America
Banking and Finance
Tel: +1 212 861 3704
[email protected]
Andrew Lockhart
Asia Pacific
Banking and Finance
Tel: +852 2846 1912
[email protected]
Olaf Gebler
Europe and Middle East
Banking and Finance
Tel: +49 69 29908 240
[email protected]
Maritza Meszaros
Latin America
Banking and Finance
Tel: +58 212 276 5031
[email protected]
We will be running a series of webinars related to these
alerts. If you would be interested in these webinars
please contact [email protected]
www.bakernet.com
This may qualify as “Attorney Advertising” requiring
notice in some jurisdictions. Prior results do not
guarantee a similar outcome.
Senate Passes Amended Version of
Emergency Economic Stabilization
Act of 2008; SEC Clarifies FASB 157;
Treasury Acts on Money Market
Guarantees
The United States Senate has approved a modestly amended version of the
Emergency Economic Stabilization Act of 2008, as previously rejected by the
House of Representatives, as part of a combined legislative package which includes
the Energy Improvement and Extension Act of 2008 and the Tax Extenders and
Alternative Minimum Tax Relief Act of 2008. Neither of these additional elements
of the legislative package directly addresses provisions of the proposed Emergency
Economic Stabilization Act of 2008 (the “Act”), though Congressional leaders viewed
the combination of the three pieces of proposed legislation as enhancing the
likelihood of the Act’s passage. Please see Baker & McKenzie’s September 30, 2008
Client Alert: If Enacted, Proposed Emergency Economic Stabilization
Act of 2008 Leaves Many Questions Unanswered Regarding Participating
Financial Institutions. This Client Alert addresses the changes adopted by the
Senate, and separate actions taken by the Securities and Exchange Commission
interpreting mark-to-market standards under FASB 157 and by the Treasury
Department to implement the money market guarantee program announced
on September 19, 2008.
Senate Version of the Emergency Economic Stabilization
Act of 2008
The Act increases, from the date of its enactment through December 31, 2009,
Federal Deposit Insurance Corporation (FDIC) coverage of insured deposits at
insured depository institutions and National Credit Union Share Insurance Fund
coverage of shares at insured credit unions from $100,000 to $250,000. Such
temporary increases in deposit and share insurance are to be disregarded by the
FDIC and the National Credit Union Administration Board in assessing premiums
against insured depository institutions and credit unions (meaning that no additional
assessments will be levied on the covered institutions for the enhanced coverage).
For the purpose of effecting this increased coverage, the FDIC and the National
Baker & McKenzie
Credit Union Administration Board may obtain loans from the Secretary of
the Treasury. [Section 136; note, numbering in the Senate version of the Act
is identical to that in the earlier House version, save for the addition of this
Section 136 and the renumbering of subsequent sections.]
The Senate version of the Act also makes changes to the earlier House version,
clarifying certain provisions and eliminating a number of inconsistencies in the
draft legislation, as follows:
•
•
Any financial institutions participating in the Troubled Asset Relief Program
(TARP), the securities of which are traded on a national securities exchange,
is to provide the Secretary with a warrant to receive non-voting common
stock or preferred stock or voting stock which the Secretary agrees not
to vote, as determined appropriate by the Secretary. In respect of any
financial institution participating in TARP, the securities of which are not
traded on a national securities exchange, such institution is to provide to
the Secretary a warrant for non-voting common stock or preferred stock
or a senior debt instrument. Warrants provided to the Secretary by a
financial institution whose shares are nationally traded are to provide for
conversion to a senior debt instrument or contain other provisions to
ensure that the Secretary is appropriately compensated for the value of the
warrant in the event the shares of such financial institution are no longer
nationally traded. Other provisions of the House version of the Act
relating to such warrants and senior debt instruments (as described in
yesterday’s Client Alert) continue in the Senate version. [Section 113]
The inconsistency between the persons (executive officers) to whom
restrictions on executive compensation set out in the House bill are
applicable in respect of direct purchases of troubled assets [Section
111(b)(2)A)] and the persons (senior executive officers) to whom
restrictions on executive compensation set out in the House bill are
applicable in respect of auction purchases of troubled assets [Section
111(c)(2)] has been corrected by making all such restrictions applicable to
“senior executive officers” who are defined as any of the five most highly
paid executives, whose remuneration is required to be disclosed under
the Securities Exchange Act of 1934, and their “non-public company
counterparts.”
SEC Interpretation of Mark-to-Market Requirements
On September 30, 2008, the SEC issued a press release entitled “SEC
Office of the Chief Accountant and FASB Staff Clarifications on Fair Value
Accounting” (SEC Release 2008-234, the “SEC Clarifications”). The SEC
Clarifications are of the standards for fair value measurement of assets set
out in FASB Statement No. 157, Fair Value Measurements.
The SEC’s release emphasizes that, in the absence of an “active market” for a
security, the determination of fair value “often requires significant judgment” by
a company’s management and by its auditors. It states that “broker quotes may
be an input when measuring fair value, but are not necessarily determinative if
an active market does not exist for the security.” It goes on to say that:
2
Client Alert
The results of disorderly transactions are not determinative… The concept
of a fair value measurement assumes an orderly transaction between market
participants… Distressed or forced liquidation sales are not orderly
transactions… Determining whether a particular transaction is forced or
disorderly requires judgment.
…Transactions in inactive markets may be inputs when measuring fair value,
but would likely not be determinative… [I]f prices in an inactive market do
not reflect current prices for the same or similar assets, adjustments may be
necessary to arrive at fair value.
A significant increase in the spread between the amount sellers are “asking”
and the price that buyers are “bidding,” or the presence of a relatively small
number of “bidding” parties, are indicators that should be considered in
determining whether a market is inactive … [which] requires judgment.
The SEC Clarifications also address the standards which should be applied, in
the exercise of judgment, as to whether a decline in value is an “other-thantemporary decline,” including consideration of the length of time and the
extent to which the market value of the asset has been less than cost, the
financial condition and near-term prospects of the issuer, and the intent and
ability of the holder to retain its investment for a period sufficient to allow a
recovery in market value.
It is anticipated that the SEC Clarifications will assist issuers, in preparation of
their 3Q2008 financial statements, to take a more robust view of asset values
of mortgage-related securities and derivatives than would otherwise be the
case. The Senate version of the Emergency Economic Stabilization Act of
2008, as noted in our Client Alert dated September 30, 2008, grants to the
SEC the authority to suspend the application of FASB 157 and mandates an
SEC study of the impact of FASB 157 within 90 days of the Act’s enactment.
Treasury Money Market Guarantee Program
The Treasury Department has now opened its Temporary Guarantee Program
for Money Market Funds (the “Money Market Guarantee Program”). The
Money Market Guarantee Program is available to any money market fund
which (i) is registered under the Investment Company Act of 1940, (ii) has a
policy of maintaining a stable net asset value or share price of $1, (iii) operates
in compliance with Rule 2a-7 of the Investment Company Act (the principal
rules and regulations applicable to money market funds, as promulgated by
the SEC), (iv) publicly offers its shares under an effective registration statement
under the Securities Act of 1933, and (v) had a net asset value per share as of
the close of business on September 19, 2008 of not less than $0.995 and was
then accepting redemption requests. Money market funds may elect to participate
in the Money Market Guarantee Program by application prior to October 8, 2008
and by entering into a standard form of Guarantee Agreement with the Treasury
Department and paying the required participation fee. Both taxable and taxexempt money market funds and retail and institutional money market funds
can participate, but not individual investors in such funds.
3
Baker & McKenzie
The program guarantees the payment of $1 per share upon liquidation of the
participating money market fund for shares held at the close of business on
September 19, 2008 (or, if less, for the number of shares held upon the fund’s
liquidation), to the limit of funds available to the Treasury for the Money
Market Guarantee Program.
A participating fund must agree to maintain, and extend if possible, any
agreement in effect on September 19, 2008 obligating a third party to support
the fund’s net asset value and, upon the occurrence of a Guarantee Event,
must promptly demand payments due under any such agreement. Treasury
will make guarantee payments to a participating fund provided that the fund
has initiated liquidation within five business days of a Guarantee Event and the
fund being liquidated within 30 days of the Guarantee Event. A Guarantee
Event is triggered if a participating fund’s net asset value falls below $0.995,
unless promptly cured.
Participating funds must pay an upfront fee of one basis point on the value of
the fund’s shares, for funds with a net asset value per share of at least $0.9975
at the close of business on September 19, 2008 or of 1.5 basis points for funds
with a net asset value per share of less than $0.9975 but greater than $0.995
on that date.
The Money Market Guarantee Program has an initial term ending on
December 31, 2008 and may be renewed by the Secretary of the Treasury up
to the close of business on September 18, 2009. The Program only covers
Guarantee Events occurring before expiration of the Program’s term. If the
Program is extended, additional fees will be payable by participating funds.
Payments under the Money Market Guarantee Program are to be made from
the Exchange Stabilization Fund (which has approximately $50 billion in assets).
The Senate version of the Emergency Economic Stabilization Act requires the
Secretary of the Treasury to reimburse the Exchange Stabilization Fund for any
payments from the Fund made under the Program.
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in
professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference
to an “office” means an office of any such law firm.
©2008 Baker & McKenzie
All rights reserved.
4