On Friday, October 3, the President signed into law, as part of a larger bill, the Emergency Economic Stabilization Act of 2008 (the act). The act, which is intended to "restore liquidity and stability to the financial system of the United States," gives the Federal Government, acting through the Secretary of the Treasury, authority to create a massive program for purchasing a broad variety of mortgage-related instruments from financial institutions, as well as other financial instruments the Secretary determines necessary to promote financial market stability.  

Though the details remain to be determined and the program implemented, it is clear from the legislation's scope and the authority granted to the Treasury Department that the act’s effects will be far-reaching. This legislation will likely transform the business and political landscape for the financial, banking, and real estate industries for years to come.  

To address the pressing financial problems the nation faces, the act will be implemented rapidly.  Ballard remains at the forefront of the ever-changing real estate and financial markets and we will continue to keep you informed as further details of the program emerge and implementation takes effect. 

A summary of the act can be found below.

Dominic De Simone, Co-Chair, Distressed Real Estate Initiative
Thomas Hauser, Business and Finance Department
Vincent Marriott III, Bankruptcy, Reorganization and Capital Recovery Group
Brian Pinheiro, Employee Benefits and Executive Compensation Group


Creation and Scope of Program

The Secretary of the Treasury (Secretary) is authorized to establish the Troubled Asset Relief Program (TARP) "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with the act and the policies and procedures developed and published by the Secretary." The TARP has an initial termination date of December 31, 2009, provided the Secretary may extend the TARP until the date that is two years after the act's enactment date upon submission of a written certification to Congress.

In connection with the creation of the TARP, the Secretary is also required to establish a program to guarantee troubled assets pursuant to which the Secretary may guarantee "the timely payment of principal of, and interest on, troubled assets in amounts not to exceed 100 percent of such payments." Premiums will be collected from financial institutions participating in the insurance program in order to meet the purposes of the act and to provide sufficient reserves to meet anticipated claims.

The term "troubled assets" is defined broadly to include: (1) residential and commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case were originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (2) any other financial instrument whose purchase is necessary to promote financial market stability as determined by the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, with written notice of such determination transmitted to the appropriate committee of Congress.

The term "financial institution" is defined as any institution, including but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.

The TARP and guaranty program will be implemented through a new Office of Financial Stability within the Department of Treasury.


In exercising the authorities granted by the act, the Secretary is to take into consideration, among other things: (1) protecting the interests of taxpayers; (2) providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security; and (3) the need to help families keep their homes and stabilize communities.

Program Funding

The TARP and insurance program have a maximum funding, at any one time (i.e., on a revolving basis), of $700 billion, with an initial $250 billion allocation. An additional $100 billion will be allocated upon a written certification of need from the President. The $350 billion balance will be allocated upon submission of a written report to Congress by the President unless the Congress, within 15 days after the submission of the President's report, passes a joint resolution disapproving such allocation.


Within 45 days after the enactment of the act (or within 2 days after the first purchase of a troubled asset, if sooner), the Secretary shall publish program guidelines including: (1) mechanisms for purchasing troubled assets; (2) methods for pricing and valuing troubled assets; (3) procedures for selecting asset managers; and (4) criteria for identifying troubled assets for purchase.

Warrants and Debt Instruments

Subject to a de minimis exception to be set by the Secretary (not to be more than $100 million in total troubled asset sales by one financial institution), the Secretary may not purchase, or make any commitment to purchase, any troubled assets unless the Secretary receives from the financial institution involved either a warrant or debt instrument in order to provide the Secretary with a reasonable participation in equity appreciation or a reasonable interest rate and to provide additional protection for the taxpayer against losses as a result of the Secretary’s purchase, and ultimate sale, of troubled assets from the institution.

Executive Compensation

The act includes several provisions designed to limit and discourage firms who participate in the TARP from paying excessive compensation, especially severance, to its senior executives. The act establishes separate restrictions for institutions that sell troubled assets directly to the Treasury and for those that sell assets only at auction. Institutions that sell troubled assets directly to the Treasury generally face stricter curbs on executive compensation, due to the increased risk that taxpayers will overpay for the assets purchased in such "non-market" transactions.

Foreclosure Mitigation and Assistance to Homeowners

In connection with the Secretary's purchase of assets secured or relating to residential real estate, including multifamily housing, the Secretary is to implement a plan that seeks to maximize assistance to homeowners, including principal and interest rate adjustments and other modifications of the underlying mortgage and utilization of loan guarantees and credit enhancements to prevent avoidable foreclosures. To further this effort, the Secretary is to coordinate with other governmental agencies to identify opportunities for the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan modification and restructuring process.

Oversight, Reporting and Transparency

The act provides for oversight, and reporting to Congress, by the Comptroller General as well as by a newly established Financial Stability Oversight Board and an Office of Special Inspector General for the Troubled Asset Relief Program. In addition, the Secretary is required to disclose transaction information to the public and to report to Congress on a regular basis.

Tax Aspects

Gain or loss derived by eligible banks from the sale of preferred stock issued by Fannie Mae or Freddie Mac will be treated as ordinary income or loss if the stock was held on September 6, 2008, or was sold or exchanged on or after January 1, 2008, and before September 7, 2008. Also, the limited exclusion for income derived by individuals from the discharge of qualified principal residence indebtedness is extended for three years to discharges occurring before January 1, 2013.

In addition to the tax provisions of the act, the overall legislation signed by the President includes a large number of other tax provisions, covering hundreds of pages, which, among other things, raise the alternative minimum tax exemption for individuals; raise taxes on the oil and gas industry significantly; include new tax breaks for the production of renewable energy; extend and improve the R&D tax credit and the new markets tax credit programs; expand the disaster relief provisions; impose tax basis reporting requirements on brokers; and impose significant new restrictions on deferred compensation.

Mark-to Market

The Securities and Exchange Commission is given authority under the securities laws to suspend mark-to-market accounting requirements if the Commission determines that it is necessary or appropriate in the public interest and is consistent with the protection of investors.

FDIC Deposit Insurance Limit

From the date of enactment of the act to December 31, 2009, the FDIC deposit insurance limit is increased to $250,000 per account holder.

To access the full legislation, click here.

A Statement by the President's Working Group on Financial Markets may be accessed by clicking here.

A Statement on the Emergency Economic Stabilization Act by Henry M. Paulson, Jr., may be accessed by clicking here.

Copyright © 2008 by Ballard Spahr LLP.
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This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.