On Oct. 3, 2008, President Bush signed into law the “Emergency Economic Stabilization Act of 2008” or the Bailout Bill; the governmental response to the recent troubles in the financial markets.1 Given the hastiness with which the Bailout Bill was put together by Congress, many of the bill's finer points are yet to be determined and its eventual impact on the financial crisis is unknown. However, several aspects of the bill, summarized below, are expected to have an immediate impact on financial services companies and public reporting companies—particularly those who hold mortgage-backed securities in their portfolios. This bulletin highlights certain major aspects of the Bailout Bill likely to impact financial services and public reporting companies.
Troubled Assets Relief Program
The primary purpose of the Bailout Bill is to create a Troubled Assets Relief Program, or TARP, under which the U.S. Treasury is authorized to purchase, insure, hold and sell certain financial instruments, primarily instruments related to mortgages issued prior to March 14, 2008. Under TARP, up to $700 billion of troubled assets may be purchased by the federal government, with $250 billion immediately available and the balance available upon request by the president and the secretary of the treasury, subject to congressional review.2 The authority to purchase troubled assets under TARP initially expires on Dec. 31, 2009, but can be extended until October 2010 upon action by the U.S. Treasury.3
Limitations on Deductibility of Certain Executive Compensation
The Bailout Bill grants, for the first time, authority to the federal government to regulate executive compensation. Under the bill when the U.S. Treasury purchases assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20 percent excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.4 The executive compensation standards will apply only while the U.S. Treasury holds a debt or equity position in the affected institutions and do not apply to existing golden parachute arrangements.5
The Bailout Bill also amends Section 162(m) of the Internal Revenue Code to limit the annual tax deduction to $500,000 for compensation paid to the CEO, CFO or one of the other three highest compensated officers of entities in which the federal government acquires $300 million or more of troubled assets under TARP and also amends Section 280G of the Internal Revenue Code in regards to golden parachutes for certain executives whose companies sell assets to the federal government under TARP.6 Those entities which sell assets in excess of $300 million as a result of TARP are prohibited under the Bailout Bill from entering into new employment contracts providing for golden parachutes, but they are not prevented from complying with the terms of existing golden parachute agreements.7
The bill does not define the terms “employment contract” or “golden parachute” and the construction of these terms as well as more definite guidance will be determined by future interpretations from the U.S. Treasury.
FAS 157 and Authority to Suspend “Mark to Market” Accounting Regulations
The Bailout Bill authorizes the U.S. Securities and Exchange Commission to suspend the mark-to-market accounting regulations under Statement of Financial Accounting Standards No. 157, or FAS 157, for any issuer or with respect to any class or category of transaction, if the SEC determines that the suspension is in the public interest and protects investors.8 The ultimate decision as to whether to suspend FAS 157 lies with the SEC and to date, the SEC has not suspended the application of FAS 157. The Bailout Bill also requires the SEC, in conjunction with the Federal Reserve and the U.S. Treasury, to provide a report to Congress within 90 days detailing the impact of FAS 157 on the quality of publicly available financial information and its impact on bank failures and the balance sheets of financial institutions.9
With the bill's passage, issuers who file reports with the SEC should anticipate additional clarification from the SEC in line with the SEC's Sept. 30, 2008 press release entitled “SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Market Value Accounting.”10 As issuers begin preparing financial statements for third quarter 2008, close attention should be paid to SEC pronouncements on FAS 157.
Temporary Increases in Deposit Insurance Coverage
The Bailout Bill also temporarily increases Federal Deposit Insurance Corporation, or 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 $250,000.11 This increase in insurance coverage expires on Dec. 31, 2009.12 The temporary increases in deposit and share insurance are disregarded for purposes of assessing premiums against covered institutions.13
1 The full text of the Emergency Economic Stabilization Act of 2008 (H.R. 1424, 110 th Cong. 2 nd Ses. (2008) (enacted) can be viewed at http://thomas.loc.gov/
2 Section 115.
3 Section 120.
4 Section 111(c).
5 Section 111(d).
6 Section 302.
7 Section 302.
8 Section 132.
9 Section 133.
10 SEC Press Release 2008-234. http://www.sec.gov/news/press/2008/2008-234.htm
11 Section 136(a)(1).
12 Section 136(a)(1).
13 Section 136(a)(2).