On January 12, 2009, President Bush, at the request of President-elect Obama, formally requested that Congress release the second $350 billion under the Emergency Economic Stabilization Act. This request can be seen as either: (a) an attempt to preserve executive branch flexibility in light of pending Congressional action; or (b) a political decision to have Bush rather than Obama veto any Congressional decision not to move forward. (Under the Emergency Economic Stabilization Act, Congress is required to take affirmative action within 15 days or the request in order to deny the $350 billion, and that denial is subject to Presidential veto – which would require a 2/3 vote to overturn.)
Director-designate of the National Economic Council, Lawrence Summers, has provided a letter to the Congressional leadership explaining why Obama believes the release of the second $350 billion is needed now. The letter acknowledges that Obama believes “there has been too little transparency and accountability; too much upside for financial institutions and executives who acted irresponsibly without providing enough help for small business owners, families who are struggling to keep their jobs and make ends meet, and innocent homeowners.” However, Obama believes that the “American people need to know that going forward the government has the resources to do whatever is necessary to stabilize our financial system and protect our economy.”
The letter identifies five changes that Obama’s Treasury Department intends to implement:
- Use Our Full Arsenal of Tools to Get Credit Flowing Again to Families and Businesses. The letter explains that a goal of the Obama administration will be to strengthen financial institutions so that they can “restart lending for small businesses, auto purchases, and municipalities.”
- Reform Our System of Oversight, Regulation and Management of Financial Crisis. The letter represents the first time that we’ve seen a government official emphasize in writing that the federal government will receive “earnings and repayments” from financial institutions. The fact that the government may profit from its investments seems rarely communicated to the public.
- Launch a Sweeping Effort to Address the Foreclosure Crisis.
- Impose Tough and Transparent Conditions on Firms Receiving Taxpayer Assistance. The letter provides that Obama will “ensure that resources are directed to increasing lending and preventing new financial crises.” This suggests that the Obama administration understands that the government should only encourage new lending when the loans make financial sense to the bank. The conditions on those receiving government assistance generally seem consistent with the existing conditions: “tough but sensible conditions that limit executive compensation until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies.” Only the limitation on acquisitions is not contained in the existing TARP Capital terms; however, we’re also not aware of many “financially strong” companies seeking to sell in this environment.
- Maximize the Role of Private Capital and Plan for Exit of Government Intervention. The letter notes that the Obama administration will “seek to replace investments made by the U.S. Government with private investment as quickly as possible.” We believe that the Treasury Department may seek to securitize and sell its TARP Capital investments as soon as a stable market is provided for it do so. Most of the restrictions in connection with TARP Capital (executive compensation, dividends, stock buybacks) are conditioned on the government continuing to own the TARP investment.