Financial Services Update

October 2, 2010

Authored by: Matt Jessee

Kaufman To Replace Warren At TARP

On Thursday, Senator Harry Reid (D-NV) announced that Senator Ted Kaufman (D-DE) was appointed to replace Elizabeth Warren as chair of the Congressional Oversight Panel for the Troubled Assets Relief Program (TARP). Kaufman was appointed to fill then-Senator Joe Biden’s remaining two years of his Senate term after being elected Vice President. Kaufman will serve until a new Senator from Delaware is sworn in on November 15 

Dodd-Frank Implementation Delayed

On Wednesday, Congress passed a spending bill to fund government operations through early December and then recessed until after the November election. However, requested budget increases for financial regulators were not included in the spending bill, which will likely result in the delay in implementation of the Dodd-Frank Wall Street Reform Act until 2011. The funding shortage would be particularly impactful on the Commodity Futures Trading Commission and Securities and Exchange Commission, which will be responsible for oversight of the over-the-counter derivatives market. Republicans, who overwhelmingly voted against the Dodd-Frank law, are poised for significant gains in the elections. If Republicans win a majority in either chamber, they have promised to block the requested funding increases for the SEC and CFTC in order to hamper the law’s implementation. 

On Thursday, Federal Reserve Chairman Ben Bernanke, Deputy Treasury Secretary Neal Wolin, Securities and Exchange Commission Chairman Mary Shapiro, Commodity Futures Trading Commission Chairman Gary Gensler, and FDIC Chairman Sheila Behr indicated to the Senate Banking Committee that their agencies will work together to ensure the Dodd-Frank Wall Street Reform Act is implemented effectively. However, Republicans questioned whether the regulators had too much power to design and implement the new regulatory structure. Behr testified that the FDIC delayed a vote on its first major rulemaking for the law this week, and Gensler testified that a list of rules his agency must pass for derivatives markets will not be ready for statute-imposed deadlines. Overall, the bill requires the regulators to write more than 500 rules, conduct 81 studies, and submit 93 reports in coming years.

House Passes Chinese Currency Bill

On Wednesday, the House of Representatives passed legislation by a vote of 348-79 to pressure China to allow its currency to appreciate. A vote in the Senate, however, will not come until after congressional elections on November 2nd, and it is unclear what effect the outcome of the elections might have on the fate of the legislation. The House bill allows the Commerce Department to treat “fundamentally undervalued currencies” as an illegal export subsidy so that U.S. companies can request a countervailing duty to offset the price advantage of Chinese goods. Republicans who voted against the legislation said they believe China will retaliate against the bill by shutting its market to U.S. farm exports, which could offset potential gains in U.S. manufacturing jobs. While President Obama has not taken a position on the legislation, House Majority Leader Steny Hoyer (D-MD) said lawmakers worked with the White House to ensure the bill did not violate WTO rules. U.S. Treasury Secretary Timothy Geithner told Congress two weeks ago that the Administration would work with the Group of 20 nations during its meeting in Seoul on November 10-11 to push China for faster currency appreciation.

AIG/TARP Agree to Exit Strategy

On Thursday, American International Group announced that it had entered into an agreement-in-principle with the U.S. Department of the Treasury, the Federal Reserve Bank of New York (FRBNY), and the AIG Credit Facility Trust to repay the funding it received from the TARP program during the 2008 financial crisis. The agreement requires AIG to repay $20 billion in senior secured debt to the FRBNY from proceeds resulting from the initial public offering of American International Assurance Company Ltd. (AIA) and the pending sale of its foreign life insurance company American Life Insurance Company (ALICO) to MetLife. The agreement also requires AIG to draw down up to $22 billion of undrawn Series F funds available to the company under the TARP, to purchase an equal amount of the FRBNY’s preferred interests, and to apply proceeds from the announced sales of the AIG Star Life Insurance Co. and AIG Edison Life Insurance to retire the remainder of the FRBNY’s SPV preferred interests. Finally, the agreement calls for the U.S. Treasury to receive approximately 1.655 billion shares of AIG common stock in exchange for the $49.1 billion of TARP Series E, Series F preferred shares, and Series C preferred shares currently held by the AIG Credit Facility Trust. In addition, AIG will issue up to 75 million warrants with a strike price of $45.00 per share to existing common shareholders. Upon the exchange, the U.S. Treasury will own 92.1% of the common stock of AIG. The exchange will not be executed until the FRBNY credit facility is repaid in full, at which time it is expected the U.S. Treasury will sell its stake in AIG on the open market. AIG expects to repay and terminate the FRBNY credit facility and to complete the issuance of common stock to the U.S. Treasury before the end of the first quarter of 2011, subject to regulatory approvals and other closing conditions.  

More Information

If you have questions regarding any of these issues, please contact

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463

Kip Wainscott, Policy Advisor
kip.wainscott@bryancave.com
1 202 508 6172