Implications of the Rescue Plan for Financial Institutions
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EESA TARP Update
Implications of the Rescue Plan for Financial Institutions

By Michael J. Percy, CPA

What began as a subprime mortgage crisis affecting a select number of institutions and markets has rapidly evolved into a situation affecting credit and liquidity markets worldwide. In response, economic and political leaders have identified and implemented both short- and long-term measures and policies, which inevitably will have long-term implications for U.S. financial institutions and the global economy as a whole.

EESA and TARP
On Oct. 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U.S. secretary of the Treasury broad authority to take actions with the aim of restoring liquidity and stability to the U.S. financial system and ensuring the economic well-being of Americans.

The primary mechanism for immediate relief under EESA is the $700 billion Troubled Asset Relief Program (TARP), which – under the direction of the newly created Office of Financial Stability – authorizes the Treasury secretary to purchase troubled assets directly from financial institutions, establish a program to guarantee the troubled assets of financial institutions, and directly purchase the equities of financial institutions. The Treasury has begun implementing measures necessary to execute TARP and will continue to outline additional details in the coming weeks.

Recent Implementation Activities
The Treasury Department chose The Bank of New York Mellon Corp. to serve as the master custodian of the program. In that capacity, the bank will manage the accounting, auction management, and other infrastructure services associated with administering the portfolio of troubled assets. The Treasury will also select a securities asset manager and a whole loan asset manager for the asset repurchase program.

Under the capital purchase program announced Oct. 14, the Treasury will purchase up to $250 billion of senior preferred shares of financial institutions by the end of 2008. The Treasury will invest $125 billion in varying amounts in the nine large financial institutions participating in the voluntary program. The remaining $125 billion will be available to small and medium-sized banks and thrifts across the nation.

Banks interested in participating in the capital purchase program should contact their primary regulator for further information and must notify the Treasury Department by 5 p.m. EST on Friday, Nov. 14, 2008, of their desire to participate. After consulting with the appropriate federal banking agencies, the Treasury will determine the eligibility of and allocations for the banks that applied.

Issues to Consider
Leaders of financial institutions have many important considerations to focus on in this changing environment, including:

  • The eligibility requirements and application processes for the various components of TARP, and the type of assets covered by TARP;
  • The impact participation in the various components of TARP could have on the financial institution’s balance sheet and overall financial outlook;


  • The impact that customers’ participation in programs such as Hope Now1 and Hope for Homeowners2 could have on the financial institution’s balance sheet and overall financial outlook;
  • The impact that impending regulatory reform and the resulting regulatory landscape might have on both the banking and nonbanking activities of the financial institution; and
  • As a result of mergers and acquisitions, potential strategic opportunities that might lead to new banking and nonbanking activities, provide access to new markets, or create operational efficiencies.
Although the details of many of these issues remain unclear, the above considerations are important for the future of any financial institution.

It is essential for leaders to properly assess – from the accounting, tax, capital, regulatory, operational, and strategic perspectives – the potential impact of the emerging components of EESA and TARP. Coordination among the affected areas of the institution, as well as continued communication with institutional advisers, trade associations, and regulators, will help ensure that the financial institution responds appropriately to the changing environment and that it capitalizes on any opportunities that arise as a result.

Looking Ahead
As the details of the administration of TARP continue to unfold in the days and weeks ahead, Crowe Horwath LLP will closely monitor the new implementation rules, program structure, and related regulations and positions – and their strategic implications for financial institutions – as well as how to navigate the rapidly changing landscape of the U.S. financial system.

Contact Information
Mike Percy is an executive with Crowe Horwath LLP in the Fort Lauderdale, Fla., office. He can be reached at 954.489.7433 or
mike.percy@crowehorwath.com.



1 Hope Now is an alliance of counselors, servicers, investors, and other mortgage market participants. See http://www.hopenow.com/.
2 The Hope for Homeowners program was created by Congress to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. See www.hud.gov/hopeforhomeowners.

 

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Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.