On November 12, Treasury Secretary Henry M. Paulson, Jr. announced a major revamping of his agency's approach to the national fiscal crisis and that the agency is shifting the focus of the Troubled Asset Relief Program (TARP).

Companies, nonprofits and higher education institutions that depend on the securitization of instruments such as credit card receivables, auto loans, student loans and “similar products” may particularly benefit from these new changes.

Treasury’s initial focus for the $700 billion TARP money was to reinstate liquidity in financial markets by purchasing “troubled assets.” It began a capital purchase program where it purchased shares in leading US financial institutions and orchestrated guarantees of certain types of accounts and financial instruments. 

Treasury has now re-evaluated how the federal government should use these funds. In his prepared remarks, Secretary Paulson stated that Treasury has identified three “critical priorities” for utilizing the remaining TARP funds appropriated by Congress:

1. Continued reinforcement of the stability of the financial system, including the possibility of additional capital for banks and non-banks;

2. Supporting markets for securitizing credit outside of the banking system;  

3. Continued efforts to reduce the risk of foreclosure.   

Secretary Paulson said: “approximately 40 percent of US consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

“What we initially perceived as just a program for asset managers is now much broader, and may bring direct financial relief to many different businesses and industries,” said Marc Fleischaker, chairman of Arent Fox in Washington, DC.

Treasury may also want to increase the effectiveness of TARP by attracting private capital, such as through matching investments. In developing a potential matching program, the Secretary said the Treasury Department “will also consider capital needs of non-bank financial institutions not eligible for the current capital program.”

Initial feedback from Capitol Hill to the Secretary’s announcement was partially of the “I told you so” variety. Senate Banking, Housing and Urban Affairs Committee Chairman Chris Dodd (D-CT) issued a statement saying that he appreciated Treasury’s “willingness to adjust to the current situation in our financial markets” and that he is “gratified that they listened to Congress when we insisted on including alternative strategies, such as liquidity injections, in the financial rescue legislation.” Both Chairman Dodd and his House counterpart, Rep. Barney Frank (D-MA), are focusing much attention on stemming the tide of foreclosures that are continuing to affect Americans across the nation. 

House Speaker Nancy Pelosi of California has proposed that when Congress returns next week for its one-week lame-duck session, it should immediately act on legislation to provide additional financial assistance to the automobile industry that might utilize some of the resources originally allocated to the TARP program under the Emergency Economic Stabilization Act.

There is already a $25 billion automobile industry direct loan program that the US Department of Energy is administering, and for which the Interim Final Rule and application criteria were published on November 5. These loans to auto manufacturers and suppliers to the auto sector will cover the costs of “reequipping, expanding, and establishing manufacturing facilities in the US to produce advanced technology vehicles, and components for such vehicles.”

Chairman Frank is working with Democratic Michigan Senator Carl Levin on legislation permitting the auto industry to tap into TARP, but they are likely to encounter some resistance, as indicated by Secretary Paulson’s comment on Wednesday that the auto sector is “critical” but that the October financial industry rescue legislation was not designed for the auto industry. Chairman Frank’s spokesman indicated that the draft proposal will involve the government taking an equity stake in the automakers, just as it has done for the large banking institutions, in return for substantial loans. Some in Congress will not support this, fearing a slippery slope among beleaguered industries.  They will likely look instead to push the Energy Department to release funds more quickly from its $25 billion loan program (which has an application deadline of December 31). 

The Arent Fox Government Relations Department will continue to monitor the latest political developments regarding the TARP program and related rescue initiatives to determine the impact upon our clients and friends. Please feel free to contact us if you have any questions or needs in this area.

Jon S. Bouker
bouker.jon@arentfox.com
202.857.6183

Craig Engle
engle.craig@arentfox.com
202.775.5791

Marc L. Fleischaker
fleischaker.marc@arentfox.com
202.857.6053