I. EXECUTIVE SUMMARY:
The Troubled Asset Relief Program (“TARP”) originally contemplated under the Emergency Economic Stabilization Act of 2008 (“EESA”) –enacted into law on October 3, 2008- has mutated and will likely continue to morph. First, the Treasury Secretary announced the creation of a Capital Purchase Program (“CPP”) under the TARP on October 14, 2008, by which the Treasury would use $250 billion of the $700 billion of EESA funds to invest in financial institutions. (Treasury Announces TARP Capital Purchase Program Description. October 14, 2008). According to the Treasury Secretary “The purpose of the CPP is to encourage U.S. financial institutions to build their capital base, which in turn will increase the capacity of those institutions to lend to U.S. businesses and consumers and to support the U.S. economy. The terms of the investment limit certain uses of capital by the issuer, including most repurchases of company stock, and increases in dividends. Under this voluntary program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms, which will include warrants for future Treasury purchases of common stock. The CPP is available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged solely or predominately in financial activities permitted under the relevant law.” (United States Department of the Treasury Tranche Report to Congress, November 4, 2008. Page 1, 2). The deadline to apply to the CPP by qualifying financial institutions was November 14, 2008, 5:00 p.m. (EDT).
By October 28, 2008 the Treasury had settled capital purchase transactions of preferred stock with warrants with 8 of the first nine financial institutions participating in the CPP (the settlement of the capital purchase transaction of the 9th institution will be made before January 31, 2009), according to the first Tranche Report to Congress issued by the Treasury on November 4, 2008 in accordance with Section 105(b) of the Emergency Economic Stabilization Act of 2008 (EESA). (United States Department of the Treasury Tranche Report to Congress, November 4, 2008.). By November 14, 2008, the Treasury had completed settlements with an additional 21 financial institutions, for a total of 30 financial institutions totaling $158,561,409,000 in Capital Purchase Program investments, according to the Transactions Report issued by the Treasury on November 17, 2008. (Capital Purchase Program. Transaction Report issued on November 17, 2008.).
On November 12, 2008, while providing an update on the state of the financial system, the economy, and the Treasury strategy for continued implementation of the $700 billion financial rescue package, the Treasury Secretary announced that purchasing illiquid mortgage-related assets is not the most effective way to use the TARP funds. (Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update. November 12, 2008). The Treasury will now design further strategies to build capital in financial institutions, examine strategies to support consumer access to credit outside the banking system, and examine strategies to mitigate mortgage foreclosures through different venues than the original commitment to purchase illiquid mortgage assets.
II. CAPITAL PURCHASE PROGRAM – SUMMARY OF TERMS OF SENIOR PREFERRED STOCK AND WARRANTS
Restrictions on Certain Transactions: Pursuant to Section 4.3 of the Securities Purchase Agreement Standard Terms, the financial institution shall not merge or consolidate with, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the successor, transferee or lessee party (or its ultimate parent entity), as the case may be (if not the financial institution), expressly assumes the due and punctual performance and observance of each and every covenant, agreement and condition of the Securities Purchase Agreement to be performed and observed by the financial institution.
Transferability; Restrictions on Exercise of the Warrant: According to the Securities Purchase Agreement Standard Terms, Section 4.4, the Treasury is permitted to transfer, sell, assign or otherwise dispose of all or a portion of the purchased securities or warrant shares at any time, and the financial institution shall take all steps as may be reasonably requested by the Treasury to facilitate the transfer of the purchased securities and the warrant shares, as long as the Treasury does not transfer a portion or portions of the warrant with respect to, and/or exercise the warrant for more than one-half of the initial warrant shares in the aggregate until the earlier of (i) the date on which the financial institution has received aggregate gross proceeds of not less than the purchase price and (ii) December 31, 2009.
Registration: The Treasury acknowledged that the Purchased Securities and the Warrant Shares have not been registered under the Securities Act of 1933 or under any state securities laws. It acquired the purchased securities pursuant to an exemption from registration pursuant to Section 4(2). The Securities Purchase Agreement Standard Terms, Section 4.5, however, states the Treasury’s Registration Rights. Namely, the financial institution agrees that as promptly as practicable after the closing date, but not later than 30 days after such closing date, the financial institution shall prepare and file with the SEC a Shelf Registration Statement covering all Registrable Securities, or designate an existing Shelf Registration Statement filed with the SEC to cover the Registrable Securities. To the extent the Shelf Registration Statement has not been declared effective or is not automatically effective upon such filing, the financial institution shall use reasonable best efforts to cause such Shelf Registration Statement to be declared or become effective and to keep such continuously effective and in compliance with the Securities Act and usable for resale. The financial institution will also grant to the Treasury piggyback registration rights for the warrants and the common stock underlying the warrants and will take such other steps as may be reasonably requested to facilitate the transfer of the warrants and the common stock underlying the warrants.
Restriction on dividends and Repurchases: Pursuant to Section 4.8(a) of the Securities Purchase Agreement Standard Terms, prior to the earlier of the third anniversary of the closing date and the date on which the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the Preferred Shares to third parties, neither the financial institution nor any subsidiary of the financial institution shall without the consent of the Treasury: (i) declare or pay any dividend or make any distribution on the Common Stock (other than regular quarterly cash dividends of no more than the amount of the last quarterly cash dividend per share declared, dividends payable solely in shares of Common Stock, and dividends or distributions of rights or Junior Stock in connection with a stockholders’ right plan); (ii) redeem, purchase or acquire any shares of Common Stock or other capital stock or other equity securities of any kind of the financial institution, or any trust preferred securities issued by the financial institution or any affiliate of the financial institution (other than redemptions, purchases or other acquisitions of the preferred shares, of shares of common stock or other junior stock in connection with the administration of any employee benefit plan in the ordinary course of business consistent with past practice (“Permitted Repurchases”)). The financial institution shall not repurchase any Preferred Shares from any holder thereof, whether by means of open market purchase, negotiated transaction, or otherwise, other than Permitted Repurchases, unless it offers to repurchase a ratable portion of the Preferred Shares then held by the Treasury on the same terms and conditions.
Executive Compensation: Section 4.10 of the Securities Purchase Agreement Standard Terms states that the financial institution shall take all necessary actions to ensure that its Benefit Plans with respect to its Senior Executive Officers comply in all respects with Section 111(b) of the EESA and shall not adopt any new Benefit Plan with respect to its Senior Executive Officers that does not comply with the same until such time as the Treasury ceases to own any debt or equity securities of the financial institution acquired pursuant to the Securities Purchase Agreement.
SENIOR PREFERRED STOCK:
The Senior Preferred stock has a regulatory capital status of Tier 1, and a term of perpetual life. It ranks senior to common stock and pari passu with existing preferred shares other than preferred shares which by their terms rank junior to any existing preferred shares. The liquidation preference is $1,000 per share. However, the Treasury may agree to purchase Senior Preferred stocks with a higher liquidation preference per share, in which case the Treasury may require the Financial Institution to appoint a depositary to hold the Senior Preferred and issue depositary receipts.
Pursuant to the Certificate of Designations (Certificate of Designations of fixed Rate Cumulative Perpetual Preferred Stock), the terms of the Senior Preferred Stock are:
Dividends Rights (Section 3): Applicable Dividend Rate means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum. The Dividend Payment Rate is February 15, may 15, august 15 and November 15 of each year. Holders of Designated Preferred Stock are entitled to receive, on each share of Designated Preferred Stock out of assets legally available therefore, cumulative cash dividends with respect to each Dividend Period. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock or Parity Stock. No Common Stock, Junior Stock or Parity Stock shall be directly or indirectly purchased, redeemed or otherwise acquired for consideration by the financial institution or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, included the latest completed Dividend Period, on all outstanding shares of Designated Preferred Stock have been or are simultaneously declared and paid in full.
Liquidation Rights (Section 4): Liquidation Preference: In the event of any liquidation, dissolution or winding up of the affairs of the financial institution, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the financial institution or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the financial institution, subject to the rights of any creditors of the financial institution, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the financial institution ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends, whether or not declared, to the date of payment. If in any distribution the assets of the financial institution or proceeds are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the financial institution ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled. With regards to liquidation rights, the merger or consolidation of the financial institution with any other financial institution or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the financial institution, shall not constitute a liquidation, dissolution or winding up of the financial institution.
Redemption (Section 5): Designated Preferred Stock may not be redeemed for a period of three years from the date of the original issue date, except with the proceeds from a Qualified Equity Offering (“Qualified Equity Offering” shall mean the sale by the financial institution after the date of the investment of Tier 1 qualifying perpetual preferred stock or common stock for cash) which results in aggregate gross proceeds to the financial institution of not less than 25% of the issue price of the Designated Preferred Stock. After the third anniversary of the date of the original issue date, the Designated Preferred Stock may be redeemed, in whole or in part, at any time and from time to time, at the option of the financial institution. All redemptions of the Designated Preferred Stock shall be at 100% of its issue price, plus (i) in the case of cumulative Senior Preferred, any accrued and unpaid dividends and (ii) in the case of noncumulative Designated Preferred Stock, accrued and unpaid dividends for the then current dividend period (regardless of whether any dividends are actually declared for such dividend period), and shall be subject to the approval of the appropriate Federal Banking Agency. Following the redemption in whole of the Designated Preferred Stock held by the Treasury, the financial institution shall have the right to repurchase any other equity security of the financial institution held by the Treasury at fair market value.
Voting Rights (Section 7): The holders of Designated Preferred Stock have no voting rights except as otherwise required by law or whenever at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors of the financial institution shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of share of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors, “Preferred Directors”, or each a “Preferred Director” to fill the created directorship at the financial institution’s next annual meeting of stockholders (or at a special meeting called for that purpose prior to the next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past dividend periods including the latest completed dividend period on all outstanding shares of Designated Preferred Stock have been declared and paid in full. At this time the voting right will terminate with respect to the Designated Preferred Stock.
Holders of Designated Preferred Stock have class voting rights on (i) any authorization, creation, or issuance of shares ranking senior to the Designated Preferred Stock; (ii) any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter; or (iii) any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the financial institution with another financial institution or other entity which would adversely affect the rights of the Designated Preferred Stock holder.
According to the Capital Purchase program Summary of Warrant Terms (TARP Capital Purchase Program. Term Sheet):
The Treasury will receive ten-year warrants, immediately exercisable, in whole or in part, to purchase a number of shares of common stock of the financial institutions with an aggregate market price equal to 15% of the Senior Preferred Stock amount on the date of the investment, subject to a reduction. The initial exercise price for the warrant, and the market price for determining the number of shares of common stock subject to the warrants, shall be the market price for the common stock on the date of the Senior Preferred investment, calculated on a 20-trading day trailing average), subject to customary anti-dilution adjustments.
Voting Rights: Pursuant to Section 6 of the Form of Warrant to Purchase Common Stock, does not entitle the Treasury to any voting rights or other rights as a stockholder of the Company prior to the date of exercise of such Warrant.
III. UNITED STATES TREASURY CAPITAL PURCHASE PROGRAM INVESTMENTS.
The Treasury Secretary settled capital purchase transactions of preferred stock with warrants with the following nine companies on October 28, 2008:
1) BANK OF AMERICA CORPORATION - $15 BILLION: According to Form 8-K filed by Bank of America with the Securities Exchange Commission on October 30, 2008, Bank of America Corporation agreed to issue 600,000 of Bank of America’s Fixed Rate Cumulative Perpetual Preferred Stock, Series N; and a warrant to purchase 73,075,674 shares of common stock, par value $0.01 per share for an aggregate purchase price of $15 billion in cash.
2) BANK OF NEW YORK MELLON CORPORATION - $3 BILLION: According to Form 8-K filed by Bank of New York Mellon Corporation with the Securities Exchange Commission on October 30, 2008, the U.S. Treasury agreed to purchase 3,000,000 shares of Bank of New York Mellon Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, and a ten-year warrant to purchase up to 14,516,129 voting common stock shares, par value $0.01 per share at an exercise price of $31.00 per share, for an aggregate purchase price of $3.0 billion in cash.
3) CITIGROUP INC. - $25 BILLION: According to Form 8-K filed by Citigroup Corporation on October 30, 2008 with the Securities Exchange Commission, Citigroup Inc. agreed to issue the Treasury 25,000 of its Fixed Rate Cumulative Perpetual Preferred Stock, Series H, and a ten-year warrant to purchase 210,084,034 common stock shares, at an exercise price of $17.85 par value $0.01 per share, for an aggregate purchase price of $25 billion in cash.
4) THE GOLDMAN SACHS GROUP, INC. - $10 BILLION: According to Form 8-K filed by The Goldman Sachs Group, Inc. on October 31, 2008 with the Securities Exchange Commission, The Goldman Sachs Group agreed to issue and sell the U.S. Treasury 10,000,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series H, and a ten-year warrant to purchase up to 12,205,045 shares of the Company’s voting common stock, par value $0.01 per share, at an exercise price of $122.90 per share, for an aggregate purchase price of $10.0 billion in cash.
5) JP MORGAN CHASE & CO. - $25 BILLION: According to Form 8-K filed by JP Morgan Chase & Co. on October 31, 2008 with the Securities Exchange Commission, JP Morgan Chase agreed to issue to the United States Department of the Treasury, in exchange for aggregate consideration of $25,000,000,000, 2,500,000 shares of the its Fixed Rate Cumulative Perpetual Preferred Stock, Series K, par value $1 and liquidation preference $10,000 per share (and $25,000,000,000 liquidation preference in the aggregate), and a warrant to purchase up to 88,401,697 shares of the Company’s common stock, par value $1 per share, at an exercise price of $42.42 per share.
6) MORGAN STANLEY – $10 BILLION: According to Form 8-K filed by Morgan Stanley on October 30, 2008 with the Securities Exchange Commission, Morgan Stanley agreed to issue and sell to the Treasury Department 10,000,000 shares of its Series D Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.01 per share, and a warrant to purchase up to 65,245,759 shares of common stock, par value $0.01 per share for an aggregate purchase price of $10 billion.
7) STATE STREET CORPORATION - $2 BILLION: According to Form 8-K filed by State Street Corporation on October 31, 2008 with the Securities Exchange Commission, State Street Corporation agreed to issue and sell to the Treasury Department 20,000 shares of its Series B fixed rate cumulative perpetual preferred stock, $100,000 liquidation preference per share, and a warrant to purchase 5,576,208 shares of State Street’s common stock at an exercise price of $53.80 per share.
8) WELLS FARGO & COMPANY - $25 BILLION: According to Form 8-K filed by Wells Fargo & Company on October 30, 2008 with the Securities Exchange Commission, Wells Fargo & Company agreed to issue to the United States Department of the Treasury, 25,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value having a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. As part of its purchase of the Series D Preferred Stock, the Treasury Department received a ten-year warrant to purchase 110,261,688 shares of Wells Fargo & Company common stock at an initial per share exercise price of $34.01. Pursuant to the Securities Purchase Agreement, the Treasury Department agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
9) MERRILL LYNCH & CO., INC. - $10 BILLION (SETTLEMENT DEFERRED): According to Form 8-K filed by Merrill Lynch & Co., Inc. on October 30, 2008 with the Securities Exchange Commission, Merrill Lynch & Co., Inc. entered into a securities purchase agreement with the U.S. Treasury setting forth the terms upon which Merrill Lynch would issue a new series of preferred stock and warrants to the U.S. Treasury (“TARP Purchase Agreement”). In view of the pending merger agreement with Bank of America Corporation, Merrill Lynch determined that it will not sell securities to the U.S. Treasury under the TARP -Capital Purchase Program (“CPP”) at this time, but may do so in the future under certain circumstances. The TARP Purchase Agreement provides for delayed settlement of a sale of $10 billion of a new series of Merrill Lynch preferred stock and warrants to purchase 64,991,334 shares of Merrill Lynch Common Stock at an exercise price of $23.08 per share. The TARP Purchase Agreement provides that the closing will take place on the earlier of (i) the second business day following a termination of the Merger Agreement with Bank of America and (ii) a date during the period beginning on January 2, 2009 and ending on January 31, 2009 if the Merger Agreement is still in effect but the merger has not been completed by the specified date, but, in the case of either (i) or (ii), in no event later than January 31, 2009. In addition, prior to January 2, 2009, if the Merger Agreement is still in effect but the merger has not been completed, Merrill Lynch has the right, after consultation with the Federal Reserve and Bank of America, to request that the U.S. Treasury consummate the CPP investment on or prior to January 1, 2009. The TARP Purchase Agreement will terminate at 12:01 am on February 1, 2009 if the investment has not been made by that date.
Completion of the CPP investment prior to the termination of the Merger Agreement is subject to Bank America’s approval. Bank of America has agreed that it will not unreasonably withhold or delay its consent. After January 1, 2009, Bank of America may not withhold its consent if, after consulting with Bank of America, Merrill Lynch reasonably determines that the failure to obtain the CPP investment would have a material adverse impact on Merrill Lynch. After January 30, 2009 until 12:01 a.m. on February 1, 2009, Merrill Lynch will have the unilateral right to obtain the CPP investment and Bank of America has consented in advance to the investment at such time if the merger has not been completed at that date.
IV. CAPITAL PURCHASE PROGRAM - DOCUMENTS
The following documents were issued on October 31, 2008 by the Treasury Department as guidelines for publicly traded financial institutions applying for the CPP:
1) Securities Purchase Agreement: This document describes the terms of the financial institution's agreement to issue shares and fulfill other requirements in exchange for Treasury's investment.
2) Form of Letter Agreement: This contractual agreement describes the firm-specific information necessary to implement the securities purchase agreement and represents the financial institution's commitment to the terms of the Securities Purchase Agreement.
3) Certificate of Designations: This document creates the preferred shares.
4) Form of Warrant – Stockholder Approval Not Required: This document describes the terms of the warrants Treasury receives when stockholder approval is not required.
5) Form of Warrant--Stockholder Approval Required: This document describes the terms of the warrants Treasury receives when stockholder approval is required.
6) Term Sheet.
7) SEC, FASB Letter on Warrant Accounting.
So far so good. By November 14, 2008 an additional 21 banks had received quite a bit of money. These included:
11/14/2008, Bank of Commerce Holdings, Redding CA, Purchase: Preferred Stock w/Warrants $17,000,000 at Par
11/14/2008, 1st FS Corporation, Hendersonville NC: Purchase Preferred Stock w/Warrants $16,369,000 at Par
11/14/2008, UCBH Holdings, Inc., San Francisco CA: Purchase Preferred Stock w/Warrants $298,737,000 at Par
11/14/2008, Northern Trust Corporation, Chicago IL: Purchase Preferred Stock w/Warrants $1,576,000,000 at Par
11/14/2008, SunTrust Banks, Inc., Atlanta GA: Purchase Preferred Stock w/Warrants $3,500,000,000 at Par
11/14/2008, Broadway Financial Corporation, Los Angeles CA: Purchase Preferred Stock w/Warrants $9,000,000 at Par
11/14/2008, Washington Federal Inc., Seattle WA: Purchase Preferred Stock w/Warrants $200,000,000 at Par
11/14/2008, BB&T Corp. Winston-Salem NC: Purchase Preferred Stock w/Warrants $3,133,640,000 at Par
11/14/2008, Provident Bancshares Corp., Baltimore MD: Purchase Preferred Stock w/Warrants $151,500,000 at Par
11/14/2008, Umpqua Holdings Corp., Portland OR: Purchase Preferred Stock w/Warrants $214,181,000 at Par
11/14/2008, Comerica Inc., Dallas TX: Purchase Preferred Stock w/Warrants $2,250,000,000 at
11/14/2008, Regions Financial Corp., Birmingham AL: Purchase Preferred Stock w/Warrants $3,500,000,000 at Par
11/14/2008, Capital One Financial Corporation, McLean VA: Purchase Preferred Stock w/Warrants $3,555,199,000 at Par
11/14/2008, First Horizon National Corporation, Memphis TN: Purchase Preferred Stock w/Warrants $866,540,000 at Par
11/14/2008, Huntington Bancshares, Columbus OH: Purchase Preferred Stock w/Warrants $1,398,071,000 at Par
11/14/2008, KeyCorp, Cleveland OH: Purchase Preferred Stock w/Warrants $2,500,000,000 at Par
11/14/2008, Valley National Bancorp, Wayne NJ: Purchase Preferred Stock w/Warrants, $300,000,000 at Par
11/14/2008, Zions Bancorporation, Salt Lake City UT: Purchase Preferred Stock w/Warrants $1,400,000,000 at Par
11/14/2008, Marshall & Ilsley Corporation, Milwaukee WI: Purchase Preferred Stock w/Warrants $1,715,000,000 at Par
11/14/2008, U.S. Bancorp, Minneapolis MN: Purchase Purchase Preferred Stock w/Warrants $6,599,000,000 at Par
11/14/2008, TCF Financial Corporation, Wayzata MN: Purchase Preferred Stock w/Warrants $361,172,000 at Par.
The banks appear to be gaming the system. And why not! This is free money--in the sense that the sort of due diligence and negotiation attendant on "real" loans are nowhere to be seen in connection with these "bailout" purchases. But whatever one thinks of the strategies for acquiring this easy money, what also appears to be true is that little is actually being used for the purpose for which Congressional votes (and voter approval prior to the Presidential election) were sought--to stabilize the financial markets (in this case the debt markets) and to reduce the exposure of banks to their bad risk taking (though quite profitable while the going was good--to their shareholders' delight).
In what might become embarrassing to the Democratic Party Congressional leadership on the cusp of control of the political branches of the federal government, House Judiciary Committee Chairman John Conyers, Jr. (D-MI) and Government Oversight Subcommittee Chairman Dennis Kucinich (D-OH) have suggested some of the ironies involved in the bailout.
"It is very troubling to learn that the $700 billion rescue package sold to the American consumer as necessary ensure to continue loans to small businesses and consumers, is apparently being used instead to squeeze smaller banks out of the market,"e; said Conyers. "I’m concerned about the federal government using these funds to take sides in mergers and to promote consolidation within the financial markets instead of reviving our economy."l
"It seems evident that bailout funds are being used in unintended and objectionable ways," said Kucinich, a leader in opposition to the bailout. "Nowhere is this more clear than in my district in Ohio, where National City was recently purchased by PNC; a bank that did not receive bailout money was purchased by a bank that did. Federal money should not be used to subsidize consolidation of the banking industry."
Press Release, Conyers, Kucinich Express Alarm Regarding the Use of Funds from the $700 Billion Rescue Package (October 29, 2008). Of course, this braodside was delivered before the election--both men may be more willing to behave under Democratic Party leadership--but the point is still well taken. The point is nicely refined in the letter delivered to the the financial governance tsarevitches under the Emergency Economic Stabilization Act of 2008. See letter to Secretary Henry Paulsen et al., dated October 29, 2008. Most interesting is the obvious--the fear that the bank bailout creates a framework to accomplish a neat trick, to use the organs of the federal government to avoid the fundamental principles of financial market integrity that the Emergency Economic Stabilization Act was meant to further by the use of federal money to consolidate the dominant position of a group of banks designated by government officials. (See Letter, supra, at page 3).
Yet, that sort of consolidation might well have been accomplished through the market--using the mechanisms of bankruptcy. And what of the poor? Or those who suffer directly as a consequence of bank failures? Some might suggest that it is possible to set up programs of subsidies for them as easily as it appears to be to set up programs for the protection of inefficient managers through the EESA. Or better yet--use the market. With several trillion dollars at their disposal, the American government is in the position to fund business. But why fund inefficient business or businesses whose controlling groups have engaged in risky behavior (for the benefit of their shareholders) and come up short. Let them fail, and then serve as an underwriter of groups seeking to purchase what is left. In that position, the American government might be able to negotiate terms governing the acquisition (for example labor protective) and guard against the self-referencing and self-protective round robin acquisitions among groups of weak or overwrought institutions currently the recipients of largess. Certainly the government would be no worse off, and might be better off for having permitted other actors into the acquisition game--including offshore interests. Those interests would, of course, have to be domesticated if they sought to use public funds for such acquisitions--a way to repatriate capital. Indeed, the critical role for the government with several trillion dollars at its disposal and a mandate to preserve the integrity of the financial system (and the domestic economy) might be to serve as a bankruptcy lender--one of the key weaknesses of the current systemic mess. See Jonathan D. Glater, Advantage of Corporate Bankruptcy Shrinks, New York Times, Nov. 19, 2008, at B1 ("More companies that file for bankruptcy protection are shutting down, lawyers say, because they cannot obtain enough financing to operate while they reorganize." Id.). Where creditors now find it hard to extend credit to companies in bankruptcy, the government could serve that purpose and thus increase the likelihood that the market might better discipline itself without too much dislocation. That is, stronger companies might emerge without the risk of large job losses but with the benefit of eliminating the corporate leadership that helped cause the problem in the first place. So, rather than provide money where needed most, the American finance tsarevitches are using the federal rescue and market integrity preservation money to aid banks intent on eating each other. Bon appetite!
Also left without much in the way of comment is the legal position of the United States as the owner of these shares and warrants. If the United States is now to be treated, with respect to those shares as a market participant, one might expect that certain principles might also not apply--sovereign immunity for one. To the extent that the United States acquires the right to name members to the board of directors, or even acquire a controlling interest in these companies, might the United States also acquire the fiduciary obligations that might go with that position? More interesting still would be the position of the United States as significant shareholder of entities over which it asserts significant regulatory oversight. None of these issues have been thought through by the current or incoming administraiton. Each is a time bomb. The Europeans have a head start on conceptualizing the problem--though their solution may be unpalatable in the American context. See, e.g., Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law, Tulane Law Review, Vol. 82, No. 1, 2008. For the Europeans, the American program of purchasing interests in banks constitutes a direct governmental subsidy of an industrial sector. It would be considered regulatory in effect, and the businesses would be considered to lose their character as private concerns. For a good discussion by one of my students, see Travis S. Hunter, Should Receiving Government Bailout Money Change Fiduciary Duties?, PorkBarrel Blogging, Nov. 12, 2008.
Americans continue to indulge in the belief that such enterprises are private--but entities in which the United States has both an ownership interest and regulatory control can hardly be considered an equal player in private markets, unless the United States commits itself that way. But there is little indication that the United States will treat its own private investments the way it has insisted that similar investments by foreign sovereign wealth funds in American businesses be treated. See Larry Catá Backer, Sovereign Wealth Funds and the Financial Crisis: Norwegian Sovereign Wealth Funds, India, and the Rising Private Power of Public Organizations, Law at the End of the Day, October 23, 2008; Larry Catá Backer, Sovereign Wealth Funds: A Smattering of Opinions that Count But Perhaps Ought Not, Law at the End of the Day, August 22, 2008.