March 2009

REGULATORY DEVELOPMENTS

Term Asset-Backed Securities Loan Facility (TALF)

The Federal Reserve Bank of New York began accepting subscriptions for TALF loans on March 17, 2009.  The first settlement date was March 25, 2009.  According to a Federal Reserve TALF Operation Announcement, $4.7B was requested in this first facility.  TALF is designed to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration.

 

Treasury Proposes Legislation for Resolution Authority

On March 26th, Treasury Secretary Geithner presented testimony to the House Financial Services Committee regarding the Treasury’s newly released legislative proposal for regulatory reform entitled the “Resolution Authority for Systemically Significant Financial Companies Act of 2009.”  Key considerations include: a single independent entity would oversee systemic risks across all financial institutions; a resolution mechanism to avoid the disorderly liquidation of any non-banking institutions; new federal regulations governing credit default swaps and over-the-counter derivatives; and new requirements for hedge funds and private equity funds.  The legislation would authorize the US government, in appropriately limited circumstances, to intervene at the appropriate time to avert the systemic risks posed by the potential insolvency of the significant financial firm.  It would cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subjected to the resolution authority of the FDIC.  This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies and futures commission merchants.

 

Federal Reserve Delays Effective Date for Certain Capital Limits

The Board of Governors of the Federal Reserve announced on March 17, 2009 the adoption of a final rule that delays until March 31, 2011, the effective date of new limits on the inclusion of trust-preferred securities and other restricted core capital elements in Tier 1 capital of bank holding companies (BHCs).  All BHCs may include cumulative perpetual preferred stock and trust-preferred securities in Tier 1 capital up to 25% of total core capital elements, rather than 15% per the rule that would have otherwise gone into effect at the end of this month.

 

ACCOUNTING DEVELOPMENTS

Mark-to-Market Accounting Hearing

On March 12th, the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing on mark-to-market accounting.  OCC Deputy Comptroller Kevin Bailey proffered the OCC’s position that it would be inappropriate to suspend current fair value measurement.  However, Mr. Bailey’s testimony did outline a number of areas that standard setting bodies should consider in order to improve the application of existing fair value requirements and the need for additional analysis before expanding fair value measurements to other financial instruments.  Similarly, FASB Chairman Robert Herz testified that the prevailing view FASB gathered from capital market participants urged FASB not to suspend or weaken mark-to-market accounting rules.  Further, Hertz warned that bending the rules to favor a particular outcome may prove to be harmful to investors, creditors and the U.S. economy in the long run.  At the conclusion of the hearings, the Subcommittee made it clear that if FASB failed to address the perceived gaps in the present framework expeditiously, then legislation aimed at accomplishing those ends would be forthcoming.  In response FASB released two proposed staff position papers discussed in the section below.  Other testimony strongly disfavored the continuation of mark-to-market accounting.

 

FASB Issues Two Proposed Staff Position Papers on Fair Value Accounting

On March 17th, FASB issued two proposed staff positions (FSPs) intended to provide additional application guidance regarding fair value measurements and impairments of securities.  Proposed FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, provides expanded guidance, in the form of a two-step process, for determining whether a market for a financial asset that historically was active is no longer active and whether or not the transaction is distressed.  Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

The comment period is scheduled to end on April 1st and FASB is expected to have a Board meeting on April 2nd to evaluate all comment letters and other input received on the FSPs.  If approved, both staff positions would apply to interim and annual periods ending after March 15th, including the first quarter of 2009.

 

LEGISLATIVE DEVELOPMENTS

H.R. 1754 and S. 664 – The Financial System Stabilization and Reform Act of 2009

Sen. Susan Collins (R-ME) introduced S. 664 on March 23, 2009 and Rep. Michael Castle (R-DE) introduced companion bill H.R. 1754 on March 26, 2009.  The proposed legislation creates an independent Financial Stability Council consisting of a Council Chairman, the Treasury Secretary and the chairpersons of the Federal Reserve Board of Governors, FDIC, SEC, CFTC and NCUA.  The Council would serve as a systemic risk monitor and would have the ability to propose changes to regulatory policy, in conjunction with existing regulatory agencies, when systemic risk could emerge due to regulatory gaps or the emergence of risky new financial products.  While the states would generally regulate insurers, the Council would have “insurance industry authority” with respect to products and activities that are financial in nature that are carried out by insurers and affiliates, if the Council determines that such products or activities pose a systemic risk.  Lastly, the Office of Thrift Supervision would merge with the Office of the Comptroller of the Currency.

 

H.R. 1349 – Federal Oversight Accounting Board Act of 2009

On March 5, 2009, Rep. Ed Perlmutter (D-CO) introduced H.R. 1349 to establish the Federal Accounting Oversight Board (FAOB) to approve and oversee accounting principles and standards for the purposes of the Federal financial regulatory agencies.  The FAOB would oversee the application of GAAP to financial markets and consider how to adjust the application of standards for different assets and different market conditions.  The FAOB would not replace FASB, but would approve the standards and their application.  The five-member board would include representatives from the Federal Reserve, Treasury, SEC, FDIC and PCAOB.

 

H.R. 1106 – Helping Families Save Their Homes Act of 2009

H.R. 1106 amends federal bankruptcy law governing a Chapter 13 debtor (adjustment of debts of an individual with regular income).  If enacted it would give bankruptcy judges the authority to rewrite the terms and conditions of a loan contract on a debtor’s principal residence in a bankruptcy proceeding.  The proposed legislation passed the House on March 5, 2009.

 

H.R. 1728 – Mortgage Reform and Anti-Predatory Lending Act of 2009

H.R. 1728 was introduced on March 26th by Rep. Brad Miller (D-NC) who sponsored a similar measure in the previous Congress.  The bill encourages lenders to make 30-year fixed-rate, fully documented loans.  The Act would prohibit lenders from underwriting loans that consumers do not have a reasonable ability to repay, prohibit practices that increase the risk of foreclosure for consumers and for refinancing, would require lenders to make a reasonable, good faith determination that the loan would provide a net tangible benefit to the consumer.  It would subject all mortgage originators to a duty of care standard, ban all mortgage loan yield spreads (compensation to mortgage loan originators and brokers based on a loan’s interest rate and terms) and lastly, the measure would make mortgage creditors, originators, assignees and securitizers (those who package home loans into securities) more liable for fraudulent loans.

 

OTHER DEVELOPMENTS

NAIC Testifies to Strength of Insurance Regulation

The NAIC participated in at least two Congressional hearings in March reasserting its position that state regulators should remain central players in insurance regulation and reform.  In both hearings, NAIC testimony attempted to highlight differences between insurance risks and bank risks noting that insurance companies are more often the risk receivers than risk creators, generally are not “too big to fail” and maintain an added safety guard (the state guaranty fund system).  Despite the NAIC’s confidence in state insurance regulation, there is growing support for alternatives such as an optional federal insurance charter or a systemic risk regulator which would regulate insurance companies along with other financial institutions.

 

NRSRO Rules and Reforms

The NRSROs’ relationships with the structured products’ issuers, sponsors and underwriters have been under intense public scrutiny.  On February 2nd, the SEC published final rules as well as re-proposed rules (the comment period ended on March 26, 2009) regarding NRSROs.  Earlier this month in the Wall Street Journal, NY Insurance Superintendent Eric Dinallo gave his thoughts on the credit rating agencies and how the rating agencies are currently compensated.  Dinallo suggests that the insurance industry and its regulators lead the way in implementing self-funded, independent buy-side ratings.  That is, the ratings would be paid for by the investors who use them.  This is just one proposal of many to address the current issuer-side compensation model and issuer “shopping around” incentives that are believed to create conflicts of interest for rating agencies.