MCUL Main SIte » Michigan Credit Union League Home » Government Affairs » Regulatory Affairs » U.S. Treasury Troubled Assets Relief Program (TARP), CC-08-01; 10/20/08
Comment Call (08-01)

To: All Affiliated and Non-Affiliated Credit Union CEOs

From: Veronica Madsen – Counsel

Date: October 20, 2008

RE: Development of Guarantee Program for Troubled Assets


The U.S. Treasury Department is seeking comments to assist in the development of the troubled assets relief program (TARP).

Please send your comments to MCUL by October 23, 2008.

BACKGROUND

Under the Emergency Economic Stabilization Act of 2008 (the Act, enacted into law on October 3, 2008, the U.S. Treasury Secretary (Secretary) is authorized to establish the TARP to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution (which includes credit unions), on such terms and conditions as are determined by the Secretary, and in accordance with the Act and the policies and procedures developed and published by the Secretary (the development of these policies and procedures are not meant to delay the TARP).
Under the Act, the term “troubled assets” means:

• Residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
• Any other financial instrument that the Secretary, after consultation with the Federal Reserve Board Chairman, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

QUESTIONS TO CONSIDER

The U.S. Treasury Department is particularly interested in comments on the specific questions as follows:

1. What are the key issues the U.S. Treasury should address in establishing the guarantee program for troubled assets?

• Should the program offer insurance against losses for both individual whole loans and individual mortgage backed securities (MBS)?
• What is the appropriate structure for such a program? How should the program accommodate various classes of troubled assets? Should the program differ by the degree to which an asset is troubled?
• What are the key issues to consider with respect to guaranteeing whole first mortgages?
• What are the key issues to consider with respect to guaranteeing HELOCs and other junior liens?
• What are the key issues to consider with respect to guaranteeing MBS?
• What are the key issues associated with guaranteeing financial instruments other than mortgage related assets originated or issued before March 14, 2008 that could be important for promoting financial market stability?
• What are the key issues to consider with respect to setting the payout of the guarantee?
• Should the payout be equal to principal and interest at the time the asset was originated or to some other value? What should that value be? What would be the impact of offering guarantees of less than 100 percent of original principal and interest?
• Should payout vary by asset class? If so, please describe.
• What event should trigger the payout under the guarantee? Should the holder be able to present the claim at will or should there be a set date? Should this date differ by asset class? Should this date differ by the degree to which the asset is troubled?
• Should the holder be permitted to sell the troubled asset with the program guarantee? If appropriate, should asset sales be restricted to eligible financial institutions or should there be no restrictions to promote liquidity in the market place?
• What are the key issues the Treasury should consider in determining the possible losses to which the government would be exposed in offering the guarantee?
• What methodology should be used to determine possible losses? Does it differ by asset class? If so, please describe. Does it differ by the degree to which the asset is troubled?
• What are the key elements the Treasury should consider in setting premiums for this program? Is it feasible or appropriate to set premiums reflecting the prices of similar assets purchased under the Act?
• If use of prices of similar assets purchased under the Act are not feasible or appropriate, should premiums be set by use of market mechanisms similar to (but separate from) those contemplated for the troubled assets purchase program? How would this be implemented? If not feasible or appropriate, what methodologies should be used to set premiums?
• Do these considerations of feasibility or appropriateness vary by asset class? If so, please describe.
• Should the premiums vary by the degree to which the asset is troubled?
• How and in what form should payment of premiums be scheduled?

2. How should a guarantee program be designed to minimize adverse selection, given that the program must be voluntary? Is there a way to limit adverse selection that avoids individually analyzing assets?

3. What legal, accounting, or regulatory issues would such a guarantee program raise?

4. What administrative and/or operational challenges would such a guarantee program create?

• What expertise would Treasury need to operate such a guarantee program? Please describe for all facets of the program.

5. What are the key issues to be considered in determining the eligibility of a given type of financial institution to participate in this program? Should these eligibility provisions differ from those of the troubled asset purchase program?

6. What are the key issues to be considered in determining the eligibility of a given asset to be guaranteed by this program? Should eligibility provisions of assets to be guaranteed under this program differ from those of the troubled asset purchase program?

7. Assuming the guarantee is priced to cover expected claims, are there situations (perhaps created by regulatory or accounting considerations) in which financial institutions would prefer this program to the troubled asset purchase program? Please describe.

• Does this preference differ by type and condition of the asset? For what troubled assets might financial institutions choose to participate in the guarantee program rather than sell under the troubled asset purchase program? Is accommodating this choice likely to best promote the goals of the EESA? Does it adequately protect the taxpayer? If not, what design feature should be included to assure these goals are met?

If you have any further questions, or to submit a response, please contact:

Veronica Madsen
Michigan Credit Union League
E-mail: veronica.madsen@mcul.org
Fax: (734) 420-2372

We Appreciate Your Response.
Home Contact Us Site Map MCUL Home About Us Press Room For Consumers CUs In Michigan