February 3, 2009 4:05 PM
TARP Lawyers to Banks: Think Twice About Taking Government Cash
Posted by Zach Lowe
With President Barack Obama and Treasury Secretary Timothy Geithner reportedly promising to attach more strings to federal bailout money, we thought it would be a good time to speak to some of the lawyers who are advising the dozens of financial institutions keen on applying for a chunk of the fresh $350 billion in Troubled Asset Relief Program (TARP) funds Congress released last month.
Those lawyers were nearly unanimous in saying that banks of all kinds are becoming more cautious about participating in TARP, with some even backing out of the program after Treasury has approved them for funding. And in some cases, lawyers say they are actively advising institutions against seeking the bailout money.
"There are going to be more and more institutions that just back out of it," says Raymond Gustini, a partner at Nixon Peabody who has advised several institutions. "What started out as virtually unfettered access to capital has become a politically sensitive issue."
Among the banks' concerns: limits on executive compensation and government oversight that could extend to tracking how every TARP dollar is spent. One clause in the general TARP agreement says Congress can amend the lending terms at any time, and that a participating bank must adhere to any such amendments, including compensation rules and loan requirements, Gustini and others say.
"That pushed a lot of banks away from the deal," says William Luedke IV, a Houston-based Bracewell & Giuliani partner who has met with boards from about 50 financial institutions interested in applying for TARP money. Of those, he says, only 15 have followed through and "the interest is tapering off" as Obama, Geithner, and others talk openly about increased oversight.
Several lawyers say the most troubling new conditions are coming from the Office of Thrift Supervision, the federal agency that regulates thrifts (savings banks and savings and loan institutions). The OTS sent out a letter last week saying any holding company running a thrift that receives TARP money will have to remain a so-called "source of strength" for the thrift, says David Baris, name partner at Kennedy & Baris, a five-lawyer boutique that has advised about two dozen institutions on TARP applications.
This "source of strength rule" requires holding companies to maintain a certain level of capital that is earmarked specifically for propping up its thrifts, lawyers say. And if a thrift under its control were to fail, a holding company that had pledged to be a "source of strength" would be on the hook for that thrift's losses, say Baris and Robert Freedman, name partner at Silver, Freedman & Taff, a Washington, D.C.-based boutique that has advised about 20 TARP applicants.
Baris, who serves as counsel for the American Association of Bank Directors, is leading a group of lawyers who have drafted a letter to the OTS urging the agency to drop the rule. They also plan to ask the OTS to void any agreements with thrifts who applied and received money before OTS instituted the rule.
"We're opposed to the agreement," Freedman says, "and we're counseling a lot of clients not to do it."
(Note: If you think banking lawyers approaching OTS may be violating President Obama's vow to stop all potential bailout recipients from lobbying, you're apparently wrong. According to the nonprofit journalism site ProPublica, the restrictions apply only to lobbying the Treasury, not sub-agencies such as the OTS).
Of Baris's two dozen clients that have applied for TARP money, at least four have subsequently decided to back out should Treasury accept their applications, he says. But far more institutions are simply choosing not to apply. When it comes to TARP, the bulk of a lawyer's work comes in meeting with boards and writing out pros and cons of TARP participation, the lawyers say.
"There are just so many others who don't wish to bother with it," Baris says.
Indeed, most that do go through with the application will accept the money just because they need the capital so badly and can't raise it another way, say Baris and Jack Greeley, a partner at Smith Mackinnon in Orlando, Fla., who has counseled about 80 financial institutions on TARP issues. Of those, about 50 have applied; Greeley estimates that at least 40 will accept in the unlikely event that Treasury approves them all.
"There's no question that (the Obama administration) is creating a lot of nervousness," Greeley says. "But if a bank can't raise that capital any other way, you'd rather deal with the Treasury issues than deal with a lack of capital."
Or as Luedke puts it: "If you have a real need, that can overcome a lot of a bank's principles. You gotta do what you gotta do."Make a comment