Legal News

Bank Lawyers on TARP Funds: D?oh!

By Dan Slater

Associated Press

President Barack Obama announces his plans to nominate Sen. Judd Gregg for Commerce Secretary, Tuesday, Feb. 3, 2009, in the Grand Foyer at the White House in Washington. (AP Photo/Ron Edmonds)

Those who predict that federal bailout programs herald a new era of socialism will get some fuel for their fire today, as President Obama plans to unveil a series of new pay curbs, including strict limits on executive salaries, such as a possible $500,000 cap on pay for execs at companies that receive substantial aid.

Here at LBHQ, we’re a bit smug this morning, thinking about a future that could see base pay for bank CEO’s dwarfed by, say, the average take-home of a Latham & Watkins partner. But we digress. Let’s turn to AmLaw to see what banking lawyers are saying about how financial institutions are responding to the strings attached TARP funds.

Lawyers told AmLaw 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,” Raymond Gustini, a partner at Nixon Peabody who has advised several institutions, told AmLaw. “What started out as virtually unfettered access to capital has become a politically sensitive issue.”

Several lawyers told AmLaw that the most troubling new conditions are coming from the Office of Thrift Supervision, the federal agency that regulates thrifts. 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 of Kennedy & Baris.

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, lawyers say.

Robert Freedman of Silver, Freedman & Taff, a Washington, told AmLaw: “We’re opposed to the agreement, and we’re counseling a lot of clients not to do it.”

Full post as published by Law Blog - WSJ.com on February 04, 2009 (boomark / email).