Banking Law

Bank Lawyers' Advice About TARP: Don't Walk Away, Run!

A few days ago, we posted about the increasing number of community banks that had been approved for capital investments through the TARP CPP program, but that had decided to pass on taking the capital. Today, Law.com discussed one of the reasons why: the banks' lawyers are scaring the bejesus out of them.

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.

[...]

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.

We've harping about Section 5.3 of the Securities Purchase Agreement since it first reared its ugly snout. We're pleased to see we're not alone, since we love being close to the madding crowd

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."

I don't have time to go into the history of the OTS' version of the source of strength doctrine, but the OTS has been trying to back-door its way into an enforceable version of that doctrine for years. If they want to make it explicit, and require a Net Worth Maintenance Agreement from holding companies that take the CPP funds, just like in the bad old days, that will kill CPP as far as federal thrifts are concerned. 

In this case, attorneys really appear to be the "deal killers" they're so often accused of being. Those banks that take their advice will likely live to not regret it. As to those banks that listen to legal advice and, in Blagojevichian fashion, decide to ignore it, some of them fit the profile sketched by Bill Ludtke.

"If you have a real need, that can overcome a lot of a bank's principles. You gotta do what you gotta do."

And when the piper eventually comes calling, you gotta pay what you gotta pay.

Full post as published by Bank Lawyers Blog on February 04, 2009 (boomark / email).