Banking Law

Ex Post Facto Right to Redo

Ballard Spahr issued a client alert last Thursday that pointed out to those who might take part in the Treasury Department's Capital Purchase Program under TARP that there is a very disturbing provision in the Securities Purchase Agreement that Treasury is requiring participants to sign.

Section 5.3 provides, in part, that the Treasury ?may unilaterally amend any provision of this Agreement to the extent required to comply with any changes after the Signing Date in applicable federal statutes.? As suggested in a letter from the American Association of Bank Directors to Secretary of the Treasury Paulson [click here], this provision could be a ?Trojan Horse? that gives Congress a troubling level of control over participating institutions. For example, under Section 5.3, Congress arguably could direct program participants not to foreclose on specified mortgages or to modify the terms of existing mortgage loans. With the recent elections and changes in Congress and the Administration, this risk cannot be entirely discounted. The Treasury has not announced whether it will modify Section 5.3.

Yeah, that's a Trojan Horse, alright, one named "Secretariat." It not only would permit a "troubling level of control" by Congress, along the lines discussed by Ballard Spahr, it would also perversely protect  the U.S. government from, and deprive the program participant of, the types of breach of contract claims that were made by institutions and stockholders when the government enacted FIRREA and breached numerous contracts with the acquirers of failed or failing thrifts and banks in the 1980s. It's not that you'll have to "dance with a bear." You won't even get the chance to dance. Whenever the bear feels the urge, he'll drag you into his cave for a hibernation season of vigorously lovemaking, and the bear will always be "top."

Unless an institution is desperate for a capital infusion and sees no other capital-raising alternative Which likely makes the institution unqualified to participate in the CPP anyway), I can't see why it would agree to let the US government change the deal unilaterally at any time in the future. Then again, perhaps I'm merely a glass half empty kind of guy, the kind of unreasonable pessimist who wouldn't leave his institution's fate the the fundamental fairness of such reputable and reasonable clowns legislators like Barney Frank, Chris Dodd, Chuck Schumer, Hank Waxman, and their enablers on both sides of the aisle. Would an institution permit any private party to unilaterally amend a contract for any reason, much less to comply with laws enacted in  the future by a Congress that appears to making up social and economic policy on the fly, and that's permeated by a decidedly anti-bank, anti-business bias?

Any Board of Directors that would approve such an agreement ought to make sure that it has carefully thought through a sound business rationale for doing so, something other than, "Aw, we know those guys would never do anything to discourage future deals with the government." While they're at it, the Board to make sure that its D&O liability policy premiums are paid up.

Full post as published by Bank Lawyers Blog on November 09, 2008 (boomark / email).