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The federal government's Troubled Asset Relief Program (TARP)—created by the Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008—gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions. The Faegre & Benson TARP Task Force has developed answers to some frequently asked questions about which institutions qualify to participate in the program and how the program is expected to work.
What rights will the government acquire along with the assets? Will the government receive an equity stake in participating companies?
Q: What can the government do with an asset that it acquires?
A: The Treasury Secretary is authorized to exercise any right received in connection with a troubled asset at any time. (§ 106(a).) The Secretary has authority to manage the purchased assets and to sell them, enter securities loans, repurchase transactions, or other financial transactions on terms and conditions and at a price determined by the Secretary. (§ 106(b) and (c).) The Secretary may hold assets to maturity or sell at a price he determines will maximize the government's return on investment. (§ 113(a)(2).)
Q: What rights does the government obtain when it buys an asset, and what might it do with them?
A: The EESA does not specify the rights directly related to the acquired assets, except that the Treasury Secretary may buy assets on terms and conditions that he deems appropriate. (§ 101(a).)Presumably the government will obtain all the rights related to the asset, but the statute does not require that result.
Q: Does the EESA require participating companies to give the government equity or debt interests?
A: If a publicly-traded company sells assets to the government, the government will acquire a warrant giving it the right to acquire nonvoting common stock or preferred stock, or, if the company does not have nonvoting stock, stock with respect to which the Treasury Secretary agrees that he will not exercise the vote. If the company is not publicly traded, the government must acquire a warrant for common or preferred stock or a senior debt instrument. (§ 113(d)(1).) The warrants or debt instruments are intended to give the government a "reasonable participation" in any equity appreciation or a reasonable interest rate premium. The Treasury Secretary can sell, exercise, or surrender the warrant or debt instrument at any time. Warrants must convert to debt if the company is no longer listed on a national exchange, and they must contain anti-dilution provisions. The exercise price of the warrant is to be set by the Secretary. (§ 113(d)(2).) The Secretary must establish a de minimus exception at not more than $100,000,000, and companies that sell less than that amount in aggregate will not have to issue warrants or debt instruments upon sale. (§ 113(d)(3).)