WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
December 12, 2008
The House and Senate returned to Washington this week for a lame duck session focused on an automobile industry rescue package. While the House approved its rescue plan by a vote of 237-170, rescue legislation stalled in the Senate after failing to receive the 60 votes necessary to proceed. Prior to approving the rescue package, the House voted 403-0 to approve an amendment offered by Rep. Steven LaTourette (R-OH) to require the Government Accountability Office and the Congressional Oversight Panel under the Emergency Economic Stabilization Act to regularly report to Congress on the amount of increased new lending by institutions participating in the Troubled Asset Relief Program (TARP) that is directly attributable to the funds they received. The House and Senate have tentatively adjourned for the year, but could return to continue work on the auto rescue package.
Don Thompson, Managing Director and Associate General Counsel, JP Morgan, testifying on behalf of JP Morgan and SIFMA, told the House Agriculture Committee this week, the industry’s implementation of a clearinghouse for credit derivatives with a central counterparty is an effective way to reduce and mutualize counterparty credit risk, which in turn will help promote market stability.
The House and Senate approved pension funding relief legislation (H.R.7327) including a one-year moratorium on the minimum required distributions (RMD) from 401(k) plans and individual retirement accounts (IRAs) for taxpayers who are 70 ½ years or older for 2009. The bill also includes a number of Pension Protection Act (PPA) technical corrections.
During the House Financial Services Committee oversight hearing on the Troubled Asset Relief Program (TARP), Chairman Barney Frank (D-MA) said Congress must see evidence that the Treasury Department is moving aggressively to avert foreclosures and measuring the performance of banks that receive TARP funds to determine if they are re-lending the money, or lawmakers will not approve the second installment of TARP funds.
SIFMA joined 71 trade associations in a letter of support for an extension of the carryback period for net operating losses (NOLs) and alternative minimum tax (AMT) NOL relief to House and Senate leadership and the chairmen and ranking members of the House Ways and Means and Senate Finance Committees.
The Senate confirmed Neil Barofsky to be Inspector General of the Troubled Asset Relief Program (TARP).
House Agriculture Committee Holds Third Hearing on CDS
Testifying on behalf of JP Morgan and SIFMA, Don Thompson, Managing Director and Associate General Counsel, JPMorgan, told the House Agriculture Committee the industry’s implementation of a clearinghouse for credit derivatives with a central counterparty is an effective way to reduce and mutualize counterparty credit risk, which in turn will help promote market stability. Thompson said the clearinghouse will also facilitate regulatory oversight by providing a single location for access to information about the credit default swap (CDS) transactions it processes. SIFMA and JP Morgan said because the CDS market is global, regulation at the federal level, with international consultation and cooperation is the right approach. Thompson said vesting authority in a single regulator would promote consistency in the application of regulations and provide comprehensive oversight of markets and market activity. He emphasized the importance of consistent standards being adopted by different regulatory bodies. SIFMA and JP Morgan said minimizing regulatory overlap and duplication results in more effective regulation without the implementation of unnecessary burdens.
House Agriculture Chairman Collin Peterson (D-MN) said the recent memorandum of understanding (MOU) between the Federal Reserve Board, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) to share information on CDS could result in a lack of regulatory oversight. After the hearing, Peterson said he intends to introduce legislation that would address the lack of transparency in the credit derivatives market. Terrence Duffy, executive chairman, CME Group, recommended mandating the clearing of most CDS. Johnathan Short, vice president and general counsel, Intercontinental Exchange, Inc. (ICE), agreed and added that some CDS may be difficult to clear. Duffy said the CME Group is ready to begin clearing upon final regulatory approval; Short said ICE could begin clearinghouse operations by the end of the year. John O’Neill, senior analyst, NYSE/Euronext, said his group is launching their clearinghouse on December 22. Bryan Murtagh, managing director, UBS Securities LLC, said over time residential mortgage-backed securities could be brought into the clearing process. John Damgard, president, Futures Industry Association, recommended making the U.S. regulatory structure competitive with foreign regulators.
House and Senate Approve Pension Funding Relief Bill
The House and Senate approved pension funding relief legislation (H.R.7327) this week. The Worker, Retiree and Employer Recovery Act of 2008 includes a one-year moratorium on the minimum required distributions (RMD) from 401(k) plans and individual retirement accounts (IRAs) for taxpayers who are 70 ½ years or older for 2009. H.R.7327, approved under suspension of the rules in the House and by unanimous consent in the Senate, would also allow single-employer plans three years to phase in pension funding target percentages and require plans that fall below the set target funding percentage for a particular year to fund up to the specified funding percentage for that year instead of 100 percent. In addition, for plan years starting between October 1, 2008 and October 1, 2009, multi-employer plans may elect to freeze their current funding certification based on the previous year’s level. The Worker, Retiree and Employer Recovery Act also includes a three-year extension of the current funding improvement or rehabilitation period for multi-employer plans from 10 to 13 years. A package of technical corrections to the Pension Protection Act, including a number of provisions supported by SIFMA, such as clarification that all plans must permit rollovers out of the plan for non-spousal beneficiaries, is also included. H.R.7327 dropped the tribal and bonus depreciation provisions included in similar legislation introduced in November by leaders of the Senate Finance Committee and the Senate Health, Education, Labor and Pensions (HELP) Committee.
HFSC Holds TARP Oversight Hearing
During a House Financial Services Committee oversight hearing on the Troubled Asset Relief Program (TARP), Chairman Barney Frank (D-MA) said in response to a request from House Minority Leader John Boehner (R-OH), the Committee will hold a hearing with the CEOs of financial institutions that have received TARP infusions. Presuming there would be a formal request for the second $350 billion installment for the TARP, Frank said his preference would be to hold the hearing with the CEOs during the three-week period Congress would have to consider such a request. Chairman Frank said the use of funds for foreclosure prevention was essential to passage of the Emergency Economic Stabilization Act (EESA) and he believes by not directly working to prevent foreclosures, the Treasury Department is in violation of the intent of the law. Chairman Frank said it will be difficult to convince members of Congress to vote for the second TARP installment if there is not evidence that the Treasury Department is moving aggressively to avert foreclosures and measuring the performance of banks that receive TARP funds to see if they are re-lending the money. Neel Kashkari, Interim Assistant Secretary for Financial Stability and Assistant Secretary for International Affairs, Treasury Department, said Treasury officials are looking at “aggregate supervisory data” from banking regulators as a way to measure the lending of TARP recipient institutions. Kashkari said by using the aggregate data, the Treasury Department can determine if TARP funds are being put to the appropriate use. Ranking Member Spencer Bachus (R-AL) said he was concerned that TARP fund recipients were using funds for the purposes of mergers and acquisitions. Rep. Maxine Waters (D-CA) said if she was not presented with evidence the Treasury was going to act to stop foreclosures, she would introduce legislation to establish a loan modification plan similar to the plan developed by Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair. Rep. Ed Royce (R-CA) said he believes loan modifications are the least expensive way to stem foreclosures. He said legislation is needed to protect servicers from investor litigation. Chairman Frank said legislation to define the legal rights of servicers will be considered in the next Congress.
SIFMA Joins 71 Other Trades In Letter of Support for NOL Carryback Extension
SIFMA joined seventy-one trade associations in a letter to House and Senate leadership and the chairmen and ranking members of the House Ways and Means and Senate Finance Committees this week in support of an extension of the carryback period for net operating losses (NOLs) and alternative minimum tax (AMT) NOL relief. The trade associations said an extension of the NOL carryback period would help struggling companies of all sizes and in all sectors retain jobs, make critical investments, and stay open for business. The trades said an expanded NOL carryback period is a proven economic stimulus measure that can deliver vital help to struggling employers.
Senate Confirms Barofsky as TARP IG
The Senate confirmed Neil Barofsky to be Inspector General of the Troubled Asset Relief Program. Barofsky was the assistant U.S. attorney for the Southern District of New York. His nomination had been previously delayed by a hold from an anonymous senator.
Bills Introduced this Week
Rep. Richard Neal (D-MA) introduced legislation (H.R.7336), which would exempt private activity bonds from taxation under the alternative minimum tax (AMT). Under current law, the interest earned on private activity bonds is tax-exempt under regular taxes, but private-activity bonds are considered a preference item under the AMT and subject to taxation on the interest. The legislation would apply to taxable years beginning after the date of enactment.
Sen. Olympia Snowe (R-ME) introduced legislation (S.3719) that would delay required minimum distributions from retirement accounts through 2010. Under current law, individuals who have reached age 70 ½ must generally begin to withdraw funds from their Individual Retirement Accounts (IRA) or defined contribution retirement plans. S.3719 would also allow retirees to recontribute to their retirement accounts the amount they were required to withdraw in 2008.
Sen. Arlen Specter (R-PA) introduced legislation (S.3720) to delay the required minimum distribution rules for individual retirement accounts and 401(k) accounts for 2008 and 2009. S.3720 would also allow retirees who already have taken the required distributions in 2008 to reinvest the distributions back into their pension plans without penalty.
Legislation (H.R.7334) introduced by Rep. Steven LaTourette (R-OH) would require each insured depository institution which receives an investment or other assistance under the Troubled Asset Relief Program (TARP) to include in their quarterly call report the amount of any increase in new lending that is attributable to the investment or assistance.
The Week Ahead
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The House and Senate have tentatively adjourned for the year. They could come back into session to continue work on the automaker rescue package.
