Attorneys field questions about federal bailout program

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Some of the most common conversations business attorneys are having with clients in the banking industry involve whether or not to apply for a portion of the federal money available through the $700 billion bailout bill.

Officially known as the Troubled Assets Relief Program (TARP), the U.S. Treasury Department is in the process of reviewing and granting applications for federal funding to restore public confidence in banks, in exchange for preferred stock.

Approximately $125 billion has been allotted for nine of the country’s largest financial institutions and another $125 billion for small and mid-size banks.

“We’re in a spot where nobody has been before, so it’s like ‘Wow, how do we react?’” said attorney W. Charles Jackson of Michael Best & Friedrich LLP.

Jackson and other attorneys in Wisconsin are helping clients navigate through the process, as well as advising them of the long-term effects of an unprecedented partnership with the federal government.

Money in the Bank

Attorney William F. Flynn said one of the biggest challenges in advising clients about the process is the erratic economic climate. A decision to take the deal with the government today, may not look as good in six months if the economy rebounds.

“It’s a challenge for executives to make a decision with any degree of confidence without knowing if the rules of the game will be the same three months from now,” said Flynn, who is a member of the Financial Markets Crisis Team at Reinhart Boerner Van Deuren S.C.

“It is not so much a function of legal advice, but the current environment,” Flynn said.

The deadline for publicly-traded banks to apply was Nov. 14 and private financial institutions have until Dec. 8.

But some banks may view the TARP money as a way to restore public faith, even if it is not in financial turmoil, according to attorney James D. Friedman, who heads up the Financial Service Task Force at Quarles & Brady LLP in Milwaukee.

Friedman said it is a daily debate as to whether some banks need immediate capital, or simply want to protect themselves in case the economy continues to slide.

“Some may look at it as an affirmation of the U.S. Government as to how strong of a bank they are,” Friedman said. “So it may not be so much from need, as much as appearance for some.”

At the same time, Friedman said enrollment in the program could have an adverse effect on consumers who view their bank as failing.

“Some ask ‘If we take it, does it look like we need it and are in trouble?’” Friedman said.

But Flynn said it could be advantageous for a bank to apply for the federal program, since nobody else is offering any kind of financial security.

“If you are an institution that needs capital today, this is an attractive option,” Flynn said.

“It’s also sort of the only game in town at the moment, until the market settles down.”

Take It Or Leave It

While the infusion of funds is an enticing option, even for those banks that may not have an immediate need, Jackson said it is important to make clients aware of the ramifications of the deal.

According to the agreements with the Treasury Department, institutions are subject to future legislative changes which may alter the way they can allocate funds.

“The Treasury [Department] basically said to us, here are documents, let’s enter into them,” Jackson said. “It’s not like you are sitting down to buy a car where you can bargain about the price or warranty.”

Friedman added that unlike private contracts, the authority of the federal government in the TARP program is total.

“Private parties never agree to that,” Friedman said. “But anybody accepting money here has to be willing to live with that.”

Plus, it is not free money either.

Part of the application process includes an evaluation as to how quickly the bank will be able to repay the loan. Initially, preferred stock will pay 5 percent dividends for the first five years, but 9 percent thereafter.

“I would tell you most people I work with expect to redeem preferred shares before that 9 percent rate kicks in,” Jackson said. “Frankly, that is pretty expensive money.”

There is also the possibility that the federal government will draft and pass bailout plans for other industries.

A recent plan to rescue automakers has been met with resistance, as have discussions about whether to infuse cash into the credit card market.

“There are some significant issues as to whether or not the TARP program will be extended to other industries, such as other insurance carriers,” said Friedman, who noted the recent $85 billion bailout of insurer AIG.

“With a new administration coming in January, with a new view, who knows what the plan will be,” Friedman said.

Portions of this story came from the Associated Press