Fed Eliminates Compensation Limits for TALF Program - 3 Mar 2009

Fed Eliminates Compensation Limits for TALF Program (Update3)

By Scott Lanman

March 3 (Bloomberg) -- The Federal Reserve and U.S. Treasury
eliminated executive-compensation limits for companies that
bundle loans accepted under a new $1 trillion program, indicating
the rules may have hampered efforts to start the plan.

The rules won’t apply to the Term Asset-Backed Securities
Loan Facility out of “desire to encourage market participants to
stimulate credit formation and utilize the facility,” the New
York Fed said in a document on its Web site today. The government
separately said it will expand the TALF to support vehicle-fleet
leases and loans for business, construction and farm equipment.

The change suggests the government doesn’t intend to apply
compensation limits beyond firms that receive direct investments
from the Treasury’s $700 billion bailout fund. Officials have yet
to announce whether such requirements will be imposed on firms
participating in a separate effort to remove as much as $1
trillion of distressed assets from banks’ balance sheets.

“Just like salesmen toward the end of the month get kind of
worried if they’re not meeting their quota, the Federal Reserve
has got to worry,” former Fed monetary-affairs director Vincent
Reinhart said. Today’s moves are “an attempt to make the
facility more accommodating,” said Reinhart, now a scholar at the
American Enterprise Institute in Washington.

Vehicle Fleets

The TALF, aimed at propping up the market for auto and
business loans, will start disbursing funds March 25 and will
probably accept securities backed by vehicle-fleet and equipment
leases starting next month, the Fed and Treasury said in a
statement today.

The Fed also lowered interest rates and so-called collateral
haircuts for loans tied to asset-backed securities with
guarantees by the Small Business Administration or to government-
guaranteed student loans. The TALF will hold monthly fundings
through at least December.

The Treasury and Fed also today reiterated that they will
seek legislation to give the Fed “additional tools” to manage
its balance sheet. The effort stems from concern that taking on
longer-term assets will make it more difficult for the central
bank to raise interest rates once the economy recovers.

Possible legislation may allow the Fed to issue its own debt
or let the Treasury issue bills for Fed use that are exempt from
the federal debt ceiling, JPMorgan Chase & Co. economist Michael
Feroli said.

Pay Limits

Under the October bailout law, recipients of rescue funds
are subject to compensation limits when the Treasury has a
“meaningful equity or debt position in the financial institution
as a result of the transaction.” The law prohibits golden-
parachute payments to a departing executive and allows a company
to recover any bonus paid to an executive based on statements
that are later shown to be “materially inaccurate.”

Alabama Senator Richard Shelby, the ranking Republican on
the Banking Committee, said compensation requirements should be
applied where government funds are “involved.”

“I think where federal money is involved, that we should
put some limits on it,” Shelby told reporters today in
Washington when asked about the TALF change. “If it’s ordinary
private enterprise, that’s none of my business.”

The revised terms and conditions of the TALF, posted on the
New York Fed’s Web site, omitted a previous section on
compensation requirements. The limits were previously instituted
because the program is being seeded with funds from the $700
billion financial-stability plan, which has provided capital
injections to banks with compensation rules attached.

‘Unjustly Enriched’

“Executive compensation restrictions are targeted towards
ensuring that executives of institutions that receive government
support are not unjustly enriched,” the New York Fed said in a
question-and-answer document on its Web site.

Some companies that may securitize loans for the TALF, such
as GMAC LLC, may already be subject to executive-compensation
requirements because they are receiving separate funding from the
financial-stability plan.

The Fed and Treasury didn’t mention the change on executive
compensation in a news release today. It was included on page 15
of the “Frequently Asked Questions.”

Chairman Ben S. Bernanke and his colleagues, after cutting
the benchmark interest rate almost to zero, are counting on the
TALF to help revive credit and end what may become the deepest
U.S. recession since World War II.

‘Manageable Risk’

“The expanded program will remain focused on securities
that will have the greatest macroeconomic impact and can most
efficiently be added to the TALF at a low and manageable risk to
the government,” the Fed and Treasury said.

The Fed and Treasury “currently anticipate that ABS backed
by rental, commercial, and government vehicle fleet leases, and
ABS backed by small-ticket equipment, heavy equipment, and
agricultural equipment loans and leases will be eligible for the
April funding of the TALF,” which is scheduled for April 14, the
agencies said.

Small-ticket equipment may include office gear such as
telephone systems, computers and printers, while heavy equipment
includes construction vehicles.

The Fed originally planned to start the program in February.
Central bank officials postponed it to ensure “all our legal and
procedural steps had been taken,” Bernanke told lawmakers last
week.

$200 Billion Start

The TALF will start by offering $200 billion in loans to
hedge funds and other investors to jump-start lending to
consumers for autos, education and credit cards and to small
businesses. The program also will help auto dealers finance the
cars on their lots.

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