Category — Public Law and Policy

This post refers to the Client Alert produced by Public Law and Policy. Read the full alert here.

For questions regarding this alert, please contact—

• David Carlin, 202.887.4133, Washington DC
• Smith Davis, 202.887.4098, Washington DC

What follows is an excerpt from the full alert:

Chairman Chris Dodd (D-CT) convened the hearing by noting that this is an extraordinarily perilous moment in American history. Economic changes reverberate far beyond corporate America. Americans are finding that their retirement accounts and mutual funds are evaporating. Families worry about how to make ends meet. The root cause of the recent collapse, according to Dodd, was the failure of the housing market, triggered by “bad lending practices.” Dodd called the Department of the Treasury’s legislative proposal “unprecedented in scope and lack of detail.” He criticized its lack of foreclosure prevention measures and accused it of rewarding the very firms that caused the current crisis. Dodd called on the Congress to rethink, reform and modernize supervision of the lending industry. This would include removing incentives for regulators to compete against each other.

Ranking Member Richard Shelby (R-AL) noted frequent misinformed assurances up to this point-including some from former Federal Reserve Board Chairman Alan Greenspan-that the economy could handle the growing mortgage situation. He attacked the “series of ad hoc measures” that have comprised the Treasury Department’s response to the crisis thus far. Now, in his view, the absence of a clear and comprehensive plan has injected additional uncertainty into the markets. He criticized the lack of details in Treasury’s current proposal, charging that it codifies the failed ad hoc approach. He stressed the necessity of a plan that focuses on average Americans.

Senator Christopher Dodd (D-Conn.) and Representative Barney Frank (D-Mass.), Chairmen of the Senate Banking and House Financial Services committees, have circulated discussion drafts of legislative responses to the Treasury Department’s proposal to bail out financial institutions by purchasing mortgages and related financial instruments. Like the Treasury plan, both draft bills would grant the Treasury secretary broad authority to purchase up to $700 billion in troubled assets. It is, of course, impossible to predict the final form of the bailout legislation, as Congress and the Treasury Department continue to negotiate its terms.

Nevertheless, several provisions of the draft legislative proposals merit attention. For example, the bills require the secretary to receive, in at least certain situations, equity stakes in the participating financial institutions in return for purchasing troubled assets. The draft bills also provide for oversight of the secretary’s activities by various bodies, including the comptroller general and congressional committees; both draft bills also contemplate limited judicial or administrative review. Perhaps most controversially, the draft proposals would require at least some financial institutions to impose certain limits on executive compensation in order to participate in the bailout program. Both draft bills also contain several homeowner-protection provisions, including amendments to the bankruptcy code that would permit modification of some mortgages.

There are, of course, numerous differences between the draft bills. For example, only the Dodd draft contemplates a new Emergency Oversight Board and a new Office of Special Inspector General to provide additional oversight of the program. As these and other differences are being resolved, the situation will remain fluid.

See a chart outlining the key differences between the two bills here.

If you have questions, please contact—

• David Carlin, 202.887.4133, Washington DC

In a July 2007 client alert, we reported on an Internal Revenue Service (IRS) effort to investigate the use of derivative transactions by hedge funds and other foreign investors to avoid U.S. withholding tax on U.S. source dividends and certain other types of income. At the time, the scope of the IRS investigation was unclear, but we noted then that it appeared to be focused on so-called “dividend enhancement” trades, such as total return swaps over U.S. publicly traded stock and similar derivatives. In addition, we noted that it remains to be seen whether the investigation would lead to tax audits of foreign funds that entered into tax-advantaged derivative transactions.

The attack on these types of transactions seems to be intensifying. On September 11, 2008, the U.S. Senate Permanent Subcommittee on Investigations, a subcommittee of the Committee on Homeland Security and Governmental Affairs, held a hearing on the transactions; in advance of the hearing, the subcommittee released a staff report entitled “Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends.” The report and hearing were the subject of numerous high-profile news articles, including articles in the Wall Street Journal and New York Times. A number of speakers, including IRS Commissioner Douglas Shulman, Professor Reuven S. Avi-Yonah and executives of certain financial institutions and investment funds, testified at the hearing.

See the full alert here.

If you have questions regarding this alert, please contact—

• Patrick B. Fenn, 212.872.1040, New York
• Stuart E. Leblang, 212.872.1017, New York
• Robert Rothman, 212.872.7411, New York
• Peter J. Guy, 212.872.1024, New York
• Stephen M. Vine, 212.872.1030, New York
• Prakash H. Mehta, 202.887.4248, Washington, D.C.
• Mark H. Barth, 212.872.1065, New York