By Ginna Ryan, Mauge, Inc.

January 28, 2009

A distinguished panel spoke to a full room at the East Bank Club January 28th, at our first luncheon of the year. They tried to break down the often-confusing language of the recently passed Emergency Economic Stabilization Act of 2008 (the "Act"). The fundamental component of the Act, The Troubled Assets Relief Program (TARP) gives broad authority to the Secretary of the Treasury to purchase troubled assets.

Our speakers for the lunch were Harold “Skip” Perry, Executive Managing Director, Real Globe Advisors, LLC and Mike Demetriou, Associate, Real Estate, Financial Crisis & Special Situations Group, Sonnenschein, Nath & Rosenthal, moderated by David Greising, Chief Business Correspondent, Chicago Tribune.

The goal of the Act is to restore liquidity and stability to our financial system by purchasing “troubled assets” from financial institutions. These assets are primarily residential and commercial mortgages and securities based on or related to these mortgages. The Secretary has been granted broad authority when deciding which assets to purchase and the disposal thereof. Consideration must be given to specific factors when evaluating these assets, such as the protection of home values, college funds, retirement accounts and life savings; the preservation of homeownership; promotion of jobs and economic growth; maximizing overall returns to taxpayers and providing public accountability for the exercise of such authority.

Mike talked about the Capital Purchase Program, a $250 billion program initiated by the Treasury and offered to U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to shore up the U.S. economy. Nine large financial institutions have already stepped up to the plate to participate in this program. Institutions participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance, for the period during which Treasury holds equity issued under the program.

Monitoring of this program is key. There are strings attached in the form of 5% interest, increasing to 9% in 5 years. The first 9 banks all received the same amount, putting them on a level playing field. They need to put the money to work right away.

Skip talked about the lessons learned from previous recessions. Most notably was Japan’s recession in the 1990’s because it, too, was due to a housing crisis. The primary difference is that the Japanese government did not respond quickly and the recession lingered for 10 years. In our current situation, our treasury has taken immediate action with the TARP program.

Skip also reminded us of the Savings & Loan (S&L) debacle of the early ‘90s. At the time, there were no processes or technology in place to take over banks. There was a call to action and within 6 months, the US Revolution Trust Corp. created a methodology and procedures and started making a market. The taxpayers all got paid back through guarantees. The takeaway was innovation in financing. Like the S&L situation, we need quick action to take control in this most severe recession. Insolvent banks should be closed, while marginal institutions should be merged. Infused capital must be conditional and bank lending needs to be put to work in communities.

The panel feels strongly that there are lots of opportunities out there. There will be a need to deploy capital and create markets. They recommended we start paying attention to what is proposed in the form of future acts and what is approved. We need to read carefully and see how each change will impact our clients.