The Emergency Economic Stabilization Act of 2008: Impact of the Historic New Law

The Emergency Economic Stabilization Act of 2008 (the “Act”) was signed into law by President Bush on October 3, 2008. Passage of the Act was the result of intense debate in both the U.S. Senate and the U.S. House of Representatives and among the American people. Debate was to be expected given the magnitude of the requested funds—$850 billion (including up to $700 billion for the purchase of troubled assets and up to $150 billion for the extension or expansion of a variety of tax breaks)—and the importance of the issues the Act addresses to an economy that has been experiencing severe stress from the fallout of the “subprime crisis” which has morphed into a more general credit crisis.

The heart of the Act is based on the concept that if financial institutions could sell their “troubled assets” (including mortgages, mortgage-backed securities and other instruments), retaining assets that are not “troubled” on their balance sheets, those institutions would be perceived as safer transactional counterparties by those with whom they do business. The Act assumes that once worries about the solvency of financial institutions dissipate, credit will again begin to flow.

The Act attempts to address some very difficult questions, including how to determine the prices the U.S. government should pay for “troubled assets,” how much power is vested in the Secretary of the U.S. Department of the Treasury (the “Secretary”) under the Act and the suspension of mark-to-market accounting.

There are, of course, no easy answers to the financial crisis and to the many questions left unanswered in the Act. We hope, however, that this summary and our practice-specific comments are useful resources, and we will continue to update you as events unfold.

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