The Emergency Economic Stabilization Act's Insurance for Troubled Assets

Summary

Many observers trace the root cause of recent instability in financial markets to uncertainty
surrounding the value of widely held securities that are based on mortgages and mortgage-related
assets. Losses on these securities have led to the unexpected and relatively sudden failure of
several large financial institutions. Credit markets have nearly frozen at times as financial
institutions demanded very high interest rates on traditionally routine short-term lending. While
there is limited evidence that financial turmoil has caused widespread damage in the broader
economy, it is feared that significant real economic effects may be forthcoming, particularly if
credit markets remain frozen.

Responding to these economic fears, the House took up the Emergency Economic Stabilization
Act of 2008 (EESA) as an amendment to H.R. 3997 on September 29, 2008. This amendment
failed by a vote of 205-228. Following this, the Senate took up a bill of the same title with a
number of additions and passed it by a vote of 74-25 on October 1, 2008, as an amendment to
H.R. 1424. On October 3, 2008, the House passed the amended version of H.R. 1424 by a vote of
263-171. The President signed the bill into law, P.L. 110-343, on the same day. The centerpiece of
both versions of the act is the Troubled Assets Relief Program (TARP), intended to address recent
instability in the financial market through a variety of measures, including an insurance program
for "troubled assets." This insurance program would provide U.S. government guarantees for
some of the securities that are perceived as being at the root of the current financial instability.

The EESA required a report on the Treasury's implementation of the TARP insurance provisions
within 90 days of enactment. This report was filed on December 30, 2008. It describes a
relatively small program to be used "with extreme discretion." No guarantees have been made
under the program, though it may be used in conjunction with the asset guarantee announced in
the November 23, 2008 assistance for Citigroup.

In the 111th Congress, Chairman Barney Frank introduced a bill amending TARP (H.R. 384) on
January 9, 2009 and the bill has been scheduled for floor action the week of January 12, 2009.
Although not amending the insurance portion of TARP (Section 102) directly, it includes
language that would clarify the authority under TARP to provide support to the municipal
securities market, which has been undermined by the failure of private insurers. Such support
could come through the insurance section of TARP, however, there may also be issues regarding
Section 149(b) of the Internal Revenue Code that limits federal guarantees for tax-exempt
securities.

This report briefly summarizes and analyzes the insurance program contained in the enacted
version of the EESA, the Treasury announcement of the guarantee program to be implemented
under the EESA, and current legislation that would affect the TARP insurance program. It will be
updated as warranted by legislative and market events.