What It Means To Our Business And Events

1. TARP What It Means To Our Business And Events TARP—Troubled Asset Recovery Program

2. TARP Samuel J. ErkonenHowe & Hutton, Ltd. Mulvaney’s Restaurant Sacramento, California April 21, 2009

3. Introduction • Understand the necessity for the legislation, its purpose and the manner by which it operates. • Recognize the impact TARP will have on the hospitality industry in general and your situation in particular. • Develop best practices for dealing with TARP and other difficult situations caused by these tough economic times. • TARP allows the U.S. Department of Treasury to purchase or insure up to $700 billion of “troubled assets.”

4. Troubled assets are (a) residential or commercial mortgages and any securities, obligation, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (b) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

5. Basically, this allows the Treasury to purchase non-liquid, difficult-to-value assets from banks and other financial institutions. • The targeted assets can be collateralized debt obligations, which were sold in a booming market until 2007 when they were hit by widespread foreclosures on the underlying loans. TARP is intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabile their balance sheets and avoid further losses.

6. The idea is not to help banks to recoup losses already incurred on troubled assets. The idea is that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. • The Act requires financial institutions selling assets to TARP to issue equity warrants, or equity or senior-debt securities

7. What Is An Equity Warrant? • An equity warrant is a type of security that entitles its holder to purchase shares in the company issuing the security for a specific price.

8. Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, but to each other and to consumers and businesses. • If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets.

9. Increased lending equates to “loosening” of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. • As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short-term basis) should decrease, further facilitating lending.

10. TARP will operate as a “revolving purchase facility.” • The Treasury will have a set spending limit, $250 billion at the start of the program, with which it will purchase the assets and then either sell them or hold the assets and collect the “coupons.” • The money received from sales and coupons will go back into the pool, facilitating the purchase of more assets. • The initial $250 can be increased to $350 billion upon the President’s certification to Congress that such an increase is necessary. • The remaining $350 billion may be released to the Treasury upon a written report to Congress from the Treasury with details of its plan for the money.

11. Congress then has 15 days to vote to disapprove the increase before the money will be automatically released. • The first $350 billion was released on October 3, 2008, and Congress voted to approve the release of the second $350 billion on January 15, 2009. • The authority of the U.S. Department of the Treasury to establish and manage TARP under a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.

12. 1-14-09. Requirements to participate: • (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institutions. • (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate. • (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the IRC provision. • (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. • President Bush used his executive authority to declare that TARP funds may be spent on any program he personally deemed necessary to avert the financial crisis, and declared Section 102 to be nonbinding. This allowed President Bush to extend the use of TARP funds to support the auto industry.

13. 1-15-09. The Treasury issued interim final rules for reporting and recordkeeping requirements. 1-21-09. The Treasury announced new regulations regarding disclosure and mitigation of conflicts of interest in its TARP contracting. 2-5-09. The Senate approved changes to the TARP which prohibit firms receiving TARP funds from paying bonuses to their 25 highest-paid employees. 2-10-09. Newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the $300 billion or so dollar remaining in the TARP funds. He intended to use $50 billion for foreclosure mitigation and use the rest to help fund private investors to buy toxic assets from banks. This highly anticipated speech coincided with a nearly 5 percent drop in the S&P 500 and was criticized for being short on details.

14. TARP Administrative Structure The program is run by the Treasury’s new Office of Financial Stability. The fund will be split as follows: • Mortgage-backed securities purchase program. This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism. • Whole loan purchase program…regional banks are particularly clogged with whole residential mortgage loans. • insurance program, trying to insure troubled assets. • equity purchase program, purchasing ownership interests in financial institutions. • homeownership preservation • executive compensation • compliance.

15. TARP Participation Criteria The Act’s criteria for participation are very unclear. It states that “financial institutions” will be included in TARP if they are “established and regulated” under the laws of the United States and if they have “significant operations” in the United States. Companies that sell their bad assets to the government must provide warrants so that taxpayers will benefit from future growth of the companies. Certain institutions seem to be guaranteed participation. U.S. banks, U.S. branches of a foreign bank, U.S. savings banks or credit unions, U.S. broker-dealers, U.S. insurance companies, U.S. mutual funds or other U.S. registered investment companies, tax-qualified U.S. employee retirement plans and bank holding companies.

16. TARP Participation Criteria In order to participate in the bailout program, companies will lose certain tax benefits and limit executive pay. Golden parachutes are limited, and unearned bonuses must be returned. Very unlikely that hedge funds will be eligible. U.S. has 8,500 banks. Real estate and mortgage-related assets (and securities based on those kinds of assets) are eligible if they originated (were created) or were issued on or before March 14, 2008, the date of the Bear Stearns bailout.

17. Pricing of Troubled Assets One of the most difficult issues facing the Treasury in managing TARP is the pricing of the troubled assets. The Treasury must find a way to price extremely complex and sometimes unwieldy instruments for which a market does not exist. In addition, the pricing must strike a balance between efficiently using public funds provided by the taxpayer and providing help to the financial institutions that need it.

18. Pricing of Troubled Assets Reverse auction. The Act encourages the Treasury to design a program using market mechanisms to the extent possible. This has led to the expectation that the Treasury will use a “reverse auction” mechanism to price assets. A reverse auction means that bidders (potential sellers of the troubled assets) will place bids with the Treasury for the right to sell a specified type of assets. The sale price will be the lowest price at which the bid will provide the required quantity of the item. Theoretically, the system creates a market price because the bidders will want to sell at the highest price they can get, but they also want to be able to make a sale, so they must set a low enough price to be competitive.

19. Congressional Oversight In a February 6, 2009 report, the Congressional Oversight Panel concluded that the Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value. The COP found the Treasury paid $254 billion, for which it received assets worth approximately $176 billion. A shortfall of $78 billion. Check it out, the Treasury bought $25 billion of assets from Citigroup on 10-14-08, however the actual value was estimated to be $15.5 billion, creating a 38% (or $9.5 billion) subsidy.

20. Protection of Taxpayer Investment • Equity stakes. Financial institutions selling assets to TARP must issue equity warrants (a security that entitles its holder to purchase shares in the company issuing the security for a specific price. 2. Limits on executive compensation. 5 five highest-paid executives. Sell more than $300 million in assets, no golden parachutes and $500,000 limit on annual tax deductions for payment of each executive as well as a deduction limit on severance benefits. Eliminate compensation structures which encourage unnecessary and excessive risk-taking. Claw-back (forced repayment of bonuses if they were paid on the basis of false data.

21. Protection of Taxpayer Investment 3. Recoupment. Director of Office of Management and Budget will submit a report on TARP after 5 years. If TARP has not been able to recoup its outlays through the sale of the assets, the Act requires the President to submit a plan to Congress to recoup the losses from the financial industry. Theoretically, this prevents TARP from adding to the national debt.

22. Protection of Taxpayer Investment • Disclosure and transparency. • Judicial review of Treasury action. Treasury actions may be held unlawful if they involve an abuse of discretion, or are found to be arbitrary, capricious or not in accordance with law. Interestingly, a financial institution that sells assets to TARP is not allowed to challenge the Treasury’s actions with respect to its specific participation in TARP.

23. Model Board Policy for Approval of Meetings, Events and Incentive/Recognition Travel Guidelines for TARP Fund Recipients • General policy statement: The CEO shall be responsible for implementing adequate controls to assure that meetings, events and incentive/recognition travel organized by the company serve legitimate business purposes and are cost justified. • All proposed meetings, events and incentive/recognition travel organized by the company must serve one or more specified legitimate business purposes (see representative listing attached). Each proposed meeting, event or incentive/recognition travel with a cost exceeding $75,000 must be supported by a written business case identifying a specific business purpose.

24. Model Board Policy for Approval of Meetings, Events and Incentive/Recognition Travel Guidelines for TARP Fund Recipients • Total annual expenses for meetings, events and incentive/recognition travel shall not exceed 15 percent of the company’s total sales and marketing spending. • The amount spent for an employee performance incentive/recognition event shall not exceed two (2) percent of the total compensation of eligible participants or 10 percent of total award earners’ compensation. • The process for approving meetings, events and incentive/recognition travel, and the procedures for assuring adherence to this policy, will be subject to independent audit to confirm policy adherence.

25. Model Board Policy for Approval of Meetings, Events and Incentive/Recognition Travel Guidelines for TARP Fund Recipients • At least 90 percent of incentive program attendees shall be other than senior executives (as defined by applicable Treasury Department guidelines) from the host organization. • Performance incentives shall not promote excessive or unnecessary risktaking or manipulation of financial results. • All internal meetings or events attended only by senior executives (as defined by applicable Treasury Department guidelines) and/or board members shall be devoted to specific business purposes, and participating senior executives shall be responsible for any expenses incurred for non-business related activities.

26. Model Board Policy for Approval of Meetings, Events and Incentive/Recognition Travel Guidelines for TARP Fund Recipients • The CEO of the company shall certify to the board at least annually that the foregoing policies are being followed, and are sufficient to provide reasonable assurance that the company’s expenditures for such purposes are not excessive. • These policies shall be subject to modification only with board approval stating the specific business rationale for the change in policy.

27. Examples of Legitimate Business Purposes for Meetings, Events, Incentive/Recognition Travel Guidelines for TARP Fund Recipients • As with all business expenditures authorized in these challenging circumstances, all proposed expenditures for meetings, events and incentive/recognition travel should be made to strengthen the competitive position of the company in the marketplace and position the company for the creation of long-term value and growth. Below is a representative list of legitimate business purposes for meetings, events and incentive/recognition travel.

28. Examples of Legitimate Business Purposes for Meetings, Events, Incentive/Recognition Travel Guidelines for TARP Fund Recipients • Effective product launches to educate sales force, channel partners and customers. • Sales conferences and employee meetings to align vision, strategy and tactics. • Training and staff development meetings – learning environments conducive to adult learning and professional development, improving participants' skills at their trade and/or their familiarity with the company's products or services. • Employee recognition programs to motivate and reward employees for achievement and productivity.

29. Examples of Legitimate Business Purposes for Meetings, Events, Incentive/Recognition Travel Guidelines for TARP Fund Recipients • Professional conferences that provide networking, education and best practice sharing across companies and industries. • Performance incentives with clear rule structures that are designed to motivate and reward high performers for exceeding established goals that generate incremental revenue growth for their respective organizations and that are beyond the investment in the program. • User conferences for customers utilizing the company's products or services to obtain feedback, build networks, provide product training and capture ideas for enhancements to the company's product offerings.

30. Examples of Legitimate Business Purposes for Meetings, Events, Incentive/Recognition Travel Guidelines for TARP Fund Recipients • Product development events designed to generate feedback for research and development purposes. • Corporate-sponsored events that further charitable purposes. • Trade shows and similar events that bring prospective buyers and sellers together. • Strategic, business and financial planning and review meetings. • Employee meetings as a result of company mergers and/or acquisitions for the purpose of alignment of products, brands and cultures.

31. TARP So, that’s TARPsje@howehutton.com312-263-3001 What It Means To Our Business And Events