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Financial Services Update

Financial Services Update

September 10, 2010

Authored by: Matt Jessee

Goolsbee to Chair White House Council of Economic Advisors

On Friday, President Obama named a longtime adviser, Austan Goolsbee, to be the chairman of the White House Council of Economic Advisers. Goolsbee is a former University of Chicago economics professor and one of three economists currently serving on the council. He previously was confirmed by the Senate and will not need to be reconfirmed. Goolsbee, 41, replaces Christina Romer, who has returned to her teaching position at the University of California, Berkeley.

Clash Over Tax Cuts Extension

With the Bush tax cuts set to expire at the end of 2010, President Obama, speaking at a White House news conference on Friday, proposed extending tax cuts for families earning less than $250,000 a year while allowing taxes to rise for those with higher incomes.  However, the President stopped short of promising a veto should Congress send him legislation extending, perhaps temporarily, tax cuts for everyone. Republicans have proposed extending the tax cuts for all income brackets. The cost to the Treasury of extending the top two income tax bracket rates, which the Bush tax cuts lowered from 39.6% to 35% and 36% to 33%, would be $700 billion over 10 years.

Stimulus Round Two

During a speech Wednesday, President Obama unveiled his new proposal to allow companies to expense 100 percent of their investments in new plants and equipment through the end of next year in effort to spur job creation. The President also announced a plan to invest $50 billion in new roads and railways, as well as permanently extend a tax credit, valued at close to $100 billion over 10 years, for businesses that conduct new research and development.

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Financial Services Update

Financial Services Update

September 7, 2010

Authored by: Matt Jessee

White House Considering New Stimulus Measures

Sources indicate that White House officials have begun considering new measures to stimulate the economy, including an extension of the expired research and development tax credit and new infrastructure spending. However, Democratic Congressional leaders have expressed concern to the White House regarding the difficulties they anticipate in passing even a small stimulus bill, particularly given the success of “Tea Party” Republican candidates in primaries over the August recess. The White House denied a story last week indicating that they are strongly considering a payroll tax holiday geared at getting businesses to start hiring new workers. It remains to be seen what, if any, stimulus measures could get passed by Congress in the current political environment. But with the Congressional midterm elections fast approaching, the push is growing for the White House to take action.

Bernanke Defends Fed’s Role in Financial Crisis

On Wednesday, during testimony before the Financial Crisis Inquiry Commission, Federal Reserve Chairman Ben Bernanke defended the Fed’s policies during the financial crisis in 2008, expressing confidence that the bailout averted a much greater crisis for the U.S. economy. Bernanke also defended the Fed’s involvement in the collapse of Lehman Brothers in September 2008, stating that the Fed did everything within its legal authority to avoid the company’s collapse. With regard to how the Fed’s role will change in the aftermath of the newly enacted Dodd-Frank Wall Street Reform bill, Bernanke said the Fed will have a more active role in managing systemic risk in the economy in order to prevent another collapse such as Lehman’s from happening again.

August Jobs Report Shows Rising Unemployment

On Friday, the Department of Labor released its August jobs report showing the economy lost another 54,000 jobs overall last month, mostly because of the loss of temporary Census Bureau jobs. The report also showed that the unemployment rate rose to 9.6 percent from 9.5 percent. Overall, the government lost 121,000 jobs in August. State and local governments, many of them grappling with severe budget deficits, cut 10,000 jobs, and another 114,000 temporary Census positions came to an end. The total number of unemployed people rose to 14.86 million in August from 14.59 million in July.

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If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
(314) 259-2463

Kip Wainscott, Associate Attorney
(202) 508-6172

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Financial Services Update

Financial Services Update

August 6, 2010

Authored by: Matt Jessee

Romer to Leave Council of Economic Advisors

On Thursday night, the White House announced that Dr. Christina Romer, chair of the Council of Economic Advisors, will leave September 3rd to return to the University of California at Berkley. Some are speculating Friday’s announcement of the 9.5% July unemployment rate may have contributed to her resignation since Romer predicted the 2009 stimulus bill would help keep the unemployment rate under 8 percent. Sources indicate that Council of Economic Advisors member Austan Goolsbee appears to be the front-runner to succeed Romer as Chairman. There is also speculation that Romer is under consideration to replace Janet Yellen as president of the Federal Reserve Bank of San Francisco. Yellen was recently nominated to be Vice Chairman of the Federal Reserve.

July Jobs Report Released

On Friday, the Department of Labor released the July jobs report showing that nonfarm payrolls declined by 131,000 jobs and the unemployment rate remained steady at 9.5 percent. 71,000 private-sector jobs were added last month while 143,000 temporary workers on the 2010 census were let go. The June data were revised down significantly showing that payrolls fell by 221,000, more than the 125,000 drop previously reported, as only 31,000 jobs were added in the private sector. Taking into account revisions to prior months this year, the U.S. economy added an average of less than 100,000 jobs a month in the first seven months of 2010.

Tax Cut Showdown In September

On Wednesday, Senate Majority Leader Harry Reid (D-NV) announced that the Senate would vote on a package of expiring tax cuts when the Senate returns in September. It remains unclear whether Senate Finance Committee Chairman Max Baucus (D-MT) will hold a committee markup on the bill or it will be brought directly to the floor. Moderate Democratic Senators Kent Conrad (D-ND) and Evan Bayh (D-IN) have called for an extension of all the “Bush” tax cuts, including those benefiting individuals earning more than $200,000 and families earning over $250,000 annually. If the Senate passes such an extension, it would likely set up a showdown with the House where a majority of Democrats do not want to extend tax cuts for all individuals. Some Democrats on the Ways and Means Committee have discussed a proposal to repeal the Bush tax cuts for the top tax brackets but delay the collection of those revenues until 2012.

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The Moving TARP Capital Executive Compensation Restrictions

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”), previously just called the economic stimulus bill.  Both the complete legislation and the provisions directly related to executive compensation can now be found online. Furthermore, we have previously posted our summaries of the executive compensation provisions and the tax provisions most likely to impact community banks.

Below, we have summarized the new TARP Capital closing documents, Senator Dodd’s Letter on the Act, the effectiveness date for the provisions of the Act, the SEC’s guidance on the Act, and remaining open questions.

New TARP Capital Closing Documents

In light of the new executive compensation restrictions, the Treasury has modified the Waiver required to be signed in order to close TARP Capital investments, as well as added a side letter that addresses the modifications introduced by the Act.

The new Waiver (i) acts as a consent to all modifications required to comply with the TARP Capital restrictions; (ii) requires repayment to the company by employees of any payments made in violation of the TARP Capital restrictions; and (iii) expands the TARP Capital restrictions to include the Emergency Economic Stabilization Act, as amended (EESA), and all rules, regulations, guidance or other requirements issued under EESA, rather than just compliance with the regulations adopted by the Treasury on October 20, 2008.  As noted below, the Waiver now must be signed by the company’s senior executive officers as well by any additional highly compensated employees “required by applicable rules or regulations.”  We have uploaded a marked version of the Waiver showing the modifications.

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Summary of Tax Impact of Economic Stimulus Legislation

The American Recovery and Reinvestment Act of 2009 (the “Act”) contained a number of tax provisions that are likely to be of particular interest to and will directly impact most, if not all, of our bank and other financial institution clients.  One of the tax provisions, the provision increasing the period that a net operating loss (“NOL”) can be carried back from two (2) to up to five (5) years, saw the addition of a provision that will substantially limit the number of taxpayers eligible to take advantage of the expanded carryback period.  The new limitation makes it likely that only smaller financial institutions will be able to take advantage of the expanded carryback period allowed by the Act.  The Act also repealed (with limited transitional protection) the relief provided in Notice 2008-83 issued by the Internal Revenue Service (“IRS”) in the fall of 2008 that exempted certain losses on loans and foreclosure property incurred by banks from the NOL limitation rules applicable to built-in losses.

Increase in the Net Operating Loss Carryback Period

Original provisions coming out of the tax writing committees of the House and Senate included a provision extending the period in which 2008 and 2009 NOLs could be carried back from two (2) to up to five (5) years.  The provision also eliminated the 90% limitation on the use of AMT NOLs that were carried back from 2008 or 2009.  The limitations in the original provisions were that the expanded carryback period did not apply (i) if the bank or other financial institution received any money under the Troubled Assets Relief Program (TARP) (ii) to Fannie Mae, Freddie Mac, or (iii) any corporation that is a member of the same affiliated group for income tax purposes as a bank or other financial institution that received TARP funds.

The Act retains the expanded carryback period for NOLs, but only for those generated in 2008 (or, at the election of the taxpayer, taxable years beginning in 2008).  Further, only taxapayers that are “eligible small businesses” may take advantage of the expanded carryback period.  An “eligible small business” that elects may carryback a 2008 NOL for up to five (5) years.  An eligible small business is a taxpayer having less than $15,000,000 in average annual gross receipts for the three (3) years prior to the year in which the NOL occurs.  Thus, the usefulness to most financial institutions of the expanded NOL carryback provisions appears to have been severely limited by the change in eligibility requirements.

Repeal of IRS Notice 2008-83

The Act retains the provisions repealing IRS Notice 2008-83 originally included in the House bill and subsequently added to the Senate bill.  An explanation of these provisions is set forth below.

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