Buzz

Some Plain Talk on the Credit Crisis...And Some Likely Outcomes

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP


Herewith some thoughts from an old hand in the financial sector on the Emergency Economic Stabilization Act of 2008 (the "Act"), establishing a fund to carry out the $700 billion "troubled asset relief program" (a/k/a "TARP"). The bill was at last passed and signed on October 3rd, in spite of a glut of polemic overload, literally hundreds of self appointed pundits expressing their opinions in The New York Times, the Wall Street Journal, Financial Times, et al., all augmented by television talking heads, talk radio and street corner prophets.

What I will try to do is put the metrics in context, in (I hope) a disciplined way which draws on my experience[1] in situations which share parallels (no two crises are exactly alike, of course) with the current circumstance.

Let me use a format I think works when one is trying to cut through an enormous overload of opinion, blather, gabble, the length and spurious certitude often inversely proportional to the wisdom and knowledge of the faux savant. A hypothetical inquisitor deposes the witness, i.e. myself.

Question: Does the Paulson proposal involve a "bailout?"

Answer: I don't think the term "bailout" is remotely accurate, at least if the AIG and Goldman Sachs cases are previews of coming attractions. In each case, those "bailouts" in fact entailed investments in a security position which is familiar in the venture capital business, often called a participating preferred, also known as a "double dip" preferred or, in my parlance, a "have your cake and eat it too" security. In both cases, Paulson's loan to AIG and Buffett's preferred stock investment in Goldman, the investor/lender has a comfortable coupon (14% for Paulson and the Treasury and 10% for Buffett), preference in liquidation plus a significant piece of equity. In the AIG case, as I read it, the Treasury's equity upside is a zero exercise price warrant, constituting a free call on 80% of AIG's equity. In the case of Goldman, I don't know the percentage of Goldman that Buffett's call pertains to; but, assuming the stock rebounds to its pre-meltdown level, Buffett will get his $5 billion back, plus a 10% return on the same (his preferred will be called), plus a profit on his warrant of, say, another $5 billion. An exit at the end of the second year, under my hypothetical, would give Buffett an IRR of 41% (not counting the 10% coupon), which is a big, big, number. In the case of AIG, obviously, there is more risk; but, with a double dip involving a 14% coupon and 80% of the upside, assuming any material recovery at all, the IRR on the deal Paulson negotiated could be out of sight.

Question: But AIG and Goldman were special deals, not under the Act and, in Goldman's case, entirely private. Let's talk about the $700 billion plan, the current legislation. How does Paulson overcome the fact that, as Vikas Bajaj reported in the Times, on September 25th:

"A big concern in Washington - and among many ordinary Americans - is that the difficulty in valuing these assets could result in Treasury's buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers' expense."[2]

How do you buy smart if you don't know what the asset is worth?

Answer: Why is it a problem that the assets are difficult to value? Take a look at the most vibrant segment of the U.S. economy, the sector peopled by the venture capital-backed companies, most of which take advantage of new developments in science and technology, a segment I have abbreviated as EVITA (Entrepreneurial, Venture-backed, Information-dependent, Technology-flavored Activity).[3]

The process of valuing (for purposes of investment) illiquid securities, hard to measure by ordinary methods, is old hat to the venture community, particularly those investing in early stage "gazelles" (as David Birch labeled venture backed companies progressing "from the embryo to the IPO"). Valuing a gazelle with no predictable cash flow is an everyday occurrence in the EVITA sector. In fact, various structures have been devised over time to deal with the issue. One such is the participating preferred I mentioned above. Whether the preferred is a straight preferred with warrants or in fact participating in accordance with its terms is significant only technically; the economics are the same, get capital back, plus an accrued coupon and a piece of the upside.

Question: The drafters thought of that, did they not? Thus, the Act (quoting a useful Gibson Dunn[4] section-by-section analysis):

"Requires that the Secretary receive warrants from participating financial institutions giving the Secretary the right to receive non-voting common or preferred stock in the institution. The exercise price for the warrants will be set by the Secretary. [5]

In fact, some of the "pundits" you (sarcastically) refer to contended that the Secretary should focus exclusively on buying preferred stock in banks and investment banks. Forget about buying assets, prop the institutions up by buying equity. Why didn't Paulson adopt that idea, buy and only buy, preferred and warrants?

Answer: Some of these institutions (perhaps a lot) can't, as a practical matter (see the law governing their incorporation) issue stock carrying a preference and/or warrants without (a) an amendment of the charter, which could require a shareholder vote; and/or (b) a waiver of negative covenants by a majority (or a supermajority) of prior series of preferred.

Question: Well, you just go get a vote or a waiver. Why not?

Answer: Please! Talk to someone who has tried. The common shareholders, as a class, or the holders of prior series of preferred are getting "crammed down." They could care less what happens to the company, or to anyone else but themselves. As Bernard Shaw said, they are "little clods of ailments and grievances."

Question: They would let the company go down the tubes, with all the bad effects on our economy? Why?

Answer: Look at the Know Nothings whose unfocused anger has persuaded hack politicians to abandon ship because their re-election is more important than their obligation to safeguard our economy. The stockholders are in the same category, "Who cares? I have nothing to lose." Thus, the Act favors preferred and warrants, but lets Paulson make exceptions.[6] Secretary Paulson needs simplicity and flexibility, otherwise, he could be facing an administrative nightmare.

Question: O.K. It's not a bailout in every case, because the Treasury can make money, at least in some instances, off the preferred and/or warrants. If the market stabilizes, and the Treasury has bought right, Treasury makes a profit on its equity upside in the seller. But, if preferred and/or warrants are not feasible?

Answer: It's not even a "bailout" if all the Treasury does is buy right. Even without a profit share in the seller, the Paulson plan is not, or at least does not have to be, a "bailout." Thus, in the September 25thWall Street Journal, a hedge fund manager declared that: "The Paulson Plan Will Make Money for Taxpayers."[7] My guess is that, even without creative structuring, the Treasury will make money on resale of the assets themselves, or holding the same until maturity. I am, in this respect, drawing on my experience as counsel to DBL Liquidating Trust, the warehouse for junk debt inherited from the Drexel bankruptcy. Almost no one, except a few very shrewd investors, bought the Trust's certificates from the creditors because the public perception was that junk debt was no more than junk; with Milken's indictment, the market for subordinated debt was psychotic. The Drexel trustees, with (I like to think) my help were able to realize close to $3 billion in proceeds from the sale of subordinated debt issued by creditworthy companies. And, the Treasury has the staying power to wait until markets settle down.[8] As the celebrated miser/investor, Hetty Green, liked to say, "Next to my children, I love a good panic more than anything else.

Question: O.K. So you think this might be a good deal for Treasury and the taxpayers?

Answer: I and a bunch of other commentators.

Question: But there is risk, risk that the assets turn out to be not 'Milken junk' but real junk, right?

Answer: Right.

Question: And, in any event, $700 billion is a lot of money for the U.S. to tie up in what just might be a long, hard slog, right?

Answer: Right.

Question: Then why not, as the Republican Right argues, let the private marketplace work this out?

Answer: My guess is that it will.

Question: But you said that won't work. Let me repeat your wise crack in footnote 6, viz: Conservatives looking for the private sector to do the job alone ignore the everlasting validity of Lord Keynes' statement that: "Markets can remain irrational longer than you (i.e. anyone other than the Treasury) can remain solvent."

Answer: Let me explain. Treasury had to step up to the plate in the first instance, to stop the bleeding. No private investor could act that expeditiously or in that amount, $700 billion. That said, there is significant private capital, in the U.S. and around the world, on the sidelines, waiting to invest in distressed assets. Some of the investors are, in fact, clients of mine and my law firm. That being the case, I and my colleagues are working up structures, public and private funds, to be waiting at the gate when the Treasury does the right thing.

Question: Which is?

Answer: Assemble the assets it buys, along with the stapled equity instruments (if any), in tranches of like securities and offer the same for sale to the private market place. Let the Treasury, with its resources and stamina, 'buy right' (like Warren Buffett) from motivated sellers, hold the assets for a period, until recovery is underway, and then sell off the positions to private buyers (some of which will most assuredly be clients of mine and my firm, given our special resources for such endeavors).[9]

Question: Treasury gets it money back?

Answer: Assuming the market recovers, it makes a profit on each trade, or most of them.

Question: But is Uncle Sam going to be Uncle Sucker because the funds you are assembling?

Answer: Some clients are already kicking the tires; others waiting in the wings..

Question: Make the big bucks, right? Way more than the Treasury, which stepped up to the plate in the first instance?

Answer: Again, look to the private equity sector for the answer to that criticism, dummy insurance. The U.S. takes back a minority interest, say 20%, when each buyer exits a tranche, trued up for cumulative net profits if the buyer owns more than one. We do this all the time. In fact, Treasury is already thinking along these lines. According to a story in the Oct. 8thWall Street Journal,[10]

"One idea being considered Treasury officials working on the rescue plan is to sell big packages of toxic debt to ventures owned partly by the government, as opposed to selling directly to the private sector, according to executives who have talked to senior government officials" .

"Modeled on some 70 such deals pioneered by the Resolution Trust Corp. during the last real-estate collapse, the so-called equity partnerships would ensure their taxpayers get a piece of the action.

"It also would reduce the amount of equity investors would have to put into deals and might even exempt private investors from what they often view as cumbersome federal oversight.

"The government 'could recoup part of its capital outlay and still have the opportunity to make money on behalf of the taxpayer should the securities appreciate in value,' says Jeff Furber, chief executive of A&W Capital Management, which was among those who teamed up with the RTC. 'It's sharing of capital, and capital is very precious right now,' he says."

Question:Dummy insurance is an old deal term in corporate finance?

Answer:One of many. In fact, Treasury can build another wrinkle into the equity partnerships, particularly if it wants (as it does) to move assets off its balance sheet, seller financing. See the Journal story quoted above.

"The joint ventures would enable the Treasury to sell assets quickly because, under the structure being discussed, the Treasury would finance the partnership. In other words, if a pool of assets was sold for, say, $5 billion, the private partners might put up $1 billion and the Treasury would essentially lend the partnership the other $4 billion.[11]

Question: Who's going to buy these tranches, as you call them?

Answer: This could be an ideal outlet valve for hedge funds, I would think. There is a trillion dollars out there, not having much luck these days with the classic A.W. Jones methodologies. This could be a golden (pardon the pun) opportunity for hedge funds to keep their investors on the reservation. And, this is just one possibility. See also the October 6thWall Street Journal:[12]

"American International Group just revealed what many private-equity firms, banks and asset managers want to know about the company's plan to pay back an $85 billion government loan: 'What's for dinner?'

Moreover, as my colleague, Bill Newman, points out, we anticipate offshore investors coming in to acquire U.S. assets at bargain prices. The last time U.S. credit became unavailable (1992 - 1993), several foreign banks came in and made a killing as well as inroads into the U.S. market. The relative currency values continue to favor this gambit.

Question: Can the "average investor" play as well?

Answer: I would hope so, with adult supervision. Thus, we tweak the `40 Act so that mutual funds can be authorized and/or organized to participate. We, of course, take a hard look at the definition of "accredited investor;" we insure transparency in the portfolio under a revised (see below) version of FAS 157; we saddle the managers with personal clawback responsibility (see below) to keep them from getting trigger happy.

That said, my sense is that the major players will be private equity funds. The feds can even grease the skids and make life more pleasant for the investors in both hedge and private equity funds plus pools of capital recruited for this specific purpose, limited secondary trading on a 144A market, like, e.g. GSTrue; this could, among other things, help establish "markets" (as in "mark-to-market") for FAS 157 purposes, and help the hedge funds handle redemptions.

Question: But do the funds buy all the good stuff and leave the Treasury with the dogs?

Answer: The make up of the tranches, and the terms of the auctions or proprietary sales, can be set up, bundling assets for sale as units so that bidders cannot cherry pick just the good stuff. In fact, if certain assets are sticky and can't be bundled in a tranche, Treasury can guarantee, the last 20%, say, of each underlying asset in the tranche, the guarantee conditional on the buyer paying at least 120% of the price Treasury paid to buy the asset or assets.[13]

Question: Other creative (your word) ideas?

Answer: Sure. Take a few structures drawn from real life, viz:

  • If the feds set up reverse auctions and wind up buying at the lowest price, Treasury can turn around and flip the contract into the secondary market at a profit, even before the deal closes. This what wise guys used to do, when the housing prices were shooting up.
  • To lighten its load, Treasury can set up reverse auctions,[14] lock in the lowest price for the tranche and, coincidentally invite the private sector to play alongside Treasury, or take the entire tranche off its hands. If Treasury wants to get tricky, it goes through the entire elbow grease and angst of setting up and closing the reverse auction, then turns around and auctions the assets to the highest bidder in the private sector, the upset price being, say, 125% of what Treasury, the 800 pound gorilla, paid.
  • If Treasury obtains warrants in the seller (Treasury must, with exceptions obtain warrants in public sellers),the warrants should call the issuer's like securities (presumably common stock). That being the case, Treasury can exercise and sell the common when the market has recovered, maybe as part of an underwritten secondary.
  • By recycling the capital it initially commits, buying and then selling and then buying again and repeating the process over and over, Treasury could put at risk no more than, say, $100 billion and yet wind up having closed on $700 billion in total purchases.

Question: This all seems too good to be true.

Answer: Listen up. The point is that you have sellers who are up against the wall, buyers who, trust me, see an enormous profit opportunity; and, working for the Treasury, some of the most sophisticated financial engineers around, armed with unlimited resources and staying power, slicing and dicing the assets into saleable portfolios. Treasury winds up, or should if it takes my advice, with a clean balance sheet and a ton of profit. How bad could that be? Bailout? Bah, humbug.

The main theme to keep in mind is that Treasury should function as an intermediary, like old time specialists on the floor of the New York Stock Exchange, matching the buy and the sell orders and committing their own capital temporarily when necessary to quiet the market in a particular security. Those specialists made tons of money, believe me, by functioning as a stabilizing mechanism.

Question: Any other issues you want to solve while you control the podium?

Answer: Sure. The hue and cry to limit the compensation of the CEOs of the supplicants for Treasury capital is, as with most political popularity contests, good theatre but lousy economics. Forget about the salary; that is, typically, the least interesting item of executive compensation (including "golden parachutes"). In fact, the Treasury gets 50% of whatever salary the CEO is paid. The trick is to look at the equity flavored compensation. Ever since the so-called "reformers" started shouting in the 80s for better alignment of management and share ownership, management options have been the main motivation elements of most compensation packages, and the main driver of stratospheric returns. Again, borrowing from venture capital at both the fund and general partner level, there is a creative way for the Treasury to cap (conditionally, of course) management equity, to tie it to performance, including the outcome to the taxpayers, and to keep control through EVITA-proven methodologies, including the "clawback." This is explained in a published piece, by me and Mills Lundburg.[15] The structure Mills and I propose can be customized to fit TARP so that the profits interests in the LLC which houses the motivational equity is controlled by the seller's board and Treasury monitors, and the upside (if any) split between the senior executives and the Treasury, with a true up at the end of the day, the clawback ... to insure there are no undeserved windfalls.

Question: How about overly lush parachutes and other compensation already, allegedly, earned?

Answer: I could make a ton of money in that area as well. Let the SEC and Treasury go after conduct they conceive of as tortious or unconscionable (criminal is another story) and assert a fine, clawing back undeserved profits. Settle with the respondents for huge bucks, the trade off being no private rights of action.

Question: Cut out plaintiffs' counsel?

Answer: You want to penalize the alleged villains and make money for the taxpayer, don't you? This is the way to maximize returns and make the media lynch mob happy.

Question: And I suppose you have a point of view on FAS 157?

Answer: I thought you'd never ask. Let me present the following quote from a paper I have presented recently at seminars[16] on FAS157 citing CFO.com:

"The new accounting rule on fair value measurement has caused a private equity firm to plunge into the red. American Capital Strategies reported a loss of $813 million for the first quarter of this year -- compared with earnings of $134 million last year -- a result of implementing FAS 157, Fair Value Measurements, it reported in a regulatory filing. .

"In its earnings announcement released this week, Wilkus emphasized that the company expects the assets -- that have experienced about $656 million of depreciation in this or a prior quarter -- to appreciate as they are hold to settlement or maturity. The filing explained that the company invests primarily in illiquid Level 3 assets, with the intention to hold the assets to settlement or maturity. 'This is the contrast to the premise under GAAP that assets generally should be valued on the basis of their current market value and, if no market exists, on a hypothetical market value,' the company stated.

"This in turn would reverse much of the current depreciation. 'The underlying credit quality of these assets remains in line with our forecasts made at the time the investments were underwritten, which include a recession,' he added. 'We believe that with the adoption of [FAS] 157, investors will need to focus on both reported GAAP fair values as well as values that we anticipate realizing on settlement or maturity of our investments, or Realizable Value. Our history bears this out."

"The point is that, under FAS 157, you must mark to (in case of Level 3, illiquid positions) to market even though the "market" is hypothetical (no trading) and the owner plans to hold until maturity. In fact, if the "market" has dried up to zero, arguably the asset, whatever the intrinsic value, is worth zero."

Question: And why are you concerned?

Answer: My concern is that what goes down, as the saying goes, must come up. Assuming the debt instruments in American Capital's portfolio are in fact paid at maturity, the likelihood, indeed the certainty, is that a write-up will be required, meaning that, in future quarters, income will be inflated not from operating results but by reason of the necessity for reversing the previous write-down. As one of my clients succinctly, and hypercritically, put it:

"FAS 157 is an example of a regulatory or standards body being so focused on fixing yesterday's problem (ENRON, in this case) that they make a change that contributes to the next problem. This, of course, is the nature of government and standards boards, as they often do not feel that they have the political capital to address a problem until it has already blown up, and then do so in a way often oblivious to the next problem to occur (and perhaps making the next problem worse).

Then, let me add some additional elements to the script, borrowing from a series of events which then-SEC Chairman Arthur Levitt, among others, deplored in the pre-Enron nineties as overly creative accounting, compromising the integrity of U.S. capital markets, viz:

One of Levitt's exemplars was the "Big Bang" gambit. Let me illustrate with a bit of corporate history: The board of a struggling company, anxious to assuage "activist" investors barking at the Board's heels, fires the CEO and brings in a White Knight and a new team from the outside. Several informally linked events then occur. First, White Knight promises "change" (sound familiar?). Second, the company accrues a huge "non-recurring" charge to earnings, blamed by White Knight and his/her team on the departed management. The charge is, in fact, composed in large part of expenses which could have been matched to income in future quarters; but White Knight persuades the board to "bite the bullet now." The stock drops like a stone. The White Knight team is granted, as is the custom, stock options carrying an exercise price equal to the current trading price of the stock, which is in the cellar. The company stays on course for the next several periods; but, profits surge because significant expenses which have been accrued and bunched inside the Big Bang no linger to impact future revenues. Lo and behold, we have instant profits and the stock price surges as well. White Knight and the team exercise their options. carefully and with ample legal advice, and everybody, except for Arthur Levitt, is (was) happy.

My point is that FAS 157 creates the opportunity for Big Bangs which no one can criticize. FAS 157 can, in effect, require a "Big Bang," as with American Capital. The optionees can make out, as before, with their heads held high. "The Devil (FAS 157) made me do it." And the options are fairly priced: "We followed IRC Section 409A to the letter." They will sell the option shares when it becomes clear the securities in the portfolio which occasioned the markdown, because the market had experienced a nervous breakdown, were not in fact economically impaired. Like the junk debt which lost its political footing (versus its economic value) when Michael Milkin was indicted, the underlying values remain at least equivalent to initial cost. Under the FAS157 mandate, as the market in those securities sheds its clinical depression, a significant write-up is required. Again, everybody (except followers of Arthur Levitt's concerns) is happy. In fact for a perceptive criticism of FAS 157 as it currently stands, let me quote from a memo from a knowledgeable client. He argues that:

"FAS 157 is an example of a regulatory or standards body being so focused on fixing yesterday's problem (Enron, in this case) that they make a change that contributes to the next problem. This, of course, is the nature of the government and standards boards, as they often do not feel that they have the political capital to address a problem until it has already blown up, and then do so in a way often oblivious to the next problem to occur (and perhaps making the next problem worse).

Question: So you would repeal FAS 157?

Answer: Not a chance. Who can argue with "fair value", vs. the old rules of thumb, which told investors next to nothing about underlying values. The job is to tweak the statement to avoid the eccentricities I (and others) cite, but not throw the baby out with the bathwater. In fact, if one takes the trouble to read the Statement (as, I suspect, few of the pundits quoted in fact have), it suggests FASB is open, as always, to amendments based on actual experience. Indeed, FASB and the SEC's Office of the Chief Accountant in fact have, on September 30th, clarified FAS 157.[17] Further, the Act (on pp. 89 and 90 of 451 pages) requires an SEC study to be filed 90 days from October 3rd. The end result will be, I hope, that "fair value" and "mark-to-market" will be prescribed but the audited entity can publish, in effect, more than one version of "fair value," explaining in detail the various metrics used, and the audit client protected from civil litigation, in the absence of fraud.

Question: O.K. You have solved all the problems. Any chance I could persuade you to sum up in one paragraph?

Answer: Sure. The gist of these long winded remarks is short and sweet. What Paulson, Buffett et al., are up to is long familiar to investors in venture capital. There are a number of creative ways to structure win/win situations, bolstering balance sheets, freeing up the credit markets and, at the same time, creating opportunities for significant profit (not, of course, without risk) for the taxpayers. Paulson knows how to do this in his sleep; the problem is in explaining the opportunities for creative structuring to the politicians, the media and then to the general public.

Post Script

One last thought: I am not sure why Secretary Paulson went to Congress in the first place. In 1967, the maestro at legislative politics (and my boss) Lyndon Johnson decided, based on then-Secretary Fowler's advice, the U.S. balance of payments was too negative and he elected to impose capital controls, to require all U.S companies to ask for a permit before committing capital to an offshore investment in the nature of a plant, an acquisition or branch - a process known as foreign direct investment. Knowing the business community would revolt, he created the Office of Foreign Direct Investment in the Commerce Department, installed me (then the Undersecretary of Commerce) as its head and announced the program as a fait accompli on New Year's Day, 1968. He based his authority on The Trading with the Enemy Act, an obscure (to everyone but him) statute on the books since the 20s. The program lasted until Johnson left office and worked without a hitch, I like to think (although it never made much difference). My last suggestion to Secretary Paulson. In order to implement my suggestions outlined above to the extent you think you need legislative authority, dust off the Trading with the Enemy Act.

October 16, 2008


[2] Bajaj, "Rescue Plan's Basic Mystery: What's All this Stuff Worth?" NYT, Sep. 25, 2008, p. 1.

[3] Bartlett, "Reopening the IPO Window," Science Progress, Jan. 3, 2008.

[4] Gibson, Dunn & Crutcher LLP, "Financial Markets in Crisis: Section-By-Section Analysis of the Emergency Economic Stabilization Act of 2008," Publications, Oct.3, 2008, p.7 (hereinafter cited as "Gibson").

[5] Given the amount of stock which could be required, there may well be not enough stock authorized and/or the board not empowered, acting alone, to create and issue the necessary instruments.

[6] The Act, see n.3 supra, "Requires the Secretary to establish an exception and alternative procedures to these requirements for any participating financial institution that is legally prohibited from issuing securities and debt instruments."

[7] Kessler, "The Paulson Plan Will Make Money for Taxpayers," WSJ, Sep. 25, 2008, A21.

[8] Conservatives looking for the private sector to do the job alone ignore the everlasting validity of Lord Keynes' statement that: "Markets can remain irrational longer than you (i.e. anyone other than the Treasury) can remain solvent."

[9] Several of Sullivan & Worcester's clients are players in: private equity funds; mutual funds (RICs) and REITs; structured finance; real estate; creditors rights; federal tax; and venture capital.

[10] Wei & Troianovski, "U.S. May Help Private Funds To Purchase Troubled Assets." WSJ, Oct. 8, 2008, C1.

[11]Id. At C14.

[12] Moore, "AIG Rings Bell: Feeding Frenzy Private-Equity Firms With Financial Appetite Has Its Portfolio on Menu:" Deal Journal, WSJ, Oct. 6, 2008, C5.

[13] The optional guarantee program authority, "up to 100%," a number I doubt Treasury will have to reach, is described in a useful 44 page summary (of a 451 page bill) by Davis Polk. "Emergency Economic Stabilization Act of 2008," Oct. 4, 2008.

[14] "A reverse auction is typically conducted via the Internet by a specialized auction agent working for the purchaser. The auction agent's responsibilities include selecting bidders (prospective suppliers), specifying the required characteristics of the items to be purchased, and publishing and enforcing auction rules. Typically, electronic bids, visible to all participants, are submitted and revised by a number of potential suppliers during a relatively short time period. The ultimate sale price is the lowest price at which a bid or combination of bids will provide the required quantity of the specified item. The reverse auction process has been praised by some for achieving substantial cost savings and criticized by others for undermining stable supplier-customer relationships and thereby delivering far less value than gross cost savings would indicate.

"The task of designing market mechanisms such as reverse auctions for purchasing troubled assets will require a high degree of technical expertise."

Id. At 10.

[15] Bartlett & Lundburg, "A New Executive Compensation Model," NYLJ, May 16, 2007.

[16] See www.vcexperts.com, "Buzz of the Week," FAS 157 - Fair Value Measurements Adopted by the FASB" Parts 1 and 2, 3/4/2008 and 3/6/2008.

[17] A useful bulletin from Strook, Strook & Lavan LLP summarizes the changes.

". the release from the SEC and FASB:

1. confirms that management's internal assumptions can be used to measure fair value when relevant market evidence does not exist;

2. addresses how the use of broker quotes should be considered when assessing the mix of information available to measure fair value;

3. affirms that the results of distressed or disorderly transactions are not determinative when measuring fair market value;

4. confirms that transactions in an inactive market can affect fair value measurements; and

5. lists factors that should be considered in determining whether an investment is other-than-temporarily impaired.

As a separate matter, one day after the SEC and FASB clarifications were issued, the United States Senate passed the Emergency Economic Stabilization Act of 2008, which includes provisions allowing, but not requiring the SEC to suspend mark-to-market accounting rules and instructing the SEC to submit to Congress a study on the effect of mark-to-market rules within 90 days of the law's enactment."

Strook, Strook & Lavan LLP, Strook Special Bulletin, "SEC and FASB Issue Clarifications on Fair Value Accounting," Oct. 2, 2008.

Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com

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