Washington – The draft of the Emergency Economic Stabilization Act of 2008, known among certain Republican leaders as a “crap sandwich,” is out. All 110 pages of it. It seems to require that Treasury take stock warrants (or senior debt if no equity is available) in exchange for buying junky securities from a financial institution, except for a few small exceptions outlined below. But it doesn’t say anything about how much of a stake Treasury is supposed to take.
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the 110-page bailout here: bailout-bill
Here are some highlights::
1) There’s a mortgage insurance program, as pushed by House Republicans, but it’s completely at the discretion of the Treasury Secretary. Institutions can ask for insurance, Treasury “may” grant it. Verdict: Not gonna happen, at least not much.
2) There’s an oversight board, which consists of the Fed chairman, the Treasury Secretary, the SEC chairman, the director of the Federal Housing Finance Agency (it’s listed in the bill as the “Federal Home Finance Agency”; here’s hoping they fix that), and the HUD secretary.
3) Treasury has to turn in a report by next April 30 recommending how financial regulation oughtta be revamped. I’d say whoever gets elected in November ought to get a task force working on that pronto.
4) 20% of any profits realized on the sale of assets go into the Housing Trust Fund and the Capital Magnet Fund
5) Treasury is encouraged to encourage servicers of the loans it buys to do workouts (that is, to change the terms of the loans to avert foreclosures).
6) If the Treasury Secretary buys securities directly from an institution and takes a “meaningful equity position,” he must follow certain standards for executive compensation and corporate governance. Limit pay, ban golden parachutes, include clawback provisions in new contracts.
7) If the Secretary buys more than $300 million from any institution (that is, even if it was in an auction, and even if he hasn’t taken a meaningful equity stake), he has to prohibit golden parachutes for any top executive hired after the purchase.
8) The Secretary must receive warrants or senior debt in return for purchases of troubled securities–unless the assets of the financial institution are $500 million or less, transactions with the institution add up to $100 million or less, or the institution is legally prohibited from issuing securities and debt instruments.
9) The authority starts at $250 billion. A written certification from the president gets it up to $350 billion. The president can then ask to jack it up to $700 billion, and if Congress doesn’t like the idea it has 10 business days to pass a resolution stopping it. Also, it appears that Congress could at any time pass a joint resolution increasing the limit past $700 billion.
11) The SEC is given permission to suspend mark-to-market accounting if it wants to. (I’m pretty sure the SEC doesn’t need Congressional permission to do that.)
12) Banks stuck with loads of now-almost-worthless Fannie and Freddie preferred shares can sell them and deduct the losses from ordinary income.
13) An earlier decision to exempt mortgage-debt forgiveness from income taxes is extended from 2010 to 2013.
14) If after five years the Troubled Asset Relief Program (the name for the fund) is still in the red, the president has to submit a proposal for recouping the shortfall from the financial institutions that benefited from the program. This provision was apparently a big deal for Nancy Pelosi, but it doesn’t actually do anything–Congress would have to pass new legislation to make anything happen on this front.
The bill also allows the Federal Reserve to start paying interest on the reserves member banks hold with it. This was already supposed to happen starting in 2011.
Once the bill is signed into law, Treasury Secretary Henry Paulson has many options open to him on how unclog the credit markets, which Senator Judd Gregg, the top negotiator on the bill for Senate Republicans, described as a massive car accident in the middle of the highway. The government must clear the accident away by buying the toxic debt so that normal traffic can flow freely. One avenue will be to do a reverse auction, where banks compete to sell the Treasury their bad paper, with the Treasury choosing the lowest offers. The Treasury may also directly negotiate with companies, though no one knows exactly how that will work.