Monday, September 29, 2008

Clusterstock's bailout summary

What's in this massive bailout Congress wasted the whole weekend negotiating? We just wasted our Sunday evening reading all 110 pages to find out. (If you want to do the same, click here.)Key points below:
  • Creation of an "Office of Financial Stability." The bailout will be run via a new government office, which henceforth will be known here and elsewhere as The Bailout Office.
  • "Preventing Unjust Enrichment": Treasury can't pay more for the crap assets than the banks bought them for (a horrifying possibility, given that most of the securities have already been written way down). This provision, however, doesn't apply to banks who acquired the assets via mergers or to banks in bankruptcy or conservatorship. It also means that the Treasury can and will pay far more than market value for this garbage (and, thus, go against the advice of Warren Buffett and Bill Gross, among others, who recommend paying market prices).
  • Includes the silly "insurance" option the GOP insisted on--whereby the banks pay the government a fee to guarantee the performance of the toxic securities and then sells them to private-market buyers. The banks won't use the option because the payments would be onerous, and Paulson won't use it because he hates it. Go, GOP!
  • The Treasury is supposed to consider a bunch of factors when making its decisions, including:
    • Limiting how much the taxpayer gets screwed
    • Not wasting money buying assets from banks that will croak anyway
    • Save jobs, life savings, house values, etc
    • Try to save small banks that got blown up by Fannie/Freddie collapse
    • Protect retirement savings by buying the crap assets of pension funds, too
  • Oversight: Must report back to Congress after 60 days and then every 30 days thereafter. Must send Congress a report after every $50 billion spent.
  • Helping homeowners. Must try to work with homeowners to modify loans if/when appropriate to avoid foreclosure. Must encourage mortgage servicers to try not to boot people out of houses, instead working on ways to avoid foreclosures (toothless provision).
  • Executive compensation at bailed-out companies. Toothless: The plan ostensibly prohibits golden parachute payments to CEOs and other "C-level" execs at bailed-out companies. However, it really only prevents payments on severance deals that are struck AFTER the bailout (specifically, it prohibits these deals completely). There is nothing about cancelling the severance payments that the executives are ALREADY contractually entitled to. What this means in practice is that bailed-out companies will have trouble hiring the best talent...because why would you work at Bailed Out Company A when you could go across the street and get a fat severance deal? It also doesn't mean the companies can't pay their CEOs $500 million a year. IN ADDITION: There's another absurd section that makes all compensation above $500,000 for the three highest paid employees at the company not tax-deductible for the company. This is LUDICROUS. It means the company can pay the executives anything it wants and that the penalty for this will be exacted on the company and its shareholders. (Unless we're mistaken, Americans are furious that CEOs make $50 million a year for running companies into the ground, not that the $50 million is tax deductible).
  • The Treasury has complete discretion over the prices it pays for crap assets (the most important provision in the whole document as far as the taxpayers are concerned). "The Secretary make such purchases at the lowest price that the Secretary determines to be consistent with the purposes of this Act." Translation: If the banks persuade me they won't sell for anything less than a sweetheart price, I can give them that price. The only good news: The Treasury has to publicly detail the prices it pays. So if the Treasury is paying grossly inflated prices, the taxpayer has a chance of finding out about it.
  • Equity/warrants: The Treasury MUST be granted warrants or debt instruments (senior debt) from public companies in exchange for more than $100 million of bailout money. No specific language on how significant this warrant or debt position must be, except that it must "provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation in the case of a warrant, or a reasonable interest rate premium, in the case of a debt instrument." AND...must provide additional protection against taxpayer losses. This is an important and just provision. The tension will be between the government wanting to take enough equity to offset the risk without scaring the bank away.
  • Size: Treasury gets $250 billion now, and another $100 billion when the President tells Congress it is needed (i.e., now). If $350 billion isn't sufficient, the President can tell Congress he/she is authorizing another $350 billion, at which point Congress can issue a "joint resolution" to block it. In other words, the default amount is $700 billion, and Congress could conceivably block the second $350 billion (the rules for blocking it are complex and doing so wouldn't be a cinch).
  • Ability to stop the madness. Congress can seek a preliminary or permanent injunction from a court to stop the program.
  • TIME LIMIT: The authority under the plan lasts until the end of 2009. Congress can then extend for another nine months or so (max 2 years from the date of signing).
  • Oversight: A bunch of oversight provisions, including appointment of Special Inspector General.
  • VERY STRANGE AND POSSIBLY ALARMING: The SEC has the ability to suspend mark-to-market accounting for financial institutions when it thinks doing so is in the public interest. The SEC will also be launching a "study" of mark-to-market accounting. Mark-to-market has been fingered as one of the villains in this collapse. It isn't, but it sounds as though the SEC may have been persuaded that it is. Without mark-to-market, there's a lot more risk of a Japan-type scenario, where banks live in denial for years about how far up the creek they are.
Financial industry might have to pay for any taxpayer losses--emphasis on "might." Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act...the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt.

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