Several news sources are reporting that a bailout bill agreement has been tentatively reached between congressional leaders and the White House.
Update: the “Summary of the Draft Proposal to Rescue U.S. Financial Markets” has been posted inside the comments.
From the Wall St Journal
“Senate Majority Leader Harry Reid (D., Nev.), in an appearance on the Senate floor Saturday, said there are only a “handful of issues still lingering” for lawmakers to finalize. He said his goal was for the Congress and the Bush administration to at the very least release an outline of the bailout plan before Asian markets open Sunday evening.
Saturday evening, a Senate aide familiar with the talks said a number of specific ideas appeared to be gaining traction, most notably the concept of creating a “financial stability” fund financed by Wall Street…
Also gaining steam was a proposal to eliminate the tax deductions for companies on executive compensation for top officers that is above $400,000….
One issue still to be resolved was how the $700 billion authority to Treasury to buy up toxic assets will be meted out.
Lawmakers want Treasury to receive the authority in tranches, receiving $250 billion immediately and another $100 billion if needed as certified by the president. The remaining $350 billion would be subject to a Congressional vote, giving lawmakers the opportunity to vote to rescind the funds. But a Senate aide familiar with the discussions said Treasury was pushing for a larger initial authority, likely around $500 billion.
Lawmakers appeared to have the advantage on the issue ahead of the evening talks, the Senate aide said, though no part of the deal had been completely finalized.”
From Reuters
WASHINGTON (Reuters) – U.S. congressional leaders on Sunday said they had reached the broad outline of a deal to put in place a $700 billion bank bailout but were awaiting details on paper before declaring it final.
“We’ve made great progress,” House of Representatives Speaker Nancy Pelosi told reporters after a night of marathon talks. “We have to get it committed to paper so we can formally agree.”
Jillayne here. So, they’ve reached an agreement, but they still have some disagreements. To me this sounds like we still don’t have an agreement, but the pressure was on to announce that perhaps they’re closer.
I’d like to know if we the taxpayers are going to be able to read the agreement and give our feedback to our elected representatives BEFORE the House votes.
The key is in what circumstances we get an equity stake in the companies. It sounds like it will be the rare exception, and if that’s the case, in my opinion there should be no deal.
I’m just the opposite as biliruben. Absent the equity stake being rare, the better run companies, that could do more with the money, won’t use the program, making it less effective. It could also cause investors to lose confidence in the equity markets, since so many companies would be at risk of dilution. The equity stake is a reason I’m against the bill, but if it’s very limited I could change my mind.
Why the heck would we want or need to be bailing out the better-run companies that don’t need the money?
That makes no sense.
The idea is that these “toxic assets” are clogging up the system, making credit less available. If that’s the case, as long as you’re dealing with an entity that provides credit, taking them out of the system would improve the availability of giving credit.
Maybe someone else can chime in here (my grasp of microeconomics is better than macroeconomics), but I’ve always understood that banks and other companies work of leverage and are restrained by certain ratios. If an asset they’re holding go down in value (e.g. one of these assets declines in value) then that reduces the amount they can loan, even if they’re a very healthy entity.
Or stated differently, the concern is the value of these “toxic assets” is likely to decline further before it gets better, making the situation worse for all the companies that hold them.
BTW, I believe JP Morgan has stated that they don’t know whether they will take advantage of the program. They didn’t say they didn’t know whether they’d be eligible. The point is, even healthy companies would like to get rid of this stuff.
From Office of Speaker Nancy Pelosi — Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION
Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets — including cutting in half the Administration’s initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers’ funds. If the government loses money, the financial industry will pay back the taxpayers.
3 Phases of a Financial Rescue with Strong Taxpayer Protections
Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes
CRITICAL IMPROVEMENTS TO THE RESCUE PLAN
Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable — protecting American taxpayers and Main Street — and these elements will be included in the legislation
Protection for taxpayers, ensuring THEY share IN ANY profits
Cuts the payment of $700 billion in half and conditions future payments on Congressional review
Gives taxpayers an ownership stake and profit-making opportunities with participating companies
Puts taxpayers first in line to recover assets if participating company fails
Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit
Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families
Limits on excessive compensation for CEOs and executives
New restrictions on CEO and executive compensation for participating companies:
No multi-million dollar golden parachutes
Limits CEO compensation that encourages unnecessary risk-taking
Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate
Strong independent oversight and transparency
Four separate independent oversight entities or processes to protect the taxpayer
A strong oversight board appointed by bipartisan leaders of Congress
A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse
An independent Inspector General to monitor the Treasury Secretary’s decisions
Transparency — requiring posting of transactions online — to help jumpstart private sector demand
Meaningful judicial review of the Treasury Secretary’s actions
Help to prevent home foreclosures crippling the American economy
The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year
Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures
Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/28/AR2008092800900.html
Good morning biliruben and Kary,
In terms of equity stakes in the companies, a few of the banks that are going to go under anyways, we’ll call those first in line, sell their toxic waste to the government, marked down to say, 60 cents on the dollar instead of more like 20 cents on the dollar in the open market.
Now the other, somewhat stable banks can sell their loans at 60 cents on the dollar in the open market, now that a price point has been reached, and they don’t have to offer equity stakes or limit executive pay.
I’d like to see the entire text of the proposal released for all of us to see, instead of just the press release from Nancy Pelosi.
The thing is, with more entities able AND willing to sell, the government would be paid less. Things that make the government pay more turn this from a bailout of the economy to a bailout of firms that are hurting.
I too would like to see the proposal. I’m not real big on the insurance idea, because I think that will cost more, but perhaps doing some of each would make it less inflationary.
8 should say the government would be paying less for each asset. That means that the ultimate cost would be less, or that they’d be more likely to turn a profit, even without an equity stake.
The 3-month and 6-month Treasuries auctions tomorrow will be interesting.
“If the government loses money, the financial industry will pay back the taxpayers.”
“Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit”
I like this brilliant idea from Nancy Pelosi. Apparently, we are here today because the financial industry cannot pay its current obligations nor honor its counter-party commitments.
So, let me think, 6 months down the line, if the government loses money, it plans to initiate a huge-margin call on the financial industry.
The government intends to initiate a run of the banks – yes, this “protection” is going to work, indeed. 🙂
—–
“Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks”
This seems to be nonsensical as the provision already exists in the IRS tax code ?
If a bank does not have a profit for the financial year, it is not taxed. If it has a loss on its books from any stock purchases / assets, it is automatically deducted against the income – and only the net income is taxed.