The Bailout Plan

doug reich

Some guy
Lawmakers Reach Tentative Bailout Deal -

Top U.S. policy makers emerged from hours of tense negotiations with a clear message just after midnight Sunday morning: A deal to bailout U.S. financial markets has been agreed on and all that remains to be done is to commit the legislation to paper.
Associated PressHouse Speaker Nancy Pelosi, Treasury Secretary Henry Paulson, right, Senate Majority Leader Harry Reid, second left, and Sen. Judd Gregg, left, announce a tentative deal on legislation regarding the financial crisis just after midnight Sunday.

Treasury Secretary Henry Paulson, House Speaker Nancy Pelosi (D., Calif.), and Senate Majority Leader Harry Reid (D.), were flanked by key negotiators in the Capitol as they announced that a $700 billion plan to have Treasury buy up toxic assets had been all but finalized after hours of exhausting negotiations.
"I think we're there," an exhausted Mr. Paulson said, a sentiment echoed in the statements of negotiators such as House Financial Services Chairman Barney Frank (D., Mass.) and Senate Banking Committee head Christopher Dodd (D., Conn.).
Those present said the bailout plan still needs to be drafted in its final form, a process staff members were expected to continue throughout the night in what one aide called a "marathon drafting session" in Ms. Pelosi's office just off the rotunda in the Capitol building. A formal announcement is scheduled for some time Sunday, though an exact time and location were not immediately available.
A summary of the tentative agreement released by Ms. Pelosi's office said the plan "gives taxpayers an ownership stake and profit-making opportunities with participating companies; puts taxpayers first in line to recover assets if a participating company fails; (and) guarantees taxpayers are repaid in full -- if other protections have not actually produced a profit." (See Ms. Pelosi's summary.)
Additionally, the summary said the legislation will expand the range of firms that can sell troubled assets to the government to include pension plans, local governments and community banks serving "low- and middle-income families."
A House Democratic aide said the government would be able to receive warrants it could hold until maturity from financial firms on assets received either through auctions or through direct purchases.
The summary also said the legislation would institute new executive-compensation requirements for participating companies, including "no multi million dollar golden parachutes," limits on compensation generally, and the ability to recover "bonuses paid based on promised gains that later turn out to be false or inaccurate."
President George W. Bush spoke with Ms. Pelosi earlier in the evening about the discussions, and the White House welcomed news of the deal. "We're very pleased with the progress tonight and appreciate the extraordinary bipartisan efforts being made to stabilize our financial markets and protect our economy," White House spokesman Tony Fratto said.
The next step will involve selling the deal to rank-and-file lawmakers, who have been unhappy over signing on to a giant bailout package just weeks before the November elections. House Minority Whip Roy Blunt (R., Mo.) said that he planned to talk to colleagues and get reactions.
During interviews on Sunday morning talk shows, presidential candidates Barack Obama and John McCain gave their tentative support for the deal.
Interviewed by ABC's "This Week," Mr. McCain said, "This is something that all of us will swallow hard and go forward with."
Mr. McCain also said he probably would have voted for legislation to keep the government running even though it contains thousands of the type of pork barrel projects he strongly opposes.
On CBS's "Face the Nation," Mr. Obama said he was inclined to support the bailout because it includes increased oversight, relief for homeowners facing foreclosure and limits on executive compensation for chief executives of firms that receive government help.
"None of those were in the president's provisions. They are identical to the things I called for the day that Paulson released his package," Mr. Obama said.
Lawmakers had entered a new round of meetings shortly after 7:30 p.m. EDT Saturday, with pizzas headed to one office and a platter from sandwich shop Cosi being delivered into the House Speaker's office. By roughly 11:30 p.m., what Sen. Reid described as a "breakthrough" came in the form of an idea from Ms. Pelosi that was enough to advance talks.
"She took over at the last minute," a House staffer familiar with the talks said Sunday morning. "The last hour-and-a-half she really brought things together and made it possible to reach this point."
Ms. Pelosi found middle ground with other negotiators on provisions aimed at allowing the federal government to recoup money for taxpayers if the asset-purchase program isn't making money after a certain amount of time. A House leadership aide said early Sunday morning that details were not immediately available because the staff was still finalizing language, but that the general concept was to provide Congress with a mechanism that would be triggered at some point in time -- likely within five years -- that would allow lawmakers to offset some, if not all, of the bailout costs.
One idea that has been floated by both conservative House Democrats and Senate Democrats has been to create a deposit insurance fund similar to the one operated by the Federal Deposit Insurance Corp. for bank accounts. A Senate aide said they were pushing provisions that would address such concerns, mainly by assessing fees on a wide swath of financial institutions over a certain asset size to create a privately-funded rescue fund to pay for any future and current bailouts.
Offers and counteroffers were flowing back and forth all night. Among the offers extended by Democrats: an agreement to drop a proposal to devote 20% of potential profits to an affordable housing fund, according to a Senate staffer close to the talks.
A House staffer reached after the deal announcement was made confirmed that lawmakers did decide to drop the affordable housing fund proposals, which would have potentially directed billions to state and local governments to fund housing projects.
One of the biggest sticking points involved concerns that executives at troubled financial institutions would wind up benefiting from handsome pay packages as the government took on more risks. But Democrats emerging from the talks said a whole array of issues related to executive pay had been addressed, including issues involving "golden parachutes," the big pay packages that are sometimes awarded to departing executives.
Mr. Dodd said that protections against golden-parachute awards had made it into the final deal, along with an insurance component sought by House Republicans as an option for the Treasury to use if necessary and requirements that Treasury is seeking to mitigate and reduce foreclosures where possible.
Overall, staff said they had successfully expanded the original two-and-a-half-page Treasury proposal delivered to Congress a week ago to include significant oversight of the asset-purchase program, executive compensation restrictions, the potential for equity stakes in firms that participate in the asset-sale program, and other protections for taxpayers that will be key to attracting bipartisan support during votes this week.
The summary issued by Ms. Pelosi's office said the legislation will include provisions giving Treasury the ability to work with cash-strapped homeowners whose mortgages are purchased by the federal government to refinance into a more affordable mortgage. Other foreclosure-prevention measures included in the agreement are an extension of the tax holiday for homeowners who face foreclosure, as well as a tax break for community banks who held shares of Fannie Mae and Freddie Mac. The rescue plan will allow affected banks to take an immediate tax deduction on losses from investments in the two firms, which were taken over by the federal government earlier this month.
Lawmakers also included provisions allowing them to keep a close eye on the Treasury program, including a bipartisan oversight board appointed by members of both parties in Congress, an inspector general to monitor Treasury decisions, and regular audits from the Government Accountability Office. Additionally, Treasury will be required to make transactions made through the troubled asset program available publicly online. Unlike the original Treasury proposal, which would have given the department legal immunity in the program, the tentative agreement reached late Saturday allows for judicial review of Treasury decisions.
Some lawmakers had set a deadline of reaching a deal by the time the Asian markets open Sunday evening. In a sign of how sensitive Congress is to market reaction, lawmakers stayed in touch with outside experts during the negotiations, including talking to billionaire investor Warren Buffett.
Associated PressSen. Charles Schumer, left, Sen. Max Baucus and Sen. Jack Reed take a short break during ongoing negotiations on Capitol Hill Saturday.

The bailout negotiations had taken a step forward Friday, when Senate Democrats agreed to include an insurance-based scheme as an option as part of the Wall Street bailout package in a bid to win support of House Republicans, who have been the main obstacle to reaching an agreement.
After an apparent agreement was announced by lawmakers Thursday, House Republicans threw a wrench into the process by saying they would not support the deal, proposing instead their own alternative plan. That plan would be based around the idea of an industry-funded insurance pool to provide certainty to the markets, rather than a taxpayer-funded scheme.

doug reich

Some guy
More coming soon...

Everyone involved got a little something: ownership interest, pay caps, less money up front...

Nancy Pelosi also released this: Summary of the Draft Proposal To Rescue U.S. Financial Markets -

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
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
On a side note, did Pelosi and Reed have the brainpower to come up even with this outline of banalities and cliches ("oversight" and "transparency")? Every time I look at Reed, I see a stupid and insipid grin plastered on his face. Are these tribunes of the people up to the task of crafting a regulatory framework? I wonder. Neither do I have high hopes concerning either Obama or McCain, both of whom are clearly way out of their depth.
probably they did not have brains to understand...but you should keep in mind that the brain behind all this is Hank Paulson, who knows the markets and govts inside out not only US, but almost the entire world..
probably they did not have brains to understand...but you should keep in mind that the brain behind all this is Hank Paulson, who knows the markets and govts inside out not only US, but almost the entire world..

Paulson wants carte blanche with no strings; it's these nincompoops who are (correctly) arguing for regulation and oversight. I doubt, however, that they have the brains, expertise, or even the patience to craft the careful details such a program must inevitably require.
"Here Nancy, hold this and stand in front of the camera. Smile!"

Nancy Pelosi is like the puppy fetching the paper: someone else wrote it, someone else bought it. But she gets the photo op. That's how you keep 'em appeased.


Your copies of the movie "Wall Street" might become collector's items now, like your grandparents' 78 rpm Al Jolson records.
All of these "strings" won't ever be exercised in any form of enforceable way anyway. If the money is needed, we'll be right back here in Washington in two months when credit still needs more cleaning up, and the extra "oversight" and "regulation" is a joke.

You think a politico is going to understand quants' black boxes? Funny.

There's always a race between Washington and Wall Street/Hedgistan to impose new rules vs. finding a way to circumvent those rules and return to business as usual. And my money is on the actual smart guys working at Wall Street--because they make the rewards big enough for the best and the brightest to come to work for THEM to create new techniques to play AROUND the rules rather than to work for the government to enforce them.

One thing you can be CERTAIN of is that this will NOT be the end of the bubbles. People will still find something to speculate on, and GS and MS will still find ways of making a pretty penny off of it, one way or another.
agree...Has over regulation ever worked? even if the regulation was effective, it only served driving out capital from one geography to another?

We saw enron explosion, Sarbanes Oxley came by: and guess what : London AIM got lot of IPO listings which might have come to NY, taking with it the liquidity..

Same, with the non-dom" tax in London.. Never it seems that the politicos ever read/understood the "Goose that lays golden eggs story".

What I think could potentially happen with all these market disruptions and potentially half baked solutions is some new center like Dubai might eat NY and London's lunch.

I really hope some good far sighted leadership finds a sensible path towards retaining or improving our current standing.
The market doesn't seem to think this deal is done. Or, if done, will work.

The market may be obstinate, but she isn't stupid: There have been at least three times in the last week that some congressman has said, "we have a deal," and there was no deal. She's skeptical.


Faculty (Undercover)
I'm skeptical that any deal will help for long. Can you picture these banks, which are deleveraging at lightspeed, taking this cash and going to market with it in search of returns? I think they have other things to do with it, including keeping a lot of it handy as shark repellent.

To whom do you lend? Who's in the market to take on debt at tough spreads, to go out and make big capital investments at what most people seem to think is the begining of a recession, not the end?

Perhaps enough market participants will wake up next week, see the sun shining, and do a cannonball right into the deep end, but I sort of doubt it. I see them dipping their toes in at best.
As it is geared to simply keep capital flowing, I don't think an emergency intervention such as this is intended to address the reticence of banks to loan - that's something only their (hopefully chastened and wisened) judgments about risk and reward can address -- and under no circumstances should any government presume to make those decisions.

To enable them to lend is a structural matter. To tell them how and when is a tactical one and in my opinion way outside the jurisdiction of the monetary authorities.

That said, once again, I agree with you. But again, this is not without precedence in quality, even if it is in scope (although, adjusted for GDP growth, I don't know if that is true).

In Chairman Greenspan's book are several anecdotes from his tenure that readily lend context to the current situation.

Two very large MetaBanks have pulled off some meta-coups of late. A trade that is bad in time of stress might turn into a real winner in the long run; the key is staying power. For those deemed "too big to fail," the government has come alongside to provide staying power.
the market has gained quickly from its day's lows.. Dow is now down 400 pts from yesterday..

Just imagine the traders (esp the algorithmic ones) who become rich and well as bankrupt with such vol..

When will a little more sanity return?
the market has gained quickly from its day's lows.. Dow is now down 400 pts from yesterday..

Just imagine the traders (esp the algorithmic ones) who become rich and well as bankrupt with such vol..

When will a little more sanity return?

When people make prices. The over-the-counter market might just become the market of preference for the forseeable future.


[edit] Bit of a blanket statement, I apologize. The point was that when the objectively "unpriceable" assets are priced, the market will know where it stands.

Of course, apart from a massive capital infusion, there is no immediate bottom on those asset values, as further market declines necessitate further capital calls. And this begins to spell recession, which pressures those asset values even further. Think "feedback loop."

So, uncomfortable as it seems, the market IS pricing those assets after all -- and it's pricing them at recession prices.
Market's reaction to this bailout is just unreasoable as it can be: simply slumped no matter the plan being passed or rejected.

We paid out tax anyway, and in stead of seeing it being used to bomb other countries, I would rather it could possibly save more people from unemployed by bail those a!@# on the street!


Faculty (Undercover)
The ride isn't over yet. Everyone in the House is up for re-election / eviction this year, and there are only 5 weeks to go. They have to campaign sometime....

Meanwhile, it looks like the commercial banks are getting their turn. Wonder how many will be left when the election results are announced?
I agree with you (though not too many will be on our side ;))
However everything changes. The fear is that a freeze in the credit market for 1 year or more will hit the economy. This will convert back to a hit for the financial sector. The boulder can start rolling ...