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UPDATED - Bush Administration Unveils $700 Billion Bailout Proposal

00:00AM Sep 20, 2008

via a special arrangement with Informa Economics, Inc.

Lawmakers to debate, vote on massive proposal

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The Treasury Department on Friday evening outlined a massive $700 billion bailout plan designed to ease the chaos in U.S. financial markets. Lawmakers spent the weekend reviewing the plan with a stated goal of crafting legislation that could pass Congress in the coming week -- after briefing representatives from both parties and both chambers, Treasury officials said they remain confident the bill will win quick approval.

Now up to Congress. According to Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking, Housing and Urban Affairs Committee, one approach under consideration would add the bailout bill to a continuing resolution Congress must clear by Sept. 30 in order to keep the government funded.

Perspective: Divided across the population, the bailout would amount to more than $2,000 for every man, woman and child in the United States, according to the New York Times. “I hate the fact that we have to do it, but it’s better than the alternative,” Treasury Secretary Henry Paulson said on Fox News Sunday. Paulson said "The cost will be determined by how quickly the economy recovers and how quickly the housing market stabilizes."

Some analysts estimate the cost could top $1 trillion. The initial cost of the savings and loan bailout of the 1980s totaled more than $500 billion, but the price tag eventually declined to around $125 billion after bank assets, primarily real estate, were sold.

The draft bill, largely penned by Bush administration officials led by Paulson, would also raise the nation's debt limit to $11.3 trillion. The current debt limit is $10.6 trillion -- the nation's debt currently stands at $9.6 trillion.

It is unclear how the new spending would affect the annual deficit, which is already at near-record levels.

The White House Office of Management and Budget (OMB) said it will keep Fannie and Freddie off the government’s books, at least for the time being. As for the new Treasury plan, OMB said in a statement Friday, that it is too early to tell how it will impact the deficit and debt. “All Treasury transactions and those of any federal agency will be fully transparent in the 2010 budget, the monthly Treasury statement, and the financial statements of the U.S. government, ” the statement said.

“This is a big package, because it was a big problem,” President Bush said Saturday at a White House news conference.“I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

Bush said he's unconcerned that the price tag on the package may seem high. "I'm sure there are some of my friends out there that are saying, `I thought this guy was a market guy, what happened to him?''' the president said. "My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''

Democratic leaders have pledged to approve a bill but say it must also include help for ordinary Americans in the form of an economic stimulus package. “It’s clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary,” the House Speaker, Nancy Pelosi of California, said in a statement. “Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

“Congress will respond to the financial markets crisis by taking action this week in a bipartisan manner that will protect the taxpayers’ interests,” Pelosi said.“Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation,” Pelosi said in a statement Sunday. “We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome. Democrats will act responsibly to insulate Main Street from Wall Street.”

Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program. “If we design it so it’s punitive and so institutions aren't going to participate, this won’t work the way we need it to work,” Paulson said on Fox News Sunday. “Let’s talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure.”

“But we need this system to work, and so we — the reforms need to come afterwards," Paulson added.

Under the draft, the Treasury secretary would have to set certain standards for executive compensation at any firm seeking to sell its shaky assets to the new entity. Those standards would have to include limitations on severance pay “determined to be appropriate in the public interest in light of the assistance being given to the entity,” among other requirements. The standards also would have to include “a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate,” according to the draft.

On Sunday, the Federal Reserve approved the conversion of the two remaining investment houses on Wall Street, Goldman Sachs and Morgan Stanley, into bank holding companies, offering them broader government protection in exchange for tighter regulation.

Key developments:

-- The Treasury department would have authority for two years from enactment to purchase and manage bad mortgage debt from any financial institution based in the United States.

-- The most recent draft includes overseas firms that do business in the States, previously excluded - and now asks for permission to buy car loans, credit-card debt and other devalued assets.

-- The plan broadly defines a “mortgage-related asset” as “residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages.” In order to qualify for purchase under the program, the asset would have to have been originated or issued “on or before September 17, 2008.”

-- Any decisions made by the Treasury Secretary are not reviewable by a court or administrative agency.

-- The Treasury Secretary would be required to initially report back to Congress within three months to the House Budget, Financial Services and Ways and Means committees and the Senate Budget, Finance and Banking, Housing and Urban Affairs committees on the plan's progress, and semi-annually thereafter. The draft language would put the Government Accountability Office in an oversight role over the new Treasury facility, and the GAO would have to report back to Congress at least every 60 days on the program’s performance.

-- Further details are likely to be presented when Paulson testifies this coming week before the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee.

-- The power given the Treasury Secretary under the proposal will make this Cabinet position a key topic in the upcoming presidential election.

Details (and fact sheet) of the legislative proposal:


Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.

(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

Proposed Treasury Authority to Purchase Troubled Assets

Washington – The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth. The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.

Management and Disposition of the Assets. The assets will be managed by private asset managers at the direction of Treasury to meet program objectives. Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets. Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury's general fund for the benefit of American taxpayers.

Funding. Funding for the program will be provided directly by Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly. As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement. (

Reporting. Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.