Financial System Bailout Tentative Agreement Reached

Published on: 10:43AM Sep 29, 2008

By Jim Wiesemeyer
via a special arrangement with Informa Economics, Inc.

Legislative language being drafted; votes ahead

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A financial system bailout tentative agreement reached early Sunday morning, subject to legislative drafting, includes strict accountability and oversight provisions, taxpayer protections, mortgage foreclosure relief, limits on executive compensation and incremental payments to buy up troubled assets.

Summing up the tentative package, Rep. Barney Frank (D-Mass.), the lead negotiator for the House Democrats, said that there was no expectation of making anyone smile. “This was never going to be a bill that was going to make people happy,” he said. “No solution to a problem can be more elegant than the problem itself. We are dealing with a very difficult problem.”

“Given the dimensions of the problem, I believe we have done a good job,” he added. “It includes genuine compromises."

The major focus of the plan would allow the Treasury Department authority to buy up troubled assets, to relieve pressure on the financial industry. The Treasury secretary would have the option to insure or buy mortgage-backed assets, language pushed by House Republicans, charging financial institutions premiums for the insurance -- The Treasury would be required to create the insurance program, but not necessarily to use it. Under the agreement, the Treasury Department will determine how to structure the insurance plan. "They will assure the premiums are set at a level that fully protects the taxpayers of the country,"said Senate Budget Chairman Kent Conrad (D-N.D.).

The agreement would limit golden parachutes — severance packages for executives leaving a company that seeks aid from the bill. It would also include a “claw-back” provision that would allow firms to reclaim incentive pay from senior personnel based on financial statements that later proved to be inaccurate.

The compensation limits will be enacted primarily, but not solely, through the tax code by reducing tax deductions for firms that pay executives more than $400,000 a year.

Congressional staffers are working on legislative language, with the goal of releasing a bill sometime on Sunday.

The House could vote on the measure today, following House Rules Committee action on the bill which allows for same-day consideration of any bill that is brought up today or Monday.

Fallback plan:
If the Congressional Budget Office and the Office of Management and Budget find that after five years the program is losing the government money, the president will be required to submit a plan to Congress to recoup the shortfall. Under the agreement, lawmakers and the administration opted to leave the decision to the next president, who must present a proposal to Congress to pay for any losses.

According to Sen. Conrad, the following are some of the details of the tentative agreement:

• The initial funding would be $250 billion. Another $100 billion would be subject to the president’s request.
• The final $350 billion could be available upon another presidential request but would be subject to a congressional disapproval resolution, which would then be subject to presidential veto. (If Congress disapproved, it would have to act within 15 days to deny the Treasury the money.)
• There would be no time restrictions on the release of the funds, so the total potentially could be paid out over a very short time.

There is no bankruptcy modification provision but foreclosure forbearance is part of the deal,Conrad said. The plan does not dedicate a portion of any profits from the bailout program to an affordable housing fund, a plan previously pushed by Democrats.

An oversight board would include the secretaries of Treasury and Commerce, the head of the Securities Exchange Commission and of the Federal Reserve. Also, there would be conflict-of-interest rules for firms hired by the Treasury to help run the program.

The tentative agreement reached late Saturday allows for judicial review of Treasury decisions. Also, Treasury would be required to make transactions made through the troubled asset program available publicly online

A summary of the tentative agreement released by House Speaker Nancy Pelosi's (D-Calif.) office (see the box below for details) 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."

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."

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."

The summary 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.

Details of the plan released by Rep. Pelosi:



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.

-- 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

Comments: The next step is to get the tentative accord into legal language, and then have a House vote followed by the Senate. All of this should take place by Monday afternoon. Congressional sources say unless there is a major issue that surfaces, it isn't a question of if Congress passes the bailout package, but when.

It looks like the House may vote on the bailout package on Monday. The Senate is not in session today, but Senators will be in Monday — and possibly Wednesday — as they complete unfinished business. Lawmakers will be observing Rosh Hashanah on Monday evening and Tuesday. Senate Majority Leader Harry Reid (D-Nev.) said that the Senate could return Wednesday to complete anything that has not been cleared.

Longer term, the same players -- and some new ones ahead -- will have to deal with what Treasury Secretary Henry Paulson calls a “21st century regulatory system” to oversee the increasingly complex financial system.

Shorter term, here is a quick recap of where major bills stand:

-- Financial Bailout: Legislative language is being written, with the House expected to vote first, likely on Monday, with the Senate following later on Monday or perhaps on Wednesday.

-- Tax Extenders: (HR 6049), (HR 7060): Major differences continue between competing House and Senate versions. Proponents are not giving up yet, but this could be punted to a new Congress.

-- Stopgap Spending (HR 2638): Both the House and Senate have passed a continuing resolution (CR) funding most agencies through March 6, 2009. President Bush will sign the omnibus spending measure into law.

-- Economic Stimulus (S 3604): While Democratic lawmakers want this on this session's agenda, the clock is ticking and this won't likely be on the completed list.

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