Details have been sketchy in terms of the specific details surrounding the $700 billion financial bailout, but as of Sunday night it looks like the revisions made by the democrats will be supported by republicans, and the bill should be cleared by the House on Monday, and acted on by the senate sometime Wednesday. The major sticking points of this proposal was to ensure that this was not seen by the public as a bailout of Wall Street, where money is thrown at companies and normal taxpayers end up seeing no benefit. Of course, this is still just a draft, and there is always the possibility that something could change, but given the urgency and the amount of time spent this weekend in creating this bill, the final result should closely resemble what we see here.
So, what does the actual bill have to say about all of this? Well, let’s examine some of the highlights. For detailed information, you can download the entire 110 page PDF document here.
Purpose of the Bill
From the start, the bill outlines some explicit purposes for its creation, and some key issues it should address.
The purposes of this Act are:
(1) to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and
(2) to ensure that such authority and such facilities are used in a manner that:
- protects home values, college funds, retirement accounts, and life savings;
- preserves homeownership and promotes jobs and economic growth;
- Â maximizes overall returns to the tax payers of the United States; and
- provides public accountability for the exercise of such authority.
Overview of Topics Covered
If you want a high level overview of what was covered in the bill, here is the table of contents that shows what is covered, and where to find that information. Below, I’ll highlight some of the most important information from these sections.
TITLE Iâ’TROUBLED ASSETS RELIEF PROGRAM
Sec. 101. Purchases of troubled assets.
Sec. 102. Insurance of troubled assets.
Sec. 103. Considerations.
Sec. 104. Financial Stability Oversight Board.
Sec. 105. Reports.
Sec. 106. Rights; management; sale of troubled assets; revenues and sale proceeds.
Sec. 107. Contracting procedures.
Sec. 108. Conflicts of interest.
Sec. 109. Foreclosure mitigation efforts.
Sec. 110. Assistance to homeowners.
Sec. 111. Executive compensation and corporate governance.
Sec. 112. Coordination with foreign authorities and central banks.
Sec. 113. Minimization of long-term costs and maximization of benefits for taxpayers.
Sec. 114. Market transparency.
Sec. 115. Graduated authorization to purchase.
Sec. 116. Oversight and audits.
Sec. 117. Study and report on margin authority.
Sec. 118. Funding.
Sec. 119. Judicial review and related matters.
Sec. 120. Termination of authority.
Sec. 121. Special Inspector General for the Troubled Asset Relief Program.
Sec. 122. Increase in statutory limit on the public debt.
Sec. 123. Credit reform.
Sec. 124. HOPE for Homeowners amendments.
Sec. 125. Congressional Oversight Panel.
Sec. 126. FDIC authority.
Sec. 127. Cooperation with the FBI.
Sec. 128. Acceleration of effective date.
Sec. 129. Disclosures on exercise of loan authority.
Sec. 130. Technical corrections.
Sec. 131. Exchange Stabilization Fund reimbursement.
Sec. 132. Authority to suspend mark-to-market accounting.
Sec. 133. Study on mark-to-market accounting.
Sec. 134. Recoupment.
Sec. 135. Preservation of authority.
TITLE IIâ’BUDGET-RELATED PROVISIONS
Sec. 201. Information for congressional support agencies.
Sec. 202. Reports by the Office of Management and Budget and the Congressional Budget Office.
Sec. 203. Analysis in Presidentâs Budget.
Sec. 204. Emergency treatment.
TITLE IIIâ’TAX PROVISIONS
Sec. 301. Gain or loss from sale or exchange of certain preferred stock.
Sec. 302. Special rules for tax treatment of executive compensation of employers participating in the troubled assets relief program.
Sec. 303. Extension of exclusion of income
The most important aspects of this plan come down to:
- How much money, for what, and when.
- Who oversees the program, and what authority do they have.
- Taxpayer protection.
- Limiting executive pay.
- Loan modification for troubled mortgages.
How Much Money
The money in this plan will essentially be used to purchased troubled assets from financial institutions.
The Secretary is authorized to establish a troubled asset relief program (orââTARPââ) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.
The money is also slated to be doled out in stages. Initially, they are authorized to issue $250 billion for the purchase of troubled assets. The president can then issue authority to increase the limit to $350 billion outstanding. After that, and a 15-day waiting period, they can authorize up to $700 billion total.
It says it is limited to $700 billion outstanding at any one time, so that leads me to believe that they could sell some of the assets, and then purchase additional assets at some point in the future as long as $700 billion isn’t exceeded.
The authority to use this money runs out at the end of 2009 unless congress authorizes a one-year extension.
This program isn’t quite a blank check that’s being issued, and there will be some oversight to this program. It will consist of two separate boards:
- Financial Stability Oversight Board
- Congressional Oversight Panel
The financial stability board would be responsible with maintaining that all policies protect taxpayers and are in the best interest of taxpayers.
The congressional oversight panel would review the state of the markets and how the plan is working. This board would consist of five outside experts that are appointed by congress.
This bailout has received a lot of negative reviews from taxpayers, and it isn’t all warranted. Most people think that if the government authorizes $700 billion to bail out financial companies, that the taxpayer would be on the hook for everything.
Well, this plan is being created to purchase mortgage securities. And while there are plenty of toxic loans in these securities, they are not completely worthless. Furthermore, bundled in these securities are plenty of higher quality loans that do still retain value.
So, even though the government will need to come up with this money, they are purchasing assets that do have some value. This value can be difficult to calculate, but there is a chance that over time, the sale of these securities back into the market could result in breaking even or even turning a profit.
If there is a loss:
If it ends up with a net loss, however, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.
Limiting Executive Pay
Here’s where many people are calling for major reform. People are sick and tired of executives who can run a company into the ground, file for bankruptcy, and leave shareholders with worthless pieces of paper while walking away with tens of millions of dollars. Well, it looks like for those who will be getting assitance from the bailout package, this won’t be the case.
Companies that take part in the plan will not be able to deduct executive salaries above $500,000.
They also will not be able to write new golden parachute contracts for the top five executives if they are fired or the company files for bankruptcy. Of course, any existing contracts would be upheld.
In my opinion, this isn’t enough. If a company is in a situation that needs assistance from this bailout, chances are the tax implications of not being able to deduct executive pay over $500,000 is almost a moot point. And if all existing golden parachute contracts remain in effect, we will still have plenty of people who stand to make millions of dollars in the event they are fired or their firm fails. This provision is a start, but a far cry from the accountability that should be in force.
Loan Modification for Troubled Mortgages
Since the government will be taking ownership of a number of subprime and other troubled mortgages that could be facing foreclosure, the government will have more power to influence loan servicers to modify the loans. Modifications may include rate adjustments, term extensions, or writedowns.
More Details on the Way
As this information begins to spread, we’ll begin hearing more details about this bill. Of course, nothing has been fully passed yet, but within the next few days we should be working with a finalized document. If you want more information, feel free to browse the 110 page PDF. It is full of information, but a lot of it is simply the use of a lot of words to explain a simple concept. But there are plenty of details that will likely escape the mainstream media, so it might be worth checking out. Either way, while I’m not particularly happy with the need for this bailout measure, I realize it is a necessary evil at this time. We never should have gotten ourselves into this mess to begin with, but we did, and now we have to deal with it. All I can hope is that it works, and it does everything it is supposed to. If not, it will be more wasted money.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I need help my house was being repossed for 7 months of
back payments I was supposed to be out September l, then
Coountrywide called and said I could keep my house if aI
sent them 5000 dollars and lowered the payment to 5,600
a month they gave two months to make it since I had been
always paying on time before and due to an illness I am
paralyzed, I accepted the terms thinking I could bring my business back but the turn on the economy made it impossible. I would like to be one of the homes that is
saved what should I do. THis is all I have now. Thank you Ivonne
This is, and always has been the plan of the Federal Banking System. This "Bailout" has happened numerous times in the past, and is the surest way to Devalue our dollar and is a COMPLETE backwards TAX.
Read the book "The Creature From Jeckel Island" to understand fully what is REALLY happening.
I guess I will add my two cents. Here's the bottom line, the finger points in too many directions to put blame in one group. The "bailout" will only cost the TAX PAYING tax payers more money that they will never benifit from. This country is in the crapper and we the people have no control over it.
I have not read the bill, but on the surface, I don't like it. I have been responsible with my finances, and own a home. Why should I pay for someone elses mortgage and help finance a business when I will see no direct benefit. This will cost the working class via taxes. Even if and/or when the money is re-couped, it will go to paying down the national debt. We will never see this money again. We need to stop bailing our private industry and failing homeowners. Government is overstepping their bounds by intervening in private affairs. Let the free market take care of itself and it will work out in the end. Everyone needs to start taking personal responsibility and stop relying on others to fix their problems! If you live on the edge, you have to expect to fall off sooner or later. If you didn't have a safety net, then you suffer your own fate.
As long as there are serious tools for helping homeowners (Not all of whom were deliberately gaming the system) I can get behind this bill. I don't like it, and we definitely need to pass a better one down the line, but this would stabilize the system top and bottom while we sort out the mess.
If however homeowners are not given assistance, under the mantra of 'they got into their own mess, they should get themselves out', bailing out Wall Street for doing essentially the same thing, then it's time to man the barricades. Seriously; bailing out wall street but telling mr. and mrs. homeowner to 'tough it out' is the worst kind of elitist class warfare, and at that point it's time for torches and pitchforks.
There is consensus that there should be some form of capital infusion for current banking crisis either through tax payer bail out or from private market. Since private market is not ready, the bail out seems to be the present options available. But every one talks about the Oversight, Tax payer protection, and limit on executive compensation but no one talks about the core issue that is buried under the SEC 102 (a) (3) EXTENT OF GUARANTEE.— Here it is. “Upon request of
a financial institution, the Secretary may guarantee
the timely payment of principal of, and interest on,
troubled assets in amounts not to exceed 100 per
cent of such payments. Such guarantee may be on
such terms and conditions as are determined by the
Secretary, provided that such terms and conditions
are consistent with the purposes of this Act”.
What it essentially means is that the holders of the Mortgage backed securities would get the face value of the note (Mortgage amount) including the potential accrued interest that they would otherwise get 5 or 10 years from now right way or may be in terms through this bail out. In other words, the tax payer pays the investment interests plus capital to the note holders right away. The payment of 100 interest on the note is unfair to the tax payer since investment involves risk and the investors should bear certain amount of risk. However, payment on the face value of the original mortgage amount (capital) without any interest or the US Treasury note interest may be fair to all the parties.
If this Bail out bill goes into effect as it is stated, the holders of securities note not only get their initial capital but also the accrued interest. They tax payer gives the capital and interest to the investors right away and the investors do not have to wait for 5 or 10 years for the note to mature.
There will be so much money in the money market and the banking system, the interest rate on the consumer borrowing has to go up significantly to curb inflation in the coming years. End result will be bad for average tax payers who are already troubled by heavy interest and taxes. If the bail out does not involve any interest, there will be some serious crumbling from the note holders, but they will be happy that they at least get their capital back. The tax payers pays very little for borrowing the $700B. Further, the bail out should specifically eliminate Hedge Funds if it needs to fair for Tax payer. Not sure if the Hedge Funds are covered under the term “Financial Institutions”. Would like to know the input.
This logic is dangerous. Who's to blame is material. If we don't learn what/who caused this mess, we will probably create a poor solution and be forced to repeat the mess again. It is likely we will make it even worse. To form a decent solution we must know what is happening, why is it happening, and who's decision caused it. Then we can find a solution. Just doing anything to do something is foolhardy and reckless.
Who's to blame of the financial mess is immaterial. The point is, we're in it and must figure a way to get out of it or minimize the pain. We have got to quit fixing blame and start fixing mistakes and ensure we don't make the same ones again. CEOs responsible should be fired and politicians voted out of office. For instance, one who oversees or help write the tax code for the American public and claims he/she didn't know he/she had to pay taxes on certain real estate property and actually didn't pay the tax have no business being in congress. This individual should either resign or be voted out of office.
I guess it's all a moot point now since it didn't even pass the House. Guess we'll just have to wait and see.
the real end of this buisness stick is this...
Who was on watch when it went down, and who should have seen this comming? The fact is we know real estate can go down in value, its happened many times before.
We have to get to the meat of the problem and that is our economy, what is its foundation now? what is the corner stone we have built this thing on? Lately its consumerism and lesuire stuff. Its not the 60's and 70's were we made everything or the 80's making Nukes or the 90's forging the internet. We just financed the last eight years of a nation on buying clothes building houses, and driving cars...thats not a economy stupid, its a Scheme
Hank, now we're talking semantics. If the homeowner's mortgage contract was fully executed after missing many payments, it would lead to the loss of their home. But they are using this bill to modify the terms before that happens. So sure, by not making a payment, the homeowner isn't living up to their end of the bargain, but at the same time, the government is now stepping in before the contract can run its course.
We’re going to be changing the contracts that homeowners entered into after they broke the contracts first by not paying their mortgages. In a golden parachute, executives have not yet broken their employment contracts because dismal earnings and bankruptcy were not included when Boards of Directors hired these executives although they should have.
The problem I have with this is...
700 billion now, but what is in place to prevent this from happening again? The markets are self-correcting but politically that's unacceptable, because voters feeling pain vote their leaders out of office. So while leadership soothes our pain, who's watching the cookie jar?
Isn't it the same short sighted government and business leaders who created this mess now promising the fix?
What kind of a moron believes housing prices can never retreat? In 2003-2004 I heard it again and again. Housing prices are never going to go down. I asked, what if they do? To which people replied, That's never going to happen. How can seemingly intelligent people be so dense?
I'm flabbergasted by this entire crisis. After watching it all unfold, I will never underestimate the insanity of group think. It seems to have turned our best and brightest into brainless zombies.
It's a slippery slope for sure, but I don't buy the whole contracts are set in stone thing under unprecedented circumstances like these. We're going to be changing the contracts that homeowners entered into, so why is changing a golden parachute package seem out of line?
Especially since company executives should be operating with their shareholders' best interest, they could ease the pain on the company by foregoing some of these gross payments going out to upper management.
I think there should at least be some sort of performance scale applied to the existing contracts. If the company emerges from this mess successfully, sure, the executive should be entitled to whatever was agreed upon. But if they can't turn the ship around after the government buys billions of their bad debt, they should probably get a reduced amount.
Of course, this all comes down to more government intervention, which I'm not real fond of to begin with, but I do think more could have, and probably should have been done in this area in the interest of the public.
Contracts are contracts even if they are for excessive executive compensation. The real problem needs to be addressed with new contracts that must be more restrictive when they are written, not after the fact. If troubled corporations start breaking employee contracts where do you draw the line? Middle managers? Bank Tellers? Should all employees get the stiff arm and not get paid?