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.