What Is Actually Included In the Bailout Legislation?
MYM Series: Wall Street Bailout Explanation 3 of 4
As you have probably heard, the U.S. Senate passed an amended version of the bailout package late on Wednesday, October 2. Mainly, changes were made to the bill in order to garner enough Republican votes in the House, where a similar package was shot down earlier in the week. If the Senate’s vote gives us any indication as to how the House of Representatives will vote, then the chances are good because the Senate overwhelmingly passed the measure 74-25. Both Senator Obama (D-IL) and Senator McCain (R-AZ) voted yes. [UPDATE: Today 10/3/2008, the House of Representatives passed the Senate measure 263-171.]
So what exactly is in the Emergency Economic Stabilization Act of 2008? The answer is a lot. When the core draft of the legislation was created by Secretary Paulson, the bill was very short three-page proposal. After negotiations and a failed House vote, the bill is now 451 pages. (The text of the bill can be accessed by clicking here.) Because of the complex nature and length of the bill, below I have outlined the highlights along with what I feel are the positive and negatives of certain provisions.
Outline of the Emergency Economic Stabilization Act of 2008
- Authority to Buy - Gives the U.S. Treasury Department the authority to purchase and eventually sell bad assets (mostly mortgage-backed securities). If the securities end up going up in value, the Treasury would then deposit the proceeds into the Treasury’s general fund, thus giving the taxpayers a gain.
- Money is Allocated to Treasury in Chunks - Although the $700 billion dollar amount was agreed to, it was in my opinion allocated somewhat responsible way by making the Treasury Department get Congressional approval for more money and makes them report to Congress on the effectiveness of their plan. Immediately, the Treasury Department will receive $250 billion and would then receive another $100 billion after issuing a report to Congress. The Remaining $350 billion would need Congressional approval.
- Treasury Can Purchase Non Mortgage Related Securities - The Treasury Department is allowed a little freedom in the types of assets it can purchase. Most of the assets, of course, will be mortgage related, but this provision allows them to purchase various products. I understand the motive for this provision, because in theory, if troubled banks need to get additional capital but cannot sell certain illiquid securities, the Treasury will help out. However, this essentially allows the Treasury to buy assets like student loans and credit card debt off the books of financial institutions, both should not be allowed. One question I have with this provision is can the Treasury buy securities from a struggling pension fund that was invested highly in mortgage-backed securities? If this is the case, then if a local government’s pension was heavily invested in bad mortgages, which would result in teachers, firefighters, and city workers losing their retirement money; perhaps this provision would add a little protection to them if not by ultimately leveling out the housing market.
- Keep People in their Homes - The bill directs the Treasury to encourage homeowners facing foreclosure to take advantage of existing programs like the HOPE Homeowners Program under the National Housing Act in order to minimize foreclosures. In my opinion, this bill does not go far enough to help people stay in their homes. It’s hard to justify $700 billion for Wall Street when we just direct those losing their homes to existing programs.
- Executive Compensation - Interestingly, this bill would cap tax deductions for executive compensation and bonuses at $500,000 to make sure bad CEO’s do not get to cash out when they run a company in the ground. In addition, this provision would not allow companies to give “golden parachutes” to their underperforming executives if the Government has completely taken over the company. I like this provision because it doesn’t allow failing CEO’s to make millions, but it’s limited so that government doesn’t play a role in the executive compensation of other business it has no hand in, this is important.
- Oversight - The bill has a couple of different oversight measures, which is extremely important considering the magnitude of the sum of money. (Sec. Paulson’s original draft did not include any oversight, essentially giving the Treasury a blank check with no limits or checks). Included forms of oversight are: GAO studies (non –partisan), an inspector general (most government agencies have an inspector general), a Congressional oversight panel, and a board made up by our Government leaders (SEC, Fed, Treasury, HUD, and FHFA).
- FDIC Insurance - The bill temporarily raises the Federal Deposit Insurance Corp.’s deposit insurance coverage from $100,000 to $250,000. The reworked plan also would give the FDIC an unlimited credit line from Treasury. This is a good thing, but after the temporary level is lowered again, customers must look for other accounts to ensure their money is insured (The FDIC insures your money in bank accounts up to $100,000, but if you are rich, you can open multiple accounts at $100,000 to insure all of your money). [Ben edit- And isn't this only going to be in place for 1 year? What happens afterwards?]
And what about you, dear reader, what do you think about this bailout? Does this work for you? Or does it further cripple our economy? $
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Comments
Honestly…what does it matter what is in the legislation… seems we are doomed if do ..and doomed if we dont… all week the forum and chats on myinvestorsplace.com were buzzing with everyones opinion… but the bottom line is that …what is the common person suppose to do… I would like to hear input or suggestions…
@ Andrew - You make a good point. What seems to get lost in the bailout talks is the average consumer. Unfortunately, nothing in the package is directly drafted at the everyday investor, but the principle of the entire package is to protect them. The common person really has to take a financial gut check for the next few years. It’s time to start living within our means, create a savings, try to get out of debt–all are things we should have been doing anyways. All of these suggestions take time, but making money takes time.
It’s no wonder we’re confused. The net benefit of this “bailout” seems to be easier access to credit again. Yet the main point made to prevent this from happening again, is to quit using credit. And why increase the FDIC to $250K to make this more palatable to us peons. I can tell you right now, the vast majority of my friends are no where near $25K in the bank, let alone $250K. And how does this even come close to help all those greedy folks whose mortgages are failing now - where does the value of that property go when the government takes it over? The way I see it, I’ll be not only paying for my within my means mortgage, but through my taxes will also be paying for many others.
@ Jim, My guess is that property values, although not right away, will experience a bump from the bailout legislation because the Government will be pumping money into the housing sector. This will free up banks to offer loans, which in turn could give them more flexibility to work with struggling homeowners to refinance their existing mortgages in addition to offering mortgages to potential homeowners. However, foreclosures will still happen for awhile and I’m guessing will slow the housing recovery. My fear is that if we experience a housing bump quickly, it would be phantom confidence in the markets that causes the uptick in prices. Then when the Government decides to unload some of these mortgage-backed securities they could cause the housing prices to fluctuate back down again because of the shock of excessive mortgage related securities on the market.
I have a paper on the bailout plan. I would like to use some info. from this, but Frank who are you exactly? Are you creditable? Did you get this info from a site and if so, what’s the source? My email is kobe1shaq1@aol.com.
Im glad they passed this bill, because we would be waiting around 5 – 10 years before the economy fixed its self. I strongly agree with the “HOPE Homeowners” chapter.
I was reading the financial news at (www.finance-maker.com) and they had an article of what would have happened if the bail out didn’t happen, its very intrusting.
Link below.
http://www.finance-maker.com/no-us-government-bail-out/
nice post keep up the good work