A Quick Look at the Bailout Draft

With the upcoming expected passage of the bailout, I noticed that the draft text was online so I decided to take a look. There's some thoughtful provisions that the first bailout plan was lacking, such as an attempt to prevent financial institutions from making an actual profit with plenty of loopholes so they don't look terribly effective.

Unjust Enrichment

Consider this first attempt to prevent the companies helped, from actually getting a little ‘too much help':

PREVENTINGUNJUSTENRICHMENT.—In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent un-just enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.

So the Treasury Secretary can't buy up troubled assets for more than the seller bought them at (who knows how little they're really worth), unless the assets were acquired in a merger or acquisition. Now, just think about how massive that loophole is… given how many of these financial institutions have been buying each other up. I really hope they don't pay anywhere near full price for these assets, as they've dropped in value significantly since they were issued… and this attempt to stop them from overpaying for them seems rather half-hearted.

Transparency and Review

Unlike the original bill the Treasury wanted, this one sets up a oversight board responsible for reviewing the actions of the Secretary and ensuring there's compliance with the rest of the act. The oversight board then has to report back to the Congressional Oversight Panel (they sure do love panels and boards). Reports covering purchases and justifications need to be sent to the Congressional Oversight Panel everytime the Treasury uses $50 billion dollars.

Not too shabby on oversight…. I wonder if the report will be put online so the people can see where their money is going?

Attempting to Reign in the foreclosures

A decent chunk of the bill includes provisions attempting to keep people in their homes, rather than foreclosing. This makes a hell of a lot of sense to me, as the more foreclosures that occur, more and more bailouts will be needed.

One of these bits allows for loan modifications of the mortgage:

(2) MODIFICATIONS.—In the case of a residential mortgage loan, modifications made under paragraph (1) may include: A) reduction in interest rates; B) reduction of loan principal; and C) other similar modifications.

Curbing executive compensation

I was actually surprised that lawmakers would do anything to offend the executives at these companies, who shell out so much money to lobbyists that inevitably comes back to the lawmakers, so I'm eying this section with skepticism as I'm sure there's more than a few loopholes.

The standards required under this subsection shall be effective for the duration of the period that the Secretary holds an equity or debt position in the financial institution.

I'm curious how easy it is for the Treasury to buy troubled assets, and try and get out of a position that qualifies in this case…

Ah, and here's one rather interesting limitation of the executive compensation, apparently it has nothing to do with how many millions the executive makes, but merely the top 5 executives for a company:

(3) DEFINITION.—For purposes of this section, the term ‘‘senior executive officer'' means an individual who is one of the top 5 executives of a public company, whose compensated is required to be disclosed pursuant to the Securities Exchange Act of 1934, and any regulations issued thereunder, and non-public company counterparts.

I really don't understand why they stopped at the top 5. How about restricting any executive (VP, Senior VP, Partner, etc) from getting those crazy incentives? Why not put a cap on everyone in the company on payment, the fairly reasonable one that they can't make more than the top paid US Govt official (currently the President, at $400k/yr)?

The good news is that it does reign in some of the crazy executive perks to an extent, like the golden parachutes, and millions of bonuses. CNN reported that in the past few years, executive compensation has gone up 20%, while earnings for the companies went up 3%. Odd how the rest of the employee's don't see 20% raises….

The limits are also a little odd, it says that while the Treasury holds assets of the company, they will be in effect:

(A) limits on compensation that exclude incentives for executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution during the period that the Secretary holds an equity or debt position in the financial institution;

That's great and all…. but I'm having trouble finding anywhere defining what these limits actually are.

More Transparency (Section 114)

Ah ha, a mere 39 pages in, a bit more on transparency. The Secretary has to make available to the public, in electronic form, full descriptions, amounts, and pricing of assets that are being bought, within 2 business days of the purchase.

If only the executive branch was a bit more transparent…. :)

How much is it really??

The first chunk of money the Treasury gets to spend, is $250 billion. Later, when its running low supposedly, the President can send a written certification to the Congress that it needs more, and the limit on outstanding money can be raised to $350 billion outstanding. After that, the Pres can write in again, and the amount can be raised to a limit of $700 billion outstanding. So in effect, its a $700 billion bail-out built without any actual data as to whether thats what it will take.

The remaining 30 pages is mainly details on which positions shall oversee who, how often, who's part of them, etc. Nothing terribly exciting stands out here, nor did I find any explanation of exactly what limits on executive compensation are being applied. Was it just golden parachutes and bonuses?

CNN took a look, and apparently came to a similar conclusion in their reading that the companies aren't allowed to write new ‘golden parachutes' for their top 5 executives…. but the current contracts which may include golden parachutes are just dandy.

They also indicate that the companies will not be able to deduct the salary they pay to executives above $500k. Errr, “deduct the salary”? Not sure what that means, hopefully it means that they're capped at $500k, but its hard to tell.

It still sucks

Overall, I'm still not happy with it. Nor are all these folks, who happen to be economists. There's some good points in that letter as well:

In addition to the moral hazard inherent in the proposal, the plan makes it difficult to move resources to more highly valued uses. Successful firms that may have been in a position to acquire troubled firms would no longer have a market advantage allowing them to do so; instead, entities that were struggling would now be shored up and competing on equal footing with their more efficient competitors.

This bail out bill is definitely better than the prior one, but I think its still a waste of my taxpayer money. There's zero guarantee it will work, zero guarantee the money will ever come back, and zero guarantee this will be the last bail-out of this magnitude we come across. While the bill has some measures to try and decrease foreclosures, most in the housing industry still believe the worst is yet to come

“We've been saying that the foreclosure trend has not yet peaked,” said Doug Robinson, a spokesman for the foreclosure prevention organization NeighborWorks America. “Before it was a subprime problem,” he said. “Now, it's everybody's problem.”

Ouch. So this bail-out only helps a few companies deal with the current problem. I really don't want to know what will the Treasury ask the taxpayer to do next to stop the companies that hold the upcoming foreclosures from going bankrupt.