RSSKey Provisions of the $700 Billion Bailout Unveiled
By John C. Lee | September 29, 2008 | 12:47 PM | 0 Comments
It’s about time! On Sunday, Congress and the White House reached a tentative deal (still needing to be voted on) on the $700 billion bailout. To remind you of the times that we are living in, this bailout is the largest financial bailout in U.S. history. You will never forget this time in our financial history. The plan could provide $250 billion immediately, $100 billion if the president saw it necessary, and the last $350 billion subject to Congressional approval. This means that the full $700 billion may not come for a very long time and both the President and Congress may disapprove of the additional funding. In my opinion, Congress fully understands the implications of putting $700 billion in taxpayer’s funds at risk; therefore, the full amount will not be risked.
Still, $700 billion will not stall the inevitable recession we are about to face. Unemployment is projected to hit 7.5% by the end of 2009, housing prices have yet to stop declining (the root of the MBS/CDO problem), and consumer spending is further restricting. I view this as a compromise between furious taxpayers on Main Street who do not wish for a Wall Street bailout and the Federal Reserve and Treasury’s repeated warnings of “total failure” if action did not occur. A recession, or if you don’t believe we are in a recession – the stock market, cannot be “forced” to improve. This is a natural part of the business (market) cycle. The excesses of our incompetence and the last traces of hubris must be eliminated prior to making a full recovery. That is the nature of any market cycle.
Here are the key provisions of the bill:
• The bill would be disbursed in stages. The authority to use the money will expire on December 31, 2009.
• The assets would be bought at “market value”. I have a hard time believing this as market value for the most toxic real estate assets still cannot be determined. Taxpayers may breakeven or make a profit if the assets appreciate (housing prices must improve for that to happen). If the government overpays for the assets, resulting in a net loss, they may be able to recover the majority of the principal on the open market once they sell the securities.
• If a net loss is evident, the bill requires that the financial industry make up the difference. This will be determined in 5-years, after the bill is enacted.
• The Treasury will have the right to take ownership stakes in participating companies. The firms willing to participate are still to be determined. I and a friend on Wall Street (SB) believe that many of the financial firms will not need to want to participate in this program. Well-capitalized firms have little inceptive to participate.
• The government may purchase non-performing assets directly from banks, giving the government more flexibility in modifying the terms of the loans.
• The Financial Stability Oversight Board (FSOB)and a congressional oversight panel will be established to oversee the program. The FSOB will include the Federal Reserve Chairman, SEC Chairman, FHA Agency Director, HUD Secretary, and the Treasury Secretary. The congressional oversight panel will consist of 5 outside experts appointed by the House and Senate.
• The treasury will establish an insurance program to insure against losses. The risk-based premiums will be paid by the financial industry. This includes MBS’s purchased before March 14, 2008.
The House is expected to vote today and the Senate is expected to vote later this week, or as early as Tuesday.
You and I will patiently wait. If you don’t watch CNBC, this week will be a good time to turn on the tube.
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