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September 28, 2008

Bailout Details

More information on the compromise bailout "intervention" is coming out now. Congressman Roy Blunt provided a comparison of the new bill to the Paulson proposal and the Dodd proposal. Just ignore the editorializing.

To summarize, Paulson wanted Treasury to buy mortgage-backed securities without Congressional oversight and to protect Treasury decisions from judicial review.

Dodd wanted Treasury to buy mortgage-backed securities, other non-mortgage-related assets (including pension plans), and contingent shares of financial institutions. He also wanted Congressional oversight of the new Treasury program with judicial review. He also wanted to tack on provisions allowing bankruptcy judges to rewrite mortgages to protect defaulting homeowners. He also wanted to funnel money to housing programs. And he wanted to cap executive compensation.

So in the compromise bill Treasury gets the power to buy mortgage-backed securities, other non-mortgage-related assets, and contingent shares. Congress will have oversight and there will be judicial review. Bankruptcy judges won't get to rewrite mortgages, but there will be a separate program allowing the government to purchase failing mortgages and rewrite them to give defaulting homeowners better terms. Executive compensation will be capped. And we're adding a "pay to play" insurance program.

If we have to do something, this bill is certainly sounds better than the other proposals. But the inclusion of non-mortgage-related assets is a problem. The point of the bailout is to give banks a second chance on their poor investment in these mortgage-backed securities. Why open the door to all these other assets? We are just giving institutions a free pass on all their poor investment strategies.

Congress wants to style this as an "intervention", not a bailout. Bullshit semantics.

MORE: We won't know until we see the actual bill, but I'm curious what Congress plans to do with the non-mortgage-related assets. Are those going to be auctioned back into the market? Presumably, only the opaque mortgage-backed securities need to be scrubbed and then properly valued. So why the need to buy other assets? What do those assets have to do with the "credit logjam" that precipitated the bailout.

I also want to know what Congress plans to do with the equity warrants, should Treasury use them. Under the terms of the AIG bailout, the government owns owns and controls the 79.9% of company.

So.... I take back what I said about the Fed not actually owning AIG. It does. And it will, because there is no provision for the redemption of the preferred shares if the loan is paid back.

Is that the future of all the financial institutions which participate in the bailout?


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posted by Gabriel Malor at 01:34 PM

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