Lawmakers of both parties emerged a little while ago to say they’d agreed on the principles of the mortgage bailout deal. What are those principles? Here’s the NY Times version (the WSJ’s was similar):
They said the bill would authorize the full $700 billion requested by President Bush, but that Congress was intent on disbursing the money in installments.
They also said that there would be limits on pay packages for executives whose firms seek assistance from the government and a mechanism for the government to be given an equity stake in some firms so that taxpayers have a chance to profit if the companies prosper in the months and years ahead.
Note that Treasury Secretary Hank Paulson, in hearings Tuesday and Wednesday, was adamantly opposed to both pay limits and a requirement that the government take equity stakes in the firms that sell assets to Treasury. Both measures would defeat the purpose of the plan because they would discourage all but the most troubled financial institutions from participating, he argued. One nice quote, from Tuesday’s hearing: “Putting capital into institutions is about failure. This is about success.”
So either (a) Paulson caved in, and his fund is going to be a much different kind of enterprise than he and Fed Chairman Ben Bernanke originally proposed or (b) the language of the bill is going to give Treasury flexibility on deciding who gets stuck with pay limits and partial government ownership, meaning Congress will have effectively caved in. Either that or the news that’s leaked out so far about the bill is wrong.
This distinction seems like a big deal because Paulson’s original proposal was for a fund that could jump in quickly and begin buying large quantities of mortgage-backed and other securities from all different kinds of financial institutions. It was supposed to create a market where right now there isn’t much of one. If the legislation requires Treasury to take an equity stake and impose pay constraints, it would be a different sort of enterprise, aimed mainly at shoring up the most troubled institutions. If it doesn’t require it, but allows Treasury to decide who gets the pay cuts and the equity cramdowns, then Paulson will be getting more or less what he asked for, plus some new powers that he didn’t even request.
We’ll know when we see the bill.
Update: Agreement? Dick Shelby has seen no agreement. From Reuters:
“I can tell you I don’t believe we have an agreement,” the Alabama Republican told reporters after the meeting which included U.S. President George W. Bush, Democratic and Republican House and Senate leaders as well as the two presidential candidates Sens. John McCain and Barack Obama.