The draft of the Emergency Economic Stabilization Act of 2008, known among certain Republican leaders as a “crap sandwich,” is out. All 106 pages of it. I just read through it really really quickly, and my main takeaway is that was that it seems to require that Treasury take stock warrants (or senior debt if no equity is available) in exchange for buying junky securities from a financial institution, except for a few small exceptions outlined below. But it doesn’t say anything about how much of a stake Treasury is supposed to take.
Anyway, here are some highlights, in the order that I stumbled across them:
1) There’s a mortgage insurance program, as pushed by House Republicans, but it’s completely at the discretion of the Treasury Secretary. Institutions can ask for insurance, Treasury “may” grant it. Verdict: Not gonna happen, at least not much.
2) There’s an oversight board, which consists of the Fed chairman, the Treasury Secretary, the SEC chairman, the director of the Federal Housing Finance Agency (it’s listed in the bill as the “Federal Home Finance Agency”; here’s hoping they fix that), and the HUD secretary. Update: Yay, they did fix the “Federal Home Finance Agency” error before actually introducing the bill today!
3) Treasury has to turn in a report by next April 30 recommending how financial regulation oughtta be revamped. I’d say whoever gets elected in November ought to get a task force working on that pronto.
4) 20% of any profits realized on the sale of assets go into the Housing Trust Fund and the Capital Magnet Fund
5) Treasury is encouraged to encourage servicers of the loans it buys to do workouts (that is, to change the terms of the loans to avert foreclosures).
6) If the Treasury Secretary buys securities directly from an institution and takes a “meaningful equity position,” he must follow certain standards for executive compensation and corporate governance. Limit pay, ban golden parachutes, include clawback provisions in new contracts.
7) If the Secretary buys more than $300 million from any institution (that is, even if it was in an auction, and even if he hasn’t taken a meaningful equity stake), he has to prohibit golden parachutes for any top executive hired after the purchase.
8) The Secretary must receive warrants or senior debt in return for purchases of troubled securities–unless the assets of the financial institution are $500 million or less, transactions with the institution add up to $100 million or less, or the institution is legally prohibited from issuing securities and debt instruments.
9) The authority starts at $250 billion. A written certification from the president gets it up to $350 billion. The president can then ask to jack it up to $700 billion, and if Congress doesn’t like the idea it has 10 business days to pass a resolution stopping it. Also, it appears that Congress could at any time pass a joint resolution increasing the limit past $700 billion.
11) The SEC is given permission to suspend mark-to-market accounting if it wants to. (I’m pretty sure the SEC doesn’t need Congressional permission to do that.)
12) Banks stuck with loads of now-almost-worthless Fannie and Freddie preferred shares can sell them and deduct the losses from ordinary income.
13) An earlier decision to exempt mortgage-debt forgiveness from income taxes is extended from 2010 to 2013.
So there you have it. I think you’d have to say Paulson got a lot of what he wanted, but seems to have given ground on equity stakes and, to a lesser extent, on executive pay. Whether this will turn out to be just an asset purchase program or a recapitalization of the banking system with the government taking big stakes in lots of financial institutions appears to be mostly up to the Treasury secretary.
Update: Sorry, missed one. It was near the end:
14) If after five years the Troubled Asset Relief Program (the name for the fund) is still in the red, the president has to submit a proposal for recouping the shortfall from the financial institutions that benefited from the program. This provision was apparently a big deal for Nancy Pelosi, but it doesn’t actually do anything–Congress would have to pass new legislation to make anything happen on this front.
Update 2: Steve Randy Waldman notes that the bill also allows the Federal Reserve to start paying interest on the reserves member banks hold with it. This was already supposed to happen starting in 2011. Now it is, if the bill passes, moved up to this Wednesday. He’s also got a lot more detailed analysis of the bill than I do here, although his verdict is pretty similar to mine: Paulson got what he wanted.
Update 3: The version on Nancy Pelosi’s site (mine was from House Financial Services) is 110 pages. I couldn’t detect any big differences in a very cursory look-through. And I’m too tired for more than a cursory look-through.
Update 4: A reader wants me to point out that the bill explicitly permits Treasury to buy securities from foreign financial institutions, including central banks. Indeed it does.