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Bailout: Reaching a Deal

by: Ron Haruni September 28, 2008    

Ron Haruni

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Capitol HillCongressional leaders and Treasury Secretary Henry Paulson emerged after hours of tense negotiations, just half hour after midnight on Sunday morning, to announce that a deal on the $700 billion bailout plan had finally been reached. Seemingly, all that remains to be done at this point is to commit the legislation to paper.

The bailout plan, which would authorize the Treasury to begin purchasing distressed debt securities from financial companies affected by the record number of home foreclosures, still needs to be drafted in its final form, but a formal announcement is expected to come some time Sunday.

Speaking before the media, the negotiators hesitated to provide specific details, but the plan is likely to include oversight, forbearance in terms of mortgage foreclosures, and limits on executive compensation for some firms, as well as give the government some authority to take equity stakes in firms that sell soured assets to the U.S. government. In addition, lawmakers may want Treasury to receive the $700 billion in tranches.

According to Wall Street Journal, the consensus so far is for the Treasury to receive $250 billion immediately from the total amount, and another $100 billion if needed as certified by the president. The remaining $350 billion would be subject to a Congressional vote. The WSJ also notes that a person familiar with the discussions said,

Treasury was pushing for a larger initial authority, likely around $500 billion.

Secretary Paulson and Federal Reserve Chairman Ben Bernanke have repeatedly stressed the importance of the rescue plan as a crucial element to revive lending and restore the flow of credit to the U.S. economy.

Congressional negotiators also said they consulted with outside experts including billionaire investor Warren Buffett “amid a focus on market reaction to the plan.”

 

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This article has 13 comments:

  •  
    Sep 28 11:38 AM
    The details are lacking. The NYTimes reported Sunday that Paulson had the nerve to demand that Congress forbid judicial review of his decision on use of the money in the bail out. He could be allocating trillions of the assets to his buddies at Goldman, etc. at discounted prices allowing them to make huge killings and no one should object. The Times also points out that Goldman officials were sitting in on the decisions about AIG and Fannie and Freddie, when they had 20 + billions at stake on the decisions. Who else from the club was present at these meetings? Certainly not any represents of the common folks. Who is getting hurt most from this bail out and fall out? The common folk. Has anyone even suggested that the culprits at AIG, Fannie, Freddie, Lehman, Goldman be indicted for this debacle. No one in authority, but the poor slob who caused a few errant mortgage loans to be made is quickly indicted and shown off as the culprit. The greates lie of all is that sub-prime mortgages caused the financial problems, when now it is exposed that the CDO's and the swaps were overwhelmingly more involved (by trillions). Hopefully the media will get this right at last and the perception for the public corrected. The facts have still to out and the bail plan will show many surprises that no on but the insiders have contemplated.
    Reply
  •  
    Sep 28 11:50 AM
    do you think its still good to buy aig for short term
    Reply
  •  
    Sep 28 11:56 AM
    It seems to me that everyone is missing something here. We're bailing out a bunch of executives who got greedy and persuaded a whole lot of working people to do something that they shouldn't have done. I think that the simple solution to this whole mess has to do with adjustable rate mortgages, which is what everyone was persuaded to take when purchasing a home. Buyers were told that they could save money, and that they would be able to refinance if the rates were going to go up at reset time.
    People in general were paying their mortgages and everything was fine until their rate reset and then everything started spiraling down from there.
    The solution would seem to stem from what started it all, and that would be to stop the mortgage rates from resetting. They could even possibly reset at a modest amount, say 1/4pt and gradually move up annualy as peoples income increased. I realize that this solution would cause a lot of financial institutions to lose some of their future profits but it wouldn't sink them. It would stop the new foreclosures, because most people would continue living in their homes and paying their current mortgage. The government wouldn't have to buy subprime mortgages, or bail out companies holding them as they would be performing loans once again.
    I know that this simplistic, but in fixing a problem you don't start at the top and work down, which is what everyone is doing in this bailout, you start at the cause (the bottom) and fix it and everything else will work itself out.
    Reply
  •  
    Sep 28 12:07 PM
    young retired guy - that approach has been in the back of my mind for awhile, thanks for putting it out there. The probable reason it isn't being implemented is that it is too simple and doesn't involve making or losing gobs of money.
    Maybe what's going on is a nifty little combo pack based on charles hopfl's post - get some big bucks to GS, MS, BAC et al to manage this charade, give the downward spiraling instruments an artificial floor, and stop having to mark everything to a declining market. Paulson may be a really good and sharp guy, but the leopard doesn't change its spots. He's got to see this as a great opportunity to make some serious bucks especially with a giant checkbook. I only hope he's making it for the taxpayers who are putting up the money.
    Reply
  •  
    Sep 28 12:11 PM
    When people have no jobs to pay for their mortgages, naturally, the next step is going to involve foreclosure. Why don't we then recognize outsourcing, instead of housing, as the root cause of the current mess? I guess its because no tax payer would want to bail out the greedy companies that outsourced their jobs. Housing is a much easier scapegoat that the taxpayers may give into. So, instead of pointing out the real root cause, a politically correct root cause is found that we can all relate to.
    Reply
  •  
    Sep 28 12:16 PM
    If this deal involves the Govt. buying subprime or Alt-A paper, it is sheer stupidity. The taxpayers should "Un-elect" any legislator who votes for it. A purchase of senior tranches might work, but not lower priority "stuff." In essence, if it is garbage in the hands of present holders, it is garbage in taxpayers hands. But, senior tranches may be a legit opportunity to help.
    Reply
  •  
    Sep 28 01:57 PM
    Putting Paulson and his buddies in charge of this fund is like handing the bank robber the keys to the vault.
    Reply
  •  
    Sep 28 02:52 PM
    tunnelguy... I think the robbers already have the keys... Last I heard all bankers have keys to their own banks.... I think a better analogy would be Paulson as the guy that hangs around bus-stations looking to hustle sweet young things for the local pimps..

    Interesting isn't it that only last year lawyers were the pariahs of our society... Maybe 'bank' is the new 4 letter word... "You... you ... you BANKER!"... If you can't laugh, you'll just cry...

    jegan ;-)
    Reply
  •  
    Sep 28 02:56 PM
    To small. To late. Not Creative. Ignores the real need, regulation. Puts off collapse for the moment. May provide an opportunity to sell into the market.
    Reply
  •  
    Sep 28 04:04 PM
    We need this plan and we need it now. To think we don't is being very short sighted. The little guy is the one that benefits most from this bill. Oh, you think it is the mega-rich? Who do you think will be picking up these assets for pennies on the dollar after many of the little people have lost their homes and their jobs. Without this bill we risk any form of wealth in this country being redistributed to a wealthy collection of mostly foreign investors.

    Maybe the assets of our banks will end up in the hands of those with links to Russian Oligarchs bought for a few pennies on the dollar? Look around you and look where the money is. So, what did we accomplish? We screwed the middle class, we expanded the lower class, and we upped the ante to join in the upper class.

    You that think this bailout is un-American?...maybe unneeded in a free market? - you really need to look at the problem with more of an open mind.

    Write your Congressman? I would bet that most here on theses boards saw the excesses and potential issues 2-3 years ago. I know I was writing about them in 2002. Why no calls complain about how things were too good - too good to be true before this mess blew up?

    Greenspan said this in September of 2002;

    "An example more immediate to current regulatory concerns is the issue of regulation and disclosure in the over-the-counter derivatives market. By design, this market, presumed to involve dealings among sophisticated professionals, has been largely exempt from government regulation. In part, this exemption reflects the view that professionals do not require the investor protections commonly afforded to markets in which retail investors participate. But regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets.

    All participants in competitive markets seek innovations that yield above-normal returns. In generally efficient markets, few find such profits. But those that do exploit such discoveries earn an abnormal return for doing so. In the process, they improve market efficiency by providing services not previously available.

    He also said this in the same speech;
    "No one can deny that fully informed market participants will generate the most efficient pricing of resources and the most efficient allocation of capital. Moreover, it could be argued that, if all information held by individual buyers or sellers became available to all participants, the pricing structure would more closely reflect the underlying balance of supply and demand. Thus full information would appear to be the unambiguous objective. But should it be?"

    He argues against a well informed market and regulations that would make it more informed. Where was the outrage then?

    I pray this bailout gets passed. It will save jobs, keep many in their homes, and especially guard against even more foreign financial influence in our great Country. We screwed up and must fix it now before we see even more harm to our economy and financial well being.

    Joe Eifrid
    Reply
  •  
    Sep 28 09:49 PM
    It is not possible to examine all the ramifications of the plan and pass judgement. However I would reiterate a few principles which perhaps are in dispute. There is sure to be some regulation which will give rise to voices touting laisser-faire. Regulation must be applied judiciously. Jimmy Carter deregulated the trucking industry, but that did not prevent regulating truck drivers. Often this took the form of safety rules that resulted in unsafe conditions. A culture of government sponsored greed has developed. Everyone needs to step back and contemplate seriously what can be done to improve American society in general, not just the economy.
    Reply
  •  
    Sep 29 03:25 AM
    Huge budget deficit and external trade deficit, and Americans are paying out for this mess = the U.S is already on the hook for recession.
    Reply
  •  
    Sep 29 05:25 PM
    Just heard this bill was defeated?
    Reply
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