Much did not make it into compromise Bail Out Bill

Click Here For The Draft Of The Bailout

The draft Bail Out Law appears to have what was stated in the media – sort of – as its provisions for the troubled assets relief program (“TARP”), and as to its other provisions.

There is a FDIC type insurance program that “may” be developed, where the Secretary may determine by category or class the troubled assets to be guaranteed and the premium associated with that class – with the methodology for setting the premium for a class and a discussion of the appropriateness of the class of assets for participation made available to the public, and with the premiums set at a level to create reserves sufficient to meet anticipated claims, based on an actuarial analysis.

There is a Financial Stability Oversight Board, which shall be responsible for reviewing the exercise of authority making recommendations, as appropriate, reporting any suspected fraud, and with authority to ensure that the policies implemented by the Secretary are— (1) in accordance with the purposes of this Act; (2) in the economic interests of the United States; and (3) consistent with protecting taxpayers, in accordance – in other words it can over-rule the Secretary.

Of course, the Secretary shall have authority to manage troubled assets purchased under this Act, and sell – at a price determined by the Secretary, sell those assets purchased under the Act.

There is a FORECLOSURE MITIGATION authorization to the Secretary saying he SHALL implement a plan and MAY use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures (Hillary Clinton’s idea that she has been pushing for a few years). The Secretary SHALL consent to reasonable requests for loss mitigation measures,including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications. To the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Federal property manager shall implement a plan that seeks to maximize assistance for homeowners and use its authority to encourage the servicers of the underlying mortgages to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.

To the extent that FOREIGN financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase the Bill.

EXECUTIVE COMPENSATION LIMITS sort of apply to ANY financial
institution that sells troubled assets to the Secretary under
this Act and they will be in effect as long as the Secretary
holds an equity or debt position in the financial institution.
But they only apply to the top five persons as disclosed in
filings under current SEC rules, and then they only apply if
the auction purchases have transferred $300 million of assets
to the Secretary from that financial institution. The only
restriction is that those five may not get any “golden parachute”,
but the Secretary can demand their compensation be limited to
“appropriate standards for executive compensation and corporate
governance” for any “new” contract.  That $400,000 salary limit
did not last long.

AUCTION PURCHASES are not required, nor is the process of asset acquisition detailed – except that the Secretary is to seek minimization of long term cost and maximum benefit to taxpayers – where “maximum benefit” can mean over paying for assets so as to get credit flowing more quickly – so it is a bit of a con-job. However, the Secretary is to – where appropriate -USE MARKET MECHANISMS like buy at lowest prices, and use market mechanisms like auctions or reverse auctions. A bit of trust is involved here.

We can pretend that a financial institution is OK by using assets values that are higher than current market values as MARK TO MARKET accounting can be changed by the SEC as needed to give the illusion – if doing so is a good idea, I guess.

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