Breaking Down the Bailout

As of this afternoon, the

"Congressional Republicans and Democrats came to an agreement on principles for the Treasury's Troubled Asset Relief Program that they will take into final negotiations with the White House." -Phil Izzo

The following is a breakdown of the "Agreement on Principles" for the "Treasury's Troubled Asset Relief Program" (aka... the bailout of the United Stated Economy) as well as my 2 cents...

Note: The details of this bailout plan can, and most likely will, change before all is said and done. I will provide updates as those changes are made.

Q: What is being done to protect taxpayers?

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

c. Requires most profits to be used to reduce the national debt

A: In regards to executive compensation, WAY too much energy has been put into this discussion. A $50 million golden parachute is about half a day’s interest on $700 billion. Can’t we just pay these people to get them out of the way, rather than have them in the center of trying to fix the things that they screwed up in the first place?

Equity sharing will add an additional layer of protection to American taxpayers and give them more assurance of actually getting the $700 billion back. As for reducing the national debt with any profits from this venture, that seems a little like a black hole. If profits were redistributed in the form of tax breaks, that would boost consumer spending, and ultimately the economy. But hey, what do I know?

Q: Who will be monitoring this process? Not that we don’t trust our own Government…

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

b. Establishes strong oversight board with cease and desist authority

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

A: This is a biggie. Oversight is very much necessary. However, as is so often the case, this could also slow the process of things down significantly. Still, it is a price that must be paid given what is at stake.

Q: Will this help the people that were “victimized” by mortgage companies?

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs

A: First off, many of these people are hardly victims. If anything, they are victims of their own stupidity. That aside, preservation of homeownership will be a key factor in the return to a healthy U.S. economy. One way to do that would be to allow judges to change the terms of mortgages. Beyond that, I'm not quite sure what could, or should be done here.

Q: How much money are we spending here?

4. Funding Authority

a. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval

A: Congress is, somewhat understandably, trying to tip-toe into this. The $100 billion check upon “certification” might have well already been cashed.

As for the second half of the $700 billion bailout, Congress wants the power to pull the plug if things don’t quite work out. Realistically speaking, this check is already cashed also. Members of congress are just hoping that they won’t have to be the ones directly responsible for cashing it.

It will be interesting to see what the initial market reaction will be to the tip-toe funding plan that has been agreed upon (in principle) by Congress. The markets have been in somewhat of a holding pattern this week awaiting the details of the bailout. I suspect that the response will be positive, followed by a period in which everyone stops for a second, looks around, and says “wait… do we even know that this will pass?” At which point we will probably resume the holding pattern until this gets past the house.

-dunkie