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Bailout Battle

September 23, 2008 - by Donny Shaw

The focus in Congress right now is on passing some version of a massive, taxpayer-funded bailout of the financial sector as quickly as possible. In the past few days, several draft versions of different bailout plans have been passed around Capitol Hill, but two in particular have taken hold as lead competing proposals from which a compromise is likely to ensue.

Luckily for us, we don’t have to wait until all the back-room dealing is over and a bill is officially introduced to see what kind of a bailout is being considered by the government. The Sunlight Foundation has posted both of the leading drafts, Treasury Secretary Henry Paulson’s bailout draft and Senate Banking Committee Chairman Chris Dodd’s bailout draft, to PublicMarkup.org for review and comment by the public.

Both draft bills already have hundreds of illuminating comments from the public. The PublicMarkup site lets people comment on specific provisions so they can really pick apart small bits of language and detail in the bills, or on the overall proposals so that people can give their general reaction to the plans. Go there and check it out. Here’s some basic background on the proposals:

The Paulson Plan

The bailout proposal from the Bush administration, submitted by Paulson, would give the Treasury Secretary broad new power to purchase up to $700 billion in mortgage-related assets at any given time from any financial institution that is based in the United States. It’s a short and simple proposal that would leave many of the decisions that will ultimately determine whether or not the bailout succeeds up to the Administration.

The draft language authorizes the Treasury “to take such actions as the Secretary deems necessary to carry out the authorities in this Act, without limitation.” And it explicitly states that “decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

The Dodd Plan

Congress’ alternative proposal, submitted by Senator Dodd (D-CT), sets the same $700 billion limit on troubled asset purchases by the government, but makes several significant changes to the Bush administration’s plan.

First and foremost, Dodd’s bill would restrict the Treasury from purchasing any troubled assets unless the government is guaranteed shares of the companies in case the price of the purchased assets falls. The draft text states that the Secretary must receive “contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased.” Under Dodd’s bill, the Treasury would be authorized to purchase troubled assets from foreign companies as well as companies in the U.S.

Additionally, the bill would limit the pay of executives at any firm that sells assets to the government under the bailout program. The bill directs the Treasury to “exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive” and to include “a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate.” Other changes to the administration’s proposal include the creation of an oversight board comprised of government and non-government officials, new authority for bankruptcy judges to restructure mortgages for homeowners facing foreclosure, and a president-appointed inspector general to oversee the entire bailout operation.

Other Plans on the Hill

Several other proposals have been floated by members of Congress. Rep. Brad Sherman (D-CA), a member of the House Financial Services Committee, has a proposal that is similar to Dodd’s in may ways, but adds an economic stimulus. Senator Bernie Sanders (I-VT) has a proposal that is designed to protect the middle class from the cost of the bailout. It includes the same equity provision as Dodd’s bill, but adds a 10 percent surtax on the income of individuals above $500,000 a year, a requirement that the government is given a discount on the troubled assets it purchases and a plan to break up other giant companies that the government considers “too big to fail,” among other things. And House Financial Services Committee Chairman Barney Frank (D-MA) has proposed that the Treasury secretary is given the authority to set “appropriate standards” for the salary of CEOs at companies that get bailed out and is directed to buy troubled assets in a way that minimizes foreclosures and evictions.

UPDATE: At the Senate Banking Committee’s bailout hearing today, Sen. Chuck Schumer (D-NY) had this suggestion:

>"Why couldn’t you ask us for $150 billion and on Jan. 15 or Jan. 20 we would come back, we would assess how it worked and grant more money if it’s really working?"

The administration will probably oppose the idea based on the bazooka theory – that making available a virtually bottomless stash of money will build confidence in the markets and potentially lead to less of the money actually being used. Sen. Barack Obama (D-IL) is interested in the idea though.

UPDATE 2: Details emerge of a new bailout plan coming from House Democrats, via Reuters:

>A House of Representatives Democratic counterproposal to the Bush administrations financial bailout plan, includes a provision to give shareholders a way to influence the composition of a financial company’s board.
>
>According to the draft bill, shareholders or groups of shareholders holding a 3 percent stake in a financial firm that participates in the rescue plan, would be allowed to put forth a proposal to nominate a director — a concept known as proxy access that corporate America has resisted.
>
>The bill also includes a provision limiting the severance pay of senior executives at participating financial firms.

UPDATE 3: In case anyone’s still following all the bailout proposals, here are two more:

Barney Frank’s discussion draft: doesn’t have any equity provision for the government, but would limit CEO pay and add some new foreclosure mitigation language.

Republican Study Committee Alternative: calls for fully suspending taxes on capital gains for two years and for transitioning Fannie Mae and Freddie Mac over to fully private companies.

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