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Senate Releases More Bailout Money, No New Strings Attached

January 16, 2009 - by Donny Shaw

Yesterday in the Senate, 6 Republicans joined 44 Democrats and one Independent-Democrat in voting to release the second $350 billion tranche of financial bailout money to be used by the incoming Obama Administration. They did so without attaching any new requirements as to how the money is to be spent or how information about the government’s bailout activities are shared with the public.

A week ago, House Financial Services Committee Chairman Barney Frank (D-MA) was spearheading an effort to pass legislation that would mandate stricter oversight and transparency of the bailout, and require at least $40 billion of the money to be spent on foreclosure prevention, among other changes. But after receiving assurances, in the form of a letter, that Obama would do many of these things with the second tranche voluntarily (without being mandated by law), Frank backed off from passing the bill and decided to take Obama at his word. As Chris Bowers at Open Left put it, “HOPE has moved from a campaign slogan to a system of governance.”

Besides being just an informal agreement and not a legal mandate, the Obama Administration’s letter leaves out several of the requirements that were a part of Frank’s bill. Among them are:

  • Applying the stricter executive compensation limits from the auto bailout bill to firms receiving TARP money, including firms that received money from the first tranche. The stricter limits would include a ban on bonuses and incentives for to the 25 most highly compensated employees of a company (instead of just the top 5), a ban on “any compensation plan that would encourage manipulation of such institution’s reported earnings to enhance the compensation of any of its employees,” and a mandate to divest in private airplanes.
  • Authority for the Treasury to have an observer at board meetings of firms that have received TARP money.
  • Expanding the Financial Stability Oversight Board that was set up by the original bailout bill and giving it new powers to overturn TARP policy decisions from the Treasury Secretary by a 2/3rds vote.
  • A pending amendment by Rep. Tim Walz to require that the quarterly reports from TARP recipients, detailing how they have spent the taxpayer money, are posted online. This one isn’t actually in Frank’s bill, but if they had continued with the debate, it almost certainly would have been added.

Any of these could end up being included in the Obama administration’s own TARP policy (not that they’ll have to follow it…) or be passed by Congress as separate legislation.

In the Senate, there is a related bill introduced by Byron Dorgan (D-ND) – the Taxpayer Protection Act – that would, among other things, add the CEO pay limits that were included in the auto bailout bill to the TARP funds. Additionally, Dorgan’s bill would create a Taxpayer Protection Prosecution Task Force designed specifically to “investigate and prosecute financial fraud cases or any other violation of law that contributed to the collapse of our financial markets,” and “seek to claw back any ill-gotten gains, particularly by those who received billions of dollars in compensation creating the real estate and financial bubble.” It would also set up a Financial Market Investigation and Reform Commission to examine how the crisis happened and report back to Congress on how it can be prevented.

Switching gears a bit, both David Sirota at Open Left and Glenn Thrush at Politico have good analysis of the Senate vote yesterday to release the rest of the TARP funds, looking at those who switched their positions on the bailout.

UPDATE: Just thought it’s also worth noting here that Timothy Geithner, who looks on track to be confirmed as Obama’s Treasury secretary, has been a key player in the first tranche of TARP funds. From a November WaPo article:

>President-elect Barack Obama has selected New York Federal Reserve Bank President Timothy F. Geithner as Treasury secretary, handing the post to a primary architect of the Bush administration’s response to the financial crisis, according to Democratic and industry officials yesterday.
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>[…]
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>A Democrat and a relative unknown outside the world of high finance, Geithner has worked closely with Treasury Secretary Henry M. Paulson Jr. to devise responses to the most critical events of the market turmoil, including the bailouts of the investment bank Bear Stearns and the insurance giant American International Group. Like Paulson, Geithner believes that the Treasury should be given vast powers to develop experimental strategies for responding to the crisis and the flexibility to abandon them if they don’t work.

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