We are starting to get some details about the Mother of All Bailouts. Some of it is good, some not so good.
Financial Institutions covered are banks, savings associations (S&Ls?), credit union, security broker/dealers and insurance companies organized or regulated in the US. That means it will include any subisdiaries of foreign banks that are under US supervision.
The Treasury Secretary will have to publish the rules within 45 days of enactment to include:
Mechanism for purchasing assets.
Methods for pricing and valuing troubled assets.
Procedures for selecting asset managers.
Criteria for identifying troubled assets.
So we’ll find out more in the next 45 days about how this will work.
Treasury can’t pay a higher price than the price the asset was purchased, but there is an exception for assets acquired in an acquisition. That sounds like the JP Morgan loophole to me. They’ll be able to offload Bear Stearns and WAMU assets at a profit.
There is an insurance component, but it requires the financial institution to pay a premium and the premium is at Treasury’s discretion. The premiums have to be high enough to establish a reserve for anticipated losses. No one will use this facility because it will be too expensive.
There will be an oversight board. Just what we need; another government agency. The board consists of:
Chairman of the Federal Reserve
Secretary of the Treasury
Director of Federal Home Finance Agency
Chairman of the SEC
Secretary of HUD
Sounds a lot like the fox guarding the henhouse to me.
Treasury will have to report to Congress every 30 days.
It looks like 20% of any profits gets diverted to some slush funds called the Housing Trust Fund and the Capital Magnet Fund. I don’t know exactly what those are yet, but i’m sure they are a black hole from which our money will never be seen again. And whatever money goes in there will eventually be the source of a scandal. Bet on it.
There’s a section on conflicts of interest which I won’t bother reading since it will be routinely ignored.
There’s a whole section on how the act will reduce or forestall foreclosures. I’ll read this later to find out how people will game the system, but its not important for now.
There are limits on compensation for companies participating. Someone will find a way around this, I’m sure, so I’ll look at the details later. There are also provisions to prevent “golden parachutes” for departing executives. I guess they’ll have to leave before their companies participate.
Treasury is supposed to use “market mechanisms” to buy assets….except when the Secretary says its not feasible or appropriate. That means he will pay whatever the hell he wants for these things.
Any company that sells assets to the fund will have to give warrants to the Treasury; terms negotiated by the Treasury. If the company isn’t public they have to give senior debt. Warrants also have to contain anti-dilution provisions. There are exceptions to the warrant provision: companies with less than $500,000,000 in assets or if the purchase is less than $100 million.
Pricing for assets acquired has to be published on the internet.
The first tranche is for $250 billion, but it can go to $350 billion if the President says so. The President can then take it to the full $700 billion by submitting a report to Congress. Congress can block it with a resolution.
There is a provision for awarding management contracts to minority and women-owned businesses. Some campaign contributor or relative of a politician is about to make a bunch of money.
There will also be an Office of Inspector General to oversee the overseers. Appointed by the President.
Increases the debt limit to $11.315 trillion. That is one big ass pile of debt.
There will also be Congressional Oversight Committee to oversee the overseer of the overseers.
Mark to market accounting rules according to FASB 157 can be suspended by the SEC. The SEC will conduct a study of mark to market to determine what role it played in the current mess.
There is also a section that allows the Fed to relax capital requirements but I can’t find it right now.
I’m calling this the Throw Everything Against the Wall and See What Sticks Bill. That doesn’t generate a cute acronym but is accurate. Basically, they’ve thrown everything in here so we’ll see what works.