Tentative Deal on Financial Bailout Package

by Erin Abrams (New York City)

Over the weekend, both Democratic and Republican members of Congress worked in overdrive to try to hammer out the details of the $700 billion bailout plan for America’s beleaguered financial institutions. Late on Sunday night, lawmakers in both Houses and the White House reached a deal.

Majority and minority leaders in both houses backed the legislation. The bill is set for a vote in Congress on Monday, but is expected to face significant opposition from lawmakers on both sides of the aisle who argue that the plan is a hasty and ill-conceived rush to fix the economic crisis that bails out wealthy corporations while doing nothing to help the average American, who may be faced with the threat of foreclosure.

Supporters of the bill explain that the financial system was in more dire need of saving than the average consumer. They further assert that the bill benefits both Main Street and Wall Street for two reasons: 1) the bill is expected to raise investor confidence and halt or at least slow the downward market slide that is currently responsible for decimating the value of many people’s 401(k) plans and other retirement funds, and 2) the bailout will enable huge corporations to remain solvent and avoid bankruptcy, so that these companies can to continue meeting payroll obligations to millions of employees nationwide.

The bill before Congress was significantly revised from the original White House proposal. Most notably, this version limits compensation for the executives of companies benefiting from the bailout. Additionally, it includes a provision to recover losses from the participating financial firms if the government has trouble selling the mortgage-backed securities after five years. The final version also includes tougher measures for federal oversight, but doesn’t include provisions suggested by Democrats to allow bankruptcy judges to rewrite the terms of failed mortgages. Also missing from the final version also was a suggestion by Republicans to insure the bad debt of banks instead of buying it outright.

The stated aim of the 110-page bill is to “provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, and for other purposes.” The legislation’s attention to “certain types of assets” refers to the mortgage-backed securities that caused the extensive exposure to subprime mortgage debt that precipitated the credit crunch at major banks and necessitated the bailout. The full text of the legislation is available here.

Key elements of the deal include:

• Distributing money in stages: $250 billion of the $700 billion will be made available to the Treasury immediately. Federal authority to use the funds will expire December 31, 2009, unless Congress authorizes an extension. The federal government will use these funds to purchase the mortgage-backed securities debt of vulnerable financial institutions.
• Protecting taxpayers: the final cost to the taxpayer is not expected to be anywhere near $700 billion, because the government is expected to buy only assets with underlying value, increasing the chances that they can eventually be resold.
• Taking an equity stake: the government is expected to take an equity stake in some companies that receive bailout funds in exchange for their bad debt.
• Reducing foreclosure: as a holder of most mortgage-backed securities after the bailout, the bill calls for the federal government to exert pressure on lenders to modify the terms of loans on the road to foreclosure.
• Limiting executive pay: companies participating in the bailout will not be able to deduct salaries above $500,000, nor will they be allowed to write new “golden parachute” contracts for departing executives, though existing contracts may stand.
• Establish oversight: the bill will establish two oversight boards, the Financial Stability Oversight Board and a congressional oversight board.
• Insuring against losses: finally, Treasury is tasked with establishing an insurance program to guarantee companies’ troubled assets, including mortgage-backed securities. Risk-based premiums will be paid by the financial industry.

News of the deal was released Sunday night in hopes that the Asian markets opening up Monday morning would reflect an increase in investor confidence based on the breakthrough. Instead, Asian markets fell amid investor skepticism that the bailout would fix the financial crisis.

Both presidential candidates, Sen. Barack Obama and Sen. John McCain, were said to approve of the bailout package.

Stay tuned to the Glass Hammer for up-to-date analysis of the bailout package, including how it will impact women on Wall Street and in other professional occupations.