Credit Card Report
Financial News Made Easy

WASHINGTON - In the short run, congressional leaders have achieved their goal of producing an agreement Sunday on a federal bailout of banks and other financial institutions holding bad mortgage debts before the world’s stock markets reopened.

But in the long run, the scope and still-unknown effects of the greatest government intervention in the financial markets since the Great Depression — and the remaining underlying instability of the nation’s economy — will impose a new political challenge for the next president and Congress elected in November. The situation already has reshaped the election campaign debate.

Congressional leaders face another immediate and uncertain challenge this week — with the House expected to vote on the plan as soon as Monday, and the Senate as soon as Wednesday — in corralling enough votes to both pass it and present the controversial two-stage bailout as a bipartisan response to a national crisis.

While resistant House Republican leaders have agreed to it, many rank and file members still are balking at the unprecedented bailout of the nation’s financial institutions, piling as much as $700 billion of new federal debt on the nation’s taxpayers.

Congressional leaders are attempting to frame the measure as their own best compromise on a plan that the Bush administration proposed which they are now calling unacceptable.

This means, in part, dividing the bailout into two phases, starting with $350 billion but requiring congressional approval for a second pay-out.

And it includes a demand that if the government does not recoup all the money that it invests in reselling mortgage debt that it purchases, it comes up with a plan to get the financial industry to cover any projected taxpayer losses.

“This is the administration’s problem,” House Speaker Nancy Pelosi (D-Calif.) said Sunday, “they sent us their bill, we did our best to improve it, and now we’ll see how much support we can get?

We will have to have bipartisanship to pass it.”

President Bush, who proposed the Treasury Department rescue and has pushed for it with national television and radio addresses, calls it essential to averting “financial panic’ in frozen lending and a “long and painful recession.

Congressional leaders agree that it is essential in averting a freeze in credit for everything from home loans and car loans to student loans and credit cards.

“Getting this done soon, promptly, is absolutely critical to the confidence of the markets,” Sen.

Judd Gregg (R-N.H.), one of the lead negotiators, said Sunday, predicting the votes to approve it this week.

The dueling candidates for president, two senators who had agreed on conditions that must be part of the federal bailout, both said Sunday that they are inclined to support the agreement.

Leaders say they have crafted the measure to ensure that banks will pay the price if the Treasury cannot recover all of the potentially $700 billion that it puts into the bailout.

Down the road, all agree, the government must pursue more effective and streamlined regulation of the financial markets — something that Paulson was proposing long before the depth of the nation’s financial crisis was exposed with failing mortgage consortiums, investment banks, an insurance company and now more banks falling victim to a credit freeze.

Yet, despite the impact of the bailout, a stumbling economy could pose a monumental problem for the next president.

Obama has conceded that some of his new taxes and initiatives, such as health care for the uninsured, may have to be “phased in” if the economy does not turn around quickly. And McCain insists that more taxes must be cut to spur the economy.

Bailout Plan in Hand, House Braces for Tough Vote

WASHINGTON — The House braced for a difficult vote set for Monday on a $700 billion rescue of the financial industry after a weekend of tense negotiations produced a plan that Congressional leaders portrayed as greatly strengthened by new taxpayer safeguards.

The 110-page bill, intended to ease a growing credit crisis, came after a frenzied week of political twists and turns that culminated in an agreement between the Bush administration and Congress early Sunday morning. The measure still faced stiff resistance from Republican and Democratic lawmakers who portrayed it as a rush to economic judgment and an undeserved aid package for high-flying financiers who chased big profits through reckless investments.

But leaders of both parties in the House and Senate intensified their efforts to sell reluctant members of Congress on the legislation. All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their push to require that the federal government insure, rather than buy, the bad debt.

Even so, lawmakers on all sides said the bill had been significantly improved from the Bush administration’s original proposal.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

“This is a major, major change,” Speaker Nancy Pelosi said on Sunday evening as she declared that negotiations were over and that a House vote was planned for Monday, with Senate action to follow.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department.
[...]

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

“This is a major, major change,” Speaker Nancy Pelosi said on Sunday evening as she declared that negotiations were over and that a House vote was planned for Monday, with Senate action to follow.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department.
[...]

Members of the conservative rank-and-file remained unconvinced.

“While it creates a gimmicky $700 billion installment plan, attempts to improve transparency, and has new provisions cloaked as taxpayer protections, its net effect is still a huge bailout of the financial sector that will snuff out the free market system,” said Representative Connie Mack, Republican of Florida.

Some Democrats bristled that they were now being called on to do the financial bidding of an administration they had viewed as previously uncooperative in dealing with executives who had performed irresponsibly or worse.

“Financial crimes have been committed,” said Representative Marcy Kaptur, Democrat of Ohio. “Now Congress is being asked to bail out the culprits.”

What $700B can’t buy: a crystal ball

Global financial markets will open Monday morning … with the knowledge that Congress and the Bush administration have come to terms on their slapdash $700 billion attempt to arrest the nation’s economic crisis.

What they won’t know—because nobody does—is whether the most dramatic government intervention since the Great Depression will solve the problem.

Few doubt that clear and decisive action by Washington is crucial to restoring a measure of confidence in frozen credit markets.

But even many of the math PhDs and finance whizzes who dreamed up arcana like “mortgage pass-through certificates” and “collateralized debt obligations” aren’t sure how the government’s plan can hack through the complexity of the 21st Century financial system.

“What’s the government going to buy and what are they going to pay? There’s no clarity on any of that,” said Rich Berg, chief executive of Chicago-based Performance Trust Capital Partners LLC. “This thing is an unbelievable can of worms.”
[...]

The unprecedented decline in the housing market has steadily eroded the value of the trillions in mortgage-related securities on the balance sheets of the nation’s financial institutions. As the value of those assets drops, losses have sucked up the resources, or “capital,” available to cover them, making it difficult for banks to lend.

As this credit crunch has worsened, confidence has plummeted, causing the crisis to infect even the safest corners of the investment world. The stock markets have cheered the prospect of government aid, but the credit markets have continued to tighten and claim victims.
[...]

The most pressing problem is that banks and other financial institutions need billions in additional capital if they are to begin lending again. Some, like Goldman Sachs, have been able to attract money from outside investors. But they are the exceptions. Raghuram Rajan, a finance professor at the University of Chicago Graduate School of Business, explained that the finance sector has an epidemic of undercapitalized firms, many too afraid to seek new investment for fear that it will signal weakness.

Allowing companies to get rid of their portfolios of failing mortgage securities—the objective of the rescue plans—would stop the bleeding and make them more attractive to investors. But the sheer complexity of the mortgage securities market could cripple this capital transfer.

Emergency Economic Stabilization Act of 2008

While just about everyone refers to the US government’s intervention into America’s financial crisis as a bailout — which it is — the official name of the deal is: Emergency Economic Stabilization Act of 2008.

The text of the Act can be read here — sad reading, when you realize that America’s tax payers will be footing most of the bill:

• Emergency Economic Stabilization Act of 2008

• Summary of Emergency Economic Stabilization Act of 2008

• Section-by-Section of Emergency Economic Stabilization Act of 2008