Status of Treasury Bailout Plan (9/28/08, 11:39pm)

The White House and leaders from the House and Senate have agreed to basic terms of Treasury’s proposed $700b financial sector bailout plan—the bill’s working title is The Emergency Economic Stabilization Act of 2008. The House will review the plan tomorrow (Monday) with the goal of voting on it and getting it to the Senate by Wednesday. Key provisions are as follows:

• Treasury would get $250b billion immediately to start buying illiquid credit securities from banks. The rest (of the original $700b that Treasury asked for) would be given out in $100b installments as Treasury reported to Congress, and up to $350b all at once wold require another vote. Treasury will have to fund this through issuing new Treasury securities, and the uptake on those securities as well as what it does to pricing (and therefore interest rates) will be a key issue to watch.

• Banks would have to give Treasury an equity stake, and banks would have to contribute stock warrants if they expect to be able to sell to Treasury. This seems loosely modeled after the Fannie/Freddie and AIG deals in which the government took 80% stakes in each of those companies in exchange for its help.

• Treasury will most likely be required to create a mandatory insurance fund paid for by participating firms that would insure the securities purchased by Treasury.

• Proposed limits on executive compensation are under consideration but would only apply going forward, and would not be retroactive on existing contracts. This is a questionable tactic and gives no real accountability for executives’ past actions. As for the sanctity of contracts, they once said you can’t modify loan notes either. Then the market started falling apart and now loan contract modifications are commonplace.