Key Flaws in the Bailout Legislation

On compensation, which is central to reforming the banks, and equity participation and essential for insulating the taxpayers from loss, the legislation is not what is being advertised by the Administration and the Speaker.

The bailout hardly restricts executive compensation. Those provisions are vague, except for golden parachutes, and really only apply to banks the government would take over.

For banks and securities companies that sell bad assets to the Treasury through the normal auction process, restrictions on compensation really only apply to golden parachutes for the top five officers--compensation that only applies if the banks fail and the CEO is pushed out. Restrictions on compensation do not apply to work performed by incumbent employees until a bank goes bust.

Hence the banks will be free to continue to pay executives through bonus systems that encourage reckless decisions as and get banks in further trouble. Only after banks get in trouble again, can the government get involved in compensation and management practices.

The same flaws apply to government warrants (equity positions in the banks).

If the government buys $100 billion of toxic paper from Citigroup (C), for example, and Citigroup recovers for now, the government will be able to do little to alter its management practices or participate in the benefits of its recovery. Only if Citigroup fails, after the bankers have been paid again, will the government be able to get involved in its business practices or get an equity stake--only when the bank is near worthless.

Disclosure: none

Comments

[whidbey:]

That is not the least, the pricing of the asset purchases are left to trial and error, mostly error and lousy bookkeeping which is traditional with government. In the end this is just a smoke screen to keep the public off balance while they see if they can figure out how to make something work. They will fail because the consumer is largely tapped and not loan worthy, so fix the banks, but no one want to borrow. Just a small oversight, nothing another trillion will not finish.

2008 Sep 29 01:33 PM

[marine41:]

Barney Frans says "We will get 90% of our loan repaid"

2008 Sep 29 02:52 PM

[Joseph Cont...:]

As part of this legislation we need to do the following:
mandate a 90 moritorium on the S-O mark to market practice.
Create and use a portion of the 700bn to fund a FMIC (Federal mortgage insurance corporation) which will address directly the wave of pending defaults, on a taxpayer by taxpayer case.
Break up the bundles to allow the above to happen, taking the bad loans back into the government thus automatically readjusting the bank portfolios.
Guarentee through the fdic or some other vehicle, all bank bonds of banks in the fdic.

Fire Paulson and the head of the FDIC for criminal activities...
drop the prime by 50 bp.

Assure that all of these additional provisions are implemented and in use BEFORE one dime is used to bail out any non bank FI.

Those are my thoughts on this terrible mess.

Joe

2008 Sep 30 08:58 AM

[AT57:]

I'm not a Democrat, but if you would look at the HOLC that FDR set up in the early '30s, you'd see a way of attacking the foreclosure side of this problem going forward. That should come FIRST! Then, if the Government wants to get into greasing the wheels of credit, they can use whatever resources remain. I would not trust the current heads of banks and other lending institutions to do right by the little guy. They rarely, if ever, do.

2008 Sep 30 10:37 AM

[Socialism c...:]

Here are the real flaws:

1) It amounts to more government growth and spending. The core problem is that government is a bloated behemoth to begin with, and that the American taxpayer is stuck in credit-based living due to flagrantly excessive taxation.
2) Government would be taking warrants for ownership in participating banks. We are not socialists - that does not go down in the America I live in.
3) Politicians who don't listen to the people. I'm pretty sick of hearing the condescending talk from politicians who insist after we nix their plans that "the people must not have understood that this is actually for them, not just Wall Street." We understand full well -- we know that there is economic pain ahead, and we are willing to take it, because only a drastic failure will get us where we need to be: a drastic housecleaning of Washington and a severe weight-loss program of our government.

2008 Sep 30 02:28 PM